RE: Why You Should Allocate to Commodities
Your allocation strategy is travelling along similar lines as my own. You are right, the USD is the traditional safe haven asset. However, a new narrative is emerging that I find very fascinating: the narrative that the USD and treasuries are no longer a safe haven (bond yields rising while USD weakens).
This narrative will surely be responsible for fleeing capital to wind up in other areas besides USD/treasuries, and I feel that currently undervalued sectors (i.e. commodities and cryptocurrencies) have a very high likelihood of receiving a generous proportion of this capital. Best time to position is before the flight takes place, which has arguably already begun and will only increase/accelerate moving forward! Glad to have you along on the journey @jfitmisc!
But what about during a recession. If the government doesn't print any money and the yield curve is flat and not ascending, then bond yields will go down and wouldn't bonds and the USD gain in strength? This causes deflation for a year or so, the USD went up in 2009 and commodities went down. I know - its counterintuitive. Do you have any links of this narrative changing?
You are right, a deflationary event (or panic in foreign markets) would cause capital inflows into USD/bonds driving yields down as they did during the GFC. However, much of this bond buying was the result of the governments directing their "printed" money into bonds (QE) , and it seems that the marginal utility of this strategy is greatly diminished - many focused on this call it lack of "dry powder".
While I do not necessarily have links on hand to show a change in narrative, it is something I have qualitatively been noticing over the past several months. It has everything to do with how the bond markets are being presented and how the US deficits are being emphasized that leads me to believe that confidence is weakening.
China is making some very bold moves and is setting itself up to directly compete with the USD Petrodollar hegemony. It is a rather gradual process and it requires China to over-leverage itself, but...
And beyond this, I have noticed a considerable shift in tone towards Europe and China, which is a direct result in changing confidence levels towards USD safe haven status. Some have even argued that Chinese bonds are attractive moving forward (I disagree), which is interesting to note just how much the narrative is changing. European bonds are even scarier.
Of course, on the longer term horizon the USD Petrodollar remains dominant, and should a deflationary environment emerge (which I believe is still a few years off, barring a Black Swan) capital will definitely flow back into US bonds/dollars because most market participants have this bias baked in, so in that sense it is a safe haven because it holds such a significant psychological place in the minds of the majority.
Currently, my thesis is that while the USD/bonds are viewed as the safest havens, they are no longer the absolute safe haven. This discrepancy leaves trillions of dollars up for grabs in other market sectors when it must re-shuffle itself accordingly. I plan on generating a post that goes a bit more depth into why I think although we may have inflation in the near term (1-3 years), the ultimate cycle turn may result in a serious deflationary environment (3-5 years).
No matter the case, commodities are undervalued and when they get to breaking out and ripping past new highs they have lots of daylight ahead of them. Definitely a de-risked situation to be investing in a sector of the market talking about bankruptcies/liquidations that we can confidently know will be around for decades to come. After all, who doesn't acknowledge we require raw materials and energy as a "modern" civilization? Especially one in which we are constantly evolving, progressing, producing, and consuming.