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Inflation, decarbonization could lead to ‘global strategic fight’ over commodities: Strategist

GraniteShares Founder and CEO Will Rhind and Martin Schulz, Federated Hermes Head of International Equity Growth Team, join Yahoo Finance Live to discuss slowing economic growth, commodity pricing, China's reopening, and pivoting away from traditional energy markets.

Video transcript

RACHELLE AKUFFO: Obviously, we saw how the markets reacted to the FOMC meetings. We thought we knew everything that was going to come out of there. What do you think the markets particularly responded to?

MARTIN SCHULZ: Thank you, Rachelle, for your time this afternoon. Well, I think the market is getting the sense that we've got this very strong pull and push fight between inflation and growth. And obviously, inflation is going to be stronger than expected. And that's primarily because the central banks, particularly in developed markets, have been behind the curve. And at the end of the day, they're going to potentially have to lead to much lower economic growth to tame that inflation.


And so, when we look at the global marketplace at Federated Harmonies, we're looking at a market and an economy that is definitely slowing. And we expect that near term, this inflationary supply shock could continue near term. We're probably at the peak. But at the end of the day, it's going to mean slowing growth. And that's why you're seeing a lot of these energy companies, commodity players, really get hit pretty hard.

JARED BLIKRE: And Will, I want to follow up on commodities with you. I know you're watching it. My question is, at what stage in the supercycle are we, if we are in a supercycle? Is this just a pause? Because we've seen-- and we can check out the YFi Interactive. I've shown this chart several times today. This is our commodities heat map. We see natural gas down 40%, crude down 17%, gasoline 23%. It goes on. Is this just a pause? Because this is really affecting consumers in a huge way here.

WILL RHIND: I think it is, although it's obviously difficult to say because we don't know the extent of the pullback at this stage. But I think if you look at the Bloomberg Commodity Index, which is probably the flagship index of the commodity markets, since that bottomed in 2020, obviously, at the height of the COVID pandemic, really, the market has gone up and to the right fairly significantly.

There was, obviously, a big premium put on commodities when Russia invaded Ukraine on February 22. That really now has come out of the market. And that index has really reverted to trend as far as I can see. So if you look at, I think, all major commodity prices, we're back to where we were before the Russia-Ukraine situation, with the exception of one commodity, and that's iron ore.

So at the moment, I think some of that premium's come out of the market. That's natural when we're talking about recession and, indeed, a slowdown in economic growth. But the big picture is that we still have a severe problem on the supply side. And to move to a global state of decarbonization, we're going to need trillions and trillions of dollars worth of money printed to fund that. And that's all good for commodities.

RACHELLE AKUFFO: And Martin, obviously, we were just there hearing about what was happening with Russia and the Ukraine, the impact on commodities starting to come out of the market a little bit. But then you also have the China factor. A lot of people were waiting for this reopening for the Chinese economy. But we're now seeing pockets of COVID popping up and more lockdowns in Beijing, Shanghai, and Xi'an. What are you watching there in terms of what you expect to affect US markets?

MARTIN SCHULZ: Yeah, so that's a great question, because I think on the one hand, China was first in and first out, we thought, but is now in a much more elongated kind of situation. And actually, as you just mentioned, we believe that this COVID zero policy is, on the one hand, working for China, but it's also continuing to delay a lot of-- and obviously, from the perspective of the supply chain affecting that negatively around the world.

And for us, China is actually a relative outperformer and has been here for the last few months. Obviously, the negativity in Chinese stocks started a few years ago, with Xi Jinping going after some of the sectors, education, the tech sector, and that sort of thing. And obviously, the property markets are also very weak. But for us, Europe is probably the weakest link right now in the global marketplace. Emerging markets, depending on where you are, may also be kind of tough to be.

But China is actually, near term, probably in a little better place because they do have some policy flexibility. So unlike the rest of the world that was cutting rates and throwing a lot of money at the problem during COVID, they now have the wherewithal to deal with any kind of slowdown. And we think we're going to start to see that on a greater scale going forward. So we actually think while it won't be a massive absolute outperformer from a relative perspective, China actually has some great opportunities. And we've been adding there in our portfolios.

JARED BLIKRE: And Will, continuing the discussion about the switchover to clean energy from fossil fuels requires a vast amount of resources. And I'm looking through your notes today. You say it may prompt an acceleration in demand for key raw materials. How is this going to affect the US and our ability to deal with supply chains here?

WILL RHIND: Well, it's going to be really difficult. And this is, again, a challenge that the world had before this year, and particularly before Russia-Ukraine, because we haven't been investing in traditional commodity markets for 10 years. I mean there's been a bear market in commodities. And so the CapEx has not been there. Add on top of that, some of the investment concerns around ESG policies, et cetera.

And you have a perfect storm, really, whereby we haven't had the investment. And now that supply response that normally one would expect when you get high commodity prices, i.e. producers are most incented to bring new production to market, just isn't there in the same way that it was before in previous cycles. So this is going to take a long time to work its way through. And there's going to be a global strategic fight between different countries, different sectors of the world for key resources in order to get a lead and get control over policies that ultimately end up in decarbonization or net zero.

JARED BLIKRE: All right--

RACHELLE AKUFFO: So, Martin, then--

JARED BLIKRE: Sorry, Rachelle, go ahead.

RACHELLE AKUFFO: Well, I was just going to say, Martin, in terms of, then, what we expect to see with inflation still in place, we know that can affect things like social stability. At what point does that start trickling in to companies and markets as well?

MARTIN SCHULZ: Well, I think Will brings up a great point. I think we're at this intersection and inflection point between, obviously, this more decarbonized world from the past. And that's leading to the supply shocks and what that we-- and this inflationary situation is definitely hurting the weaker links in the global economy. We've already seen this happen in places like Sri Lanka. But inflationary is a very insidious, obviously, situation that will affect many societies, whether in the developed or developing world.

I think the biggest, if you will, kind of-- not surprise, but the biggest factor right now is really the strength of the US dollar. If you take a look at how strong the dollar is, it's really at the highest levels that we've seen, in many cases, in over 20 years. And from that perspective, generally speaking, the dollar kind of goes in, like, these seven to 10-year cycles.

And we had expected the dollar to be starting to weaken, but in fact, obviously, with some of these post-COVID kind of supply chain inflationary issues, we're now seeing an increased risk-off appetite. And that higher, obviously, dollar level and inflation in some of these emerging markets are going to potentially lead to social unrest.

Again, I think the biggest, really, concern for us, particularly here for the US, is, when can the Fed kind of step its-- take its foot off the pedal, the metal, so to speak, and really start to maybe kind of reverse course? And I don't see that near term because particularly, in the case of the US dollar, with it being so strong, it's actually keeping inflationary pressures in the US somewhat muted. If that were to reverse, it's going to continue to keep inflationary pressures high. And so there's this, obviously, situation in which the Fed is in a no-win situation. So it's going to be tough to play be the hero at this point in time.