Barron's Streetwise - Oil, Gold, and Grains Are Only Getting Started, He Says

Episode Date: April 14, 2023

John LaForge at Well Fargo Investment Institute lays out the case for a bullish commodities super-cycle. Plus, brace for a lot more store closings. Learn more about your ad choices. Visit megaphone.fm/adchoices

With record levels of dry powder available for investment, find out what's in store for private markets in 2025 and beyond. Listen to Crafting Capital in partnership with UBS at partners.wsj.com slash UBS, Spotify and Apple Podcasts. Commodity super cycles are not about the underlying economy globally. They are about a lack of supply. The reality is supply during a super cycle bull is such an overwhelming issue that my prices can still rise even if demand is off a little bit. Hello and welcome to the Barron Streetwise podcast. I'm Jack Howe and the voice you just heard is John LaForge. He's the head of real asset strategy at Wells Fargo Investment Institute, WIFI, as it's known to absolutely no one. John is a commodities guy, and in a moment, he'll lay out the case that we're in a

bullish super cycle that could last for years longer. We'll also hear from a retail analyst who says a recent lull in store closings just ended. Get ready for 50,000 more closures over the next five years. Listening in is our audio producer, Jackson. Hi, Jackson. Hi, Jack. I feel like we haven't been talking about zinc enough on the podcast. What do you know about zinc? Give me all your zinc facts.

Tell me everything. In a finance podcast, you've got to talk about the supply and demand. It's, it's mind. It probably has to be processed. So that's the supply and demand. There's zinc and sunscreen. I feel like this is a school essay and you've been asked for a thousand words. You've got a solid 50 at your, at your paddock, but go ahead.

Do you know what pennies are made out of uh zinc yeah you got it 98 zinc i don't know how i guess i don't know how i guess so the sunscreen and pennies on the demand i came prepared with some zinc facts i've been doing a little zinc reading zinc comes from ore that's only about 5% to 15% zinc. So what miners do is they take that ore, they pulverize it, and they sort it, and they come up with a zinc concentrate that's about 55% zinc. And that gets sent to smelters. And smelters use high heat to turn the concentrate into 99% plus pure zinc. And zinc, as you say, is used for many things. The biggest use

around the world is for galvanization. You add it to steel to make it corrosion resistant. So it's a lot of uses in the construction industry. There is a glut of zinc concentrate at the mines, but there has been bottlenecks in the smelting business. Last year, smelting was constrained, and so you ended up with very high prices for finished zinc. Just this past week, there was a 19% price increase for the fees charged by smelters, and zinc experts say that that is a bearish sign for the metal because it's a big incentive to create more finished zinc. That's not the only thing you have to watch. Of course, you have to keep an eye on construction demand in China, where they use a lot of galvanized steel. You have to watch the war in Ukraine because smelting is very energy intensive.

And the disruption of energy supplies in Europe has knocked out some smelting capacity there. So if there's more energy that comes down the road, it could be a smelting rebound. Is this episode going to be just about zinc? It's not. I'm exhausted already. That was everything I know. That was a little more than everything I know about zinc. And this is why I find commodities impossible. This is why I don't own a commodity fund because, first of all, stocks seem complicated to people who are new to them, but I think they're quite simple. You can invest in an index fund and you own shares of businesses, and those businesses

are run by very smart people who have incentives to make their shares go higher, which is what I want because I own the shares too. So it's easy. You buy an index fund and then you let the smart people do their thing. And, you know, conditions change. You can follow the news if you want, but you don't really have to do anything about it. There's other people handling it. With commodities, there are no smart managers. There's no long-term growth strategy or anything like that. No competitive advantages. There's just supply and demand. You know, this was just

zinc, but all that stuff I said, that doesn't begin to tell you about, you know, if you've got a commodities fund, what's going to happen with soybean prices, right? There's a drought in Argentina. It was supposed to get better this year. It's not getting better as quickly as people thought. And the USDA just reduced its forecast for Argentinian soybean and corn output. What does that mean for prices? I don't know. In France, you had strikes at refineries that constrained output there. What has that meant for the crack spreads between crude oil and gasoline, the price differential?

There's a lot to keep track of, and it changes all the time. And there's no one out there who's watching it for you, which makes commodities impossible in the short term and in the long term. Why bother? I think, or I have thought, because stocks beat commodities over the long term, why bother? I think, or I have thought, because stocks beat commodities over the long term. And anyhow, if you've got one of those index funds, companies hold some commodities. And some of those companies in the index fund are miners or they're crop processors or they're drillers. So, you know, you kind of have your commodity exposure, right? This falls under a broad investment philosophy of mine, which I will

call why bother? When people ask me, do I need, the answer is almost always no. You need almost nothing. I'm an investment minimalist bordering on a portfolio nudist. Don't change the podcast tagline to that, whatever you do. I heard myself say that out loud and it didn't say i feel like we already lost advertisers but well you just need some index when you need some blue chip stocks you need some bonds and uh you know yeah you smidgen of small caps smidgen of overseas stocks and you're okay the next thing people have people want to talk to you about you know private equity and crypto and this and that yeah why bother that's my philosophy what do you think are you telling me i have to throw away my hard red versus soft red winter wheat PowerPoint

presentation I had? Well, I want to see it. I like to follow all the details. I just don't like to do any of it. But I heard a compelling case this past week from a commodity expert at Wells Fargo Investment Institute. His name is John LaForge. I'm looking at a note. It's titled the commodity bull super cycle. And it sounds exciting. Super anything sounds exciting. Well, what's a what's a super cycle? And why are we in one? Sure. Actually, it's super for me because I've been studying super cycles for a long, long time. I've been doing this for 30 years. And the problem with that is you have to be quite honest with your bosses that, hey, for 10 years, stay away from commodities.

And then for another 10 years, hey, this is the time. And it's now the time. 10 years, hey, this is the time. And it's now the time. John says that commodities are prone to long super cycles, both bullish and bearish. And there are technical reasons and fundamental reasons, but mostly behavioral reasons. Everybody just tends to overdo everything in both directions. They do it because there's a lack of supply. But eventually what happens is price goes high enough. Everyone and their mother is out looking for the stuff. They find it and prices collapse for 10 years. Then we wake up after that 10 year period and realize, oh, we don't have enough of this stuff. And we go through the whole cycle again. John says that there have been six Buller super cycles for commodities going back to 1791.

It lasted from nine to 24 years apiece. Right now, we're in a seventh that began about three years ago, March 2020. To get an idea of what one of these Buller super cycles looks like, you can look at the last one. It lasted from 1999 to 2008. There were some commodities that peaked a few years later than that. And there were some absolutely stunning price runs. Oil at one point went from $10 to $150 per barrel. Copper went from $0.60 a pound to $4.60 a pound. Gold went from $2.50 to $1,900 an ounce. And corn went from $2 a bushel to $8. John says super cycles are like black holes. There's a gravitational pull that's difficult for individual commodities to escape. So if you're trying to figure out, hey, what's going to be a

better bet in the years to come? Tin or palladium or butter? You don't have to bother. You just buy a fund that holds a little bit of everything. And when the Buller super cycle appears to be ending, you sell it. How do you tell? We'll come to that. One thing to know about commodity super cycles is that there are bearish ones too, and they can last a long time and have brutal price declines, much worse than typical stock declines. The last bearish super cycle for commodities from 2008 to 2020, it brought prices for a broad commodities index down 73%. And that helps to explain why the bullish super cycles take so long to play out. Consider oil.

We've heard from oil executives on this podcast, and they've told us that their investors demand discipline. They're not sure that high prices are going to last. They don't want them to ramp up production too quickly and end up right back in a long slump. John says that's denial about what's happening, and it's a hallmark of the early stages of a Buller super cycle. Eventually, what will happen is these same investors will say, hey, we're missing out on a lot of upside here. It's time to ramp up production. And companies will begin to do that. And then, as he says, it'll turn into a free for all. And so what happens during these 10 year periods is the beginning of them is a lot of denial. It's a lot of they don't believe it because the prior 10 years really stunk up the joint and they just don't want to they

don't want to be caught in what they were over the last 10 years. So the whole idea of we don't have enough commodities and a new bull begins, the reason it takes 10 years to play out is because the beginning of it is a lot of denial by the producers. Then eventually after a few more years, I'll give it two more years, the producers start going, oh, wait a minute, we can make a lot of money here. Let's do this. But they still do it in increments. But at the very end, it's an all out. It's a free for all. Hey, look at the money we could have made for the last eight years. Our board is now really ticked off at us. We could have been opening up new mines. We could have been buying other companies. Let's go do it. If I had to pick one sign of the end of the last bullish commodity super cycle, it would

probably be the 2011 purchase by Caterpillar of a mining equipment company called Bucyrus. It was a big expensive deal. Everyone wanted metals of all kinds. And this was a way for Caterpillar to get in on supplying all that equipment. And of course, it came right before a long slump in metals prices. John says that's more or less what a blow-off top looks like. And then you get the last three years, the sign of the producers will really start getting tricky and will start buying companies like you talked about. They'll start, all of a sudden, their production quotas will go from 6% year-over-year growth to 30%. They go, aha, we're going to clean up. And prices, commodity prices, tend to, momentum-wise, really start to pick up speed

because investors have finally been convinced this is a good place to be, and they start piling in. We're not nearly there yet. We're three years into the current bullish super cycle, according to John. And, you know, a typical one lasts longer than 10 years. Also, commodities prices broadly are up 80% during the current cycle. But the average for all bullish super cycles is 247%. So John says you can expect years more of stock-like returns for commodities, but not necessarily stock-like returns for stocks. Stocks don't have to do poorly. They just don't do their normal

10% plus yearly gains when commodities are in their super cycle. So technically, you could say stocks struggle. And in the case of this answer, what you find is commodities can do well even if stocks don't go anywhere. In fact, it's quite common that stocks struggle to put up their normal gains. It doesn't mean stocks have to go down. It just means they really have a hard time putting up those 10% plus annualized gains when commodities are doing what they're doing. That's an important point. We got a reading on inflation this past week that showed it's still high, but the rate is coming down. And investors looking around for signs of earnings deterioration for companies or weakness for the broader economy.

And if you buy commodities as protection for inflation, you might be thinking, now's the time to sell, not buy. But John says that a bullish commodity super cycle is all about a shortage of supply. You don't necessarily need a hot economy. And often, you don't get a hot stock market. Last year, stocks and bonds both stunk. Commodities gained 16%. I asked John how best to invest in commodities, and he said active management can make sense. commodities. And he said active management can make sense. The commodities themselves, I'd recommend not only a basket, but active management. It really does matter in the commodity space. With stock land, you can go do an indexed fund and do quite well. Commodities, you do have to deal with a roll yield, which is very important. And you have another portion of it, which is you basically put your cash in bonds for a period of time. So not to get too complicated,

but in commodities, it's a little trickier for investors. So I'd say go with active management. John ran commodities research for years for a firm called Ned Davis Research before coming to Wells. And early on at Wells, before prices started running, he didn't exactly get the celebrity treatment. For about 2017 to about 2020, when I walked around the halls here at Wells, I would get the looks of, why do we hire this guy? This guy keeps talking about how ugly his baby is. Like, why are we even talking to this guy? And everyone had the, even my bosses had the running joke and i said it's going to come sooner or later guys and and fortunately i was settled here at well so in in march of 2020 uh that's when we started pounding the table it was like here comes

here it is and everyone's like are you crazy this is covid we're all locked up and uh so it was kind of fun making that call so for yeah, the last three years have been good. I'm hearing parallels to the story about Noah and the Ark. You're Noah and it just started raining. If you're looking to add a bit of broad commodity exposure, there's a passive ETF. It's called iShares GSCI Commodity Dynamic. I'm still going with the name, Jackson. Role Strategy ETF. The ticker there is C-O-M-T. It uses a rules-based future strategy, and it costs 0.48% a year. I feel like that's a good deal relative to the length of the name.

If you want active management, there's a fund that Morningstar gives high marks. It's called BlackRock Commodity Strategies Fund. The ticker is B-I-C-S-X. Don't even think of buying the A shares. They charge you as much as five and a quarter percent upfront on those. Yuck. There are institutional shares that are a much better deal. They don't charge you upfront. There's a 0.72% ongoing fee. The initial investment minimum is preposterous, $2 million, but they waive it for many employee retirement accounts. And if you buy through some broker mutual fund marketplaces, they cut the minimum to a thousand bucks. What do you think, Jackson? Has John talked you into it? Are you going super cycle? Oh man, I'm looking for those funds you've talked about, but my only worry is it involves timing

the market, which I'm not sure I'm very good at. But there might be other indicators. I'm going to send you a photo right now. Okay, let me take a look. Is this email? No, no, it's your message. Oh, my God. What did you say? Oh, on the phone, on my phone.

Okay. On the phone, yeah. Something crazy would like to... Okay, hold on. This is part of a new segment we're going to be doing called Old Guy Takes a Long Time to Find Photo. It's just like... Oh, wow.

So this is the draft class. This is the NBA draft class. And the top photo was what year? 2003. So we have LeBron James there on the right. Oh, wow. And so you're talking about the boxiness of the pants. These gentlemen are wearing very large, very baggy pants. And down below, what year is that draft class? That's 2018. Those pants are so slim fitting, it looks painful. And there could not be a more dramatic difference.

Where did you find this photo have you just you just track sports pant sizes or what's going on going around twitter but but i'm thinking you know what was happening in 2003 i don't know commodities these guys look like they're smuggling canned hams around the ankles of their pants, but, uh, you know, 2003, that was the beginning of the commodity bull cycle, 2018 deep in the bear cycle. I think when those pants start getting big and boxy again, it's time to buy. This is a new indicator. I'm going to, I'm going to call John back and I'm going to ask him if he knows anything about this one. What do you say? We take a quick break here. We'll come back back we talk about stores and closures

sure you happy with that sure you want to try it once more we can't do this every week once more once more okay let's have gravitas no gravitas lower sure sure was it make it more authoritative dude i'm just kidding it's your last week i gotta break your chops a little bit all right sure sure what's up spotify this is hobby i remember this one time we were on tour. We didn't have any guitar picks, and we didn't have time to go to the store, so we placed an order on Prime, and it got there the next day, ready for the show. Whatever you're into, it's on Prime.

With TD Direct Investing, new and existing clients could get 1% cash back. Great! That's 1% closer to being part of the 1%... Maybe, but definitely 100% closer to getting 1% cash back with TD Direct Investing. Conditions apply. Offer ends January 31, 2025. Visit td.com slash dioffer to learn more. Welcome back, Jackson. We have talked before about the retail reckoning, right? About a lot of the malls have fallen on hard times and they're shutting stores and some of the chains are cutting back in their stores and some chains are going out of business. And we've talked about the fact that the big reason, yes, there's been a rise in e-commerce, but just America relative to other developed

nations appears overstored, right? They built a lot of store capacity over the decades and now there's a reckoning where they have to reduce square footage. But here's a figure that fascinated me. In 2021, squarely during the pandemic, there were 11,000 net stores added across the U.S. Just when you thought that retailers would have fallen on hard times, there'd be more closures than ever, there were actually more stores added than closed. And the reason has to do with some of the assistance that was given out during the pandemic to stores to keep people on payrolls.

I saw a note recently from UBS analyst Michael Lasser, and it says that he predicts a return to closures, and not just a little return, 50,000 plus store closures ahead over the next five years. I reached out to him to learn more about that. So there had been a steady decline in the number of store closings from 2015 to 2020, somewhere in the neighborhood of 1,000 to 5,000 per year. Then what happened, the pandemic happened. There was an overwhelming amount of direct and indirect support that was provided to the retail sector directly in the form of PayTech Protection Program that gave direct support to businesses and indirect support

through things like stimulus checks, child tax credit. And as a result, in 2021, there was actually an increase in the total number of stores in the United States in the neighborhood of 11,000. neighborhood of 11,000. And last year was actually an okay year for most retailers because they recognize sales in nominal dollars. And when inflation is running so hot, their sales are doing pretty well because they're passing along such intense price increases. So that also helped. Our belief is now that those factors are behind us, this is going to be the tipping point where we see an acceleration in store closings. Is it going to be from entire chains closing down or is it going to be from,

you know, chains just trimming the number of stores or both? So three things. One, we are seeing big chains that are experiencing challenge. Bed Bath & Beyond is a good example. And there are others who are trimming their footprints. Number two, the shopping mall. That is going to be an area of disproportionate share gains for the large, well-positioned players and really a disproportionate amount of closings. To put that in perspective, as of last year, there was about 57 square feet of shopping center space per household in the United States. In 2000, that number was 55. And keep in mind that since 2000 to 2022, e-commerce has gone from virtually a very small percentage of total retail sales to about 20% of retail sales. So mathematically, you just don't need as much shopping mall space in this country,

despite the fact that there is more per capita, that leads us to believe that the shopping mall will be a disproportionate source of store closures moving forward. And finally, the area that is going to be most at risk is small retailers. About 58% of the stores in the United States are operated by companies that have less than 20 employees. So it's just those mom and pop retailers who don't have the resources to compete as effectively with the likes of these big, well-capitalized players who are making enormous and substantial investments in their businesses right now. investments in their businesses right now. Okay. So if we're thinking about what this means for investors, before we come to the potential beneficiaries from this, what about the publicly traded chains? You mentioned Bed Bath, which I guess is a difficult case, but there are some other chains out there that are publicly traded, maybe closing some stores. And are there ones where you think

the chains are really in trouble long term? Or are there ones where they're going to be closing some stores and that can help them? That's exactly what they need. You know, these kind of, you know, the specialty chains, I'm thinking of like a footlocker or some of the other chains like that. So an area that I cover is consumer electronics. A retailer that has been effective at repositioning store base is Best Buy. It's been closing some of its larger stores and moving into a smaller footprint. So that's a good example of where there has been closings, but it's leading to a stronger, better positioned retailer. There's going to be other retailers who are not as well situated, not in the universe that I cover. And so I'm resistant to put anyone

in play as a result. And then we have 50,000 fewer stores five years from now. I think of Amazon, who else stands to benefit from that? Think of Walmart too. Walmart's going to be putting $15 to $20 billion in CapEx into the ground, into its stores each year for the foreseeable future. It's going to be automating its distribution centers. It's going to be putting more its distribution centers. It's going to be putting more resources towards things like Walmart Plus. At the end of the day, what the customer wants is a frictionless experience. For a retailer like the size of Walmart, it's going to have the resources to be able to create a better experience for the customer. It's going to allow

it to gain a disproportionate amount of market share. Similarly, Target. Target is well-situated because of the customer segment that it serves, the product categories that it offers, and all the enhancements it's made to its business model over the last few years, like drive up, like remodeling its stores, like launching new and innovative private label alternatives. So our view is that the two categories will be the large well-positioned players like a Walmart, like a Target, as well as some of the more niche players that had differentiated experience.

Let me offer you a couple. Number one is Academy Sports. That's a retailer that tends to serve communities in the South with more opening price points, sporting goods in a bigger box that as there's consolidation in the sporting goods sector, which we've already seen, but that should continue, that'll benefit a retailer like Academy Sports. All I know is on one hand, you think, why do you need sporting goods chains? On the other hand, when you have kids and when they're in sports, it's not like when me and you were kids.

It's like you just spend endless amounts of money. I mean, just throwing money in every direction on sports leagues and equipment and all this different stuff. Not only that, Jack, but also the fact that you and I are sitting at home and having this conversation, what that means is we have permanently transitioned to a more casual society. And as a result, we're going to be wearing more athletic wear, more casual footwear. That's going to be to the benefit of retailers like Academy Sports. And so it's a play on more work from home and more time at home. Okay. Any others come to mind like that?

Yeah. Another one is a retailer that is disrupting the flooring market. It's part of home improvement. It's called Floor & Decor. It's big boxes that sell hard surface products like flooring, like countertops, shower doors. It's got a unique value proposition where there's very little prices in a broad assortment. That's another retailer that stands to benefit because of consolidation in the retail landscape. Yeah, I can imagine that's the kind of thing where you got to see it. You can't buy it online. You got to go there and kind of see the stuff. That's right. It's a very considered purchase. What happens to all these stores when they all close? I mean, what happens to all this space? Are there, you know, I guess there's no more retailers coming along to fill that space.

Does it get repurposed for something else? That's the key. It'll be need to be repurposed to a more productive use. And whether that's residential real estate, schools, fitness facilities, it will be repurposed over time, but it will take time for that to be repurposed. I think it's going to be pickleball courts based on what I'm seeing. All pickleball. Thanks so much for your time, Michael. Good to see you. Same here.

Take care. Thank you, Michael and John. And thank all of you for listening. Jackson Cantrell is our producer. Jackson, last week we mentioned that this will be your last episode. You're leaving the glitz and glamour of the Barron's podcasting world. Now we're going to miss you and we appreciate all your contributions. Anything to say?

I can't lie. I'm a little bit misty eyed right now, but it's, you are a crier. Go ahead. But it's, it's been so great to work with you these last couple years and the whole Barron's team. Hard rapping.

Five, four. No pressure. Go ahead. A huge thank you to our listeners because they- Oscar Music Rising. They make this show worth doing, and I'm so excited to join them as a dedicated listener myself. That sounds great. You can finally start listening to the podcast

that sounds great don't do not leave me a crappy review all right all right four stars subscribe to the podcast on apple podcast spotify or wherever you listen to podcasts and if you listen on apple you can write us a review you can say goodbye to jackson if you want you can send us a question to answer on a future episode of the podcast. You just tape a voice memo and you email it to jack.how. That's H-O-U-G-H at barons.com. Thanks and see you next week.