After all, previous commodity cycles have lasted a decade or more. The two most recent cycles lasted from 2000 through 2013 and from the late 1960s through the early 1980s.
Even though there was an anemic recovery in the years immediately following the 2008 financial crisis, commodities performed very well right after the Great Recession. Commodity prices, in Cuggino’s view, are driven by three factors: supply-demand issues, monetary policy and the dollar.
All three appear to be pointing to higher inflation and higher prices for raw materials. The question is whether the nascent rebound is sustainable or just a head fake.
For now, real interest rates are negative and monetary policy will remain dovish for at least a year, if central bankers are to be believed. More fiscal stimulus also is on the way.
Following an election that dominated the news cycle and ended with a vote for divided government, Cuggino suspects that a Democratic administration will lean toward more regulation. President-elect Biden has made bold promises regarding climate change and they will come with a price tag.
This could prompt the economy to revert to the slower-than-normal growth it has experienced for most of the last two decades. But there is still reason to believe a resumption of higher than expected inflation is possible.
Cuggino notes that the stimulus programs during the Great Recession were non-inflationary—much of the 2008 and 2009 stimulus packages was injected into banks’ balance sheets. This time much of the stimulus made its way onto Main Street, and the savings rate remains elevated as consumers’ spending choices remain limited.
Even if there is a Roaring Twenties recovery, Cuggino thinks the velocity of money will pick up sharply. And the commodity markets may not need to extend their rapid rise of the last month to percolate inflation.