Barry Ritholtz Sees More Upside in Commodities

Mike Norman, anchor, HardAssetsInvestor.com [HAI]: Welcome back everybody to the HardAssetsInvestor.com interview series. My name is Mike Norman. I’m the founder of the Economic Contrarian Update and I’m here today with Barry Ritholtz, CEO of Fusion IQ, for the second part of our interview. You can access Part I here.

Barry, let’s talk about commodities and hard assets. You say that the Fed put this in play. I won’t argue: It’s clear that there is a giant asset allocation going on, probably for very good reason. You look at very large investors’ pension funds, endowments and institutions moving into commodities and hard assets now as an asset class.

If you say the Fed created that, at some point the Fed can also put an end to that. We’re seeing now, within the Fed itself, some hesitation and reluctance on the part of some members to continue to cut rates. How is that going to impact, in your opinion, commodities?

Barry Ritholtz, CEO, Fusion IQ (Ritholtz): Well, remember, the Fed is one factor. You have a couple of factors. The Fed is a big factor, [but] fundamental demand from the Pacific Rim, from Asia and from India … that’s driving it. World population is now 6 billion and growing, so we’re going to continue to see demand for foodstuffs and other hard assets that are going to be significant. But I keep working my way back to the Fed. We’re printing a lot of money. The dollar continues to basically be in a very, very weak position vis-à-vis the rest of the currencies. All these entities, all these commodities that are dollar-denominated—that’s having an impact.

Norman: How much money are we printing? Have you taken a look?

Ritholtz: I look at the monthly [data] from the various regional Feds.

Norman: If you look at the monetary base, which is the money aggregate that the Fed has the most control over, it is growing at the slowest rate in 20 years. As a matter of fact, it has never been growing as slowly. The only time it was growing more slowly or contracting was right after Y2K when the Fed pumped a lot of money in it and then took it out because the planes didn’t fall out of the sky, the computers didn’t crash. It’s a fallacy.

Ritholtz: But it’s more than just greenbacks. It’s the repos, it’s all these various entities. The Fed has now put a trillion dollars back into the financial economy. That’s money that’s looking for a home. Traditional mean reversion: You look at what we did over the past 10, 20 to 30 years in equities. I think a lot of big pension funds and a lot of big foundations are looking at equities. We just saw in The Wall Street Journal’s “lost decade column” and they’re starting to say, you know, we need to really be diversified with some private equity and some hard commodities and some precious metals, and so a lot of this money that’s been pumped into the system is looking for a home, and not all of it is going to flow to equities.

Norman: What percent of these institutional investors, these big large investors, do you think now have taken exposure to commodities?

Ritholtz: I think that a healthy percentage of these have small commodity exposure: 1, 2 or 3% of an overall asset allocation plan. But when you look at commodities as a traditional or nontraditional asset, the thought process is, hey, are we early in the stage of this commodity boom? Are we suckers buying in at the end? You look at the history of commodity bull and bear markets—they tend not to be like a business cycle or an equity cycle. They tend to run for 10, 12, 15 years, and I suspect that we’re going to continue to see, with a little consolidation, a little back-in filling etc., more upside in commodities. I think people and foundations are getting similar advice.

Norman: Let me ask you this: Here we sit with crude oil at all-time record highs, yet we see stockpiles, inventories of crude, at the upper end of the five-year range, and gasoline inventories at the highest level in 16 years. Distillate inventories, the same picture. Why is it that prices continue to rise when you see perhaps suggested in the fundamentals that they shouldn’t be this high?

Ritholtz: That’s a really good question. It’s pretty clear at this point that if we’re not in a recession since January/December, we’re teetering on the very edge of it. My working assumption is, as things contract, as people pull in their horns and spend a little less, we’d see commodities prices come in. That hasn’t happened yet, so that tells me one of two possibilities are out there: Either it’s going to happen sometime over the next couple of months as things get progressively worse, or there are other factors that are keeping these prices high. Some of it is speculation, some of it is fear of Mideast disruptions.

Norman: Very quickly, what about gold? How do you feel about gold?

Ritholtz: We like gold long term. We think that it hasn’t hit its all-time high on an inflation-adjusted basis, and again, most commodity bull markets will seek a new all-time high. It’s rare you see a significant rally, a significant bull market, where you fail to breach the prior inflation-adjusted high.

Norman: All right. Well, there you have it folks, and don’t forget to check Barry’s blog at thebigpicture.com. This is Mike Norman, and remember, stop by here every day for great advice on commodities and hard assets. See you next time.

Be sure to check Part I of our interview with Barry Ritholtz.

Comments

[richjoy]

I like to check in on what Barry Ritholz is thinking (bigpicture.com)...we need him to keep us from getting too exurberant!...I'm serious, he always makes his case with facts.

[bluesmoke]

Bring Barry over any time. Thanks.

[galewhitaker]

Right on! There are so many bubble heads blowing smoke everywhere its really refreshing to read what Barry has to say. He seems like a guy who is saying what he really believes and not trying to convince us to make the same bets he is making.

[User 68127]

Why doesn't Barry post on Seeking Alpha anymore?

[sorgmot]

Every US dollar ever created is an IOU. All around the world, people, banks, corporations, governments, and etc. hold those markers either directly or as stocks and bonds and other proxies.

Our thesis is that Ronald Regan ended the US dollar crises of the 1970's and the attendant run up in commodity prices by ordering the USA Federal Reserve Bank to run interest rates up to 18.00%. Of course investors in USA bonds took huge losses.

In the years from 1982 to 2002 USA interest rates slid down to about 2.00%. As interest rates fell, investors in USA dollar bonds and stocks and real estate, took interest payments and also principal gains as USA stocks, bonds, and real estate rose based on lower interest rates. So, investors were happy to hold USA dollar IOU.s.

The tide turned in 2003 as USA interest rate started to rise. A long-term rise in USA interest rates set in taking USA dollar bonds, stocks, and real estate down in terms of USA dollars. Foreign investor began selling USA dollar assets and converting the proceeds to other currencies. Stock markets outside the USA boomed in terms of there local currencies and in terms of US dollars.

Commodities are international and they started to rise in USA dollars in 2003, after 23 years of declines and slumbering. Commodities did not appreciate as much in foreign currencies since they were rising against the US dollar.

That is where we are now. If they want the old commodity prices back all they have to do is run USA interest rates back up to 18.00%. If not, then more and more humans on the planet will cash out of USA dollar promises and into foreign currencies and commodities.

You can make your own bets based on what you think will happen next. Good luck.

Click our site, and then click commodities, and then click Moore to see graphs of commodity and foreign currency prices back to the late 1970's.

[richjoy]

To: USER68127
I read a few weeks ago on Barry's blog that he was considering withdrawl from Seeking Alpha because they had edited his material (whereas he said his agreement with them specifically stated they would publish his material without edits)...So make of it what you like.

[Lisa]

There's an article by him today:
seekingalpha.com/artic...