Real Things Matter More Than Fake Money

Tracking the baby formula shortage... The start of a commodity boom... Real things matter more than fake money... Bucking the 'everything is down' trend... Oil, wheat – and coal! – are booming... How to add commodities to your portfolio...

Today, we'll do our best to look at 'what's working'...

After all, we've spilled a lot of ink this year talking about what's broken – and for good reason, we think.

A bloody war is still going on in Eastern Europe... Record-high inflation is hitting us in the wallets and pocketbooks... The major U.S. indexes are in or near bear market territory...

And to top off our troubles, parents across the country have been scrambling to find baby formula for their little ones over the past week.

It's the latest chapter in the "blame it on a broken supply chain" saga – with a touch of regulatory and monopolistic flavor tossed in.

Here's what I (Corey McLaughlin) mean...

One of the main ingredients in baby formula is sunflower oil...

And it has been typically sourced, in part, from Ukraine. That fact, plus the shutdown in February of one of the few major suppliers of baby formula in the U.S. – an Abbott Laboratories (ABT) factory in Michigan – have made this necessity hard to find lately.

Now, I know what you might be thinking at this point... I thought we were going to talk about "what's working" today.

Let's get to that now...

First, amid the public outrage over the past week, the U.S. Food and Drug Administration ("FDA") and Abbott Labs reached an agreement yesterday to reopen the plant in Michigan. The FDA said Abbott will correct the insanitary conditions that led to its closure.

New baby formula should start hitting store shelves in six to eight weeks.

It makes you wonder what both sides were waiting for over the past three months. All of a sudden, when faced with a public-relations disaster, a solution happens just like that.

In any case, the story reminded us of an important trend that has been playing out in the markets for more than a year...

I'm talking about the start of a commodity boom...

When did you last think about where a good chunk of the world's sunflower oil came from, for example? Or that it's a primary ingredient in baby formula?

At least for me, the answer before the past week was... never.

My point is, throughout the past two-plus years of the COVID-19 pandemic and into a war that has shaken global supply chains, I sense more people have been reminded of – or have learned for the first time – "where things come from."

The things that we buy come from real places. They're harvested or made by real people. They're shipped in big containers by rail or airplane. And while these forms of transportation are as automated as possible, they still rely on real workers to run smoothly.

That's not to say these ideas were never important. They always were, of course. But folks are paying more attention now on all kinds of raw materials than just two years ago...

In other words, real things matter – and they matter more than fake money...

We're seeing it in real time with near-record-high inflation essentially eating away at any of the more than $5 trillion in pandemic "emergency" benefits Uncle Sam provided to millions of people. And we're seeing it through the "juice" being pulled out of the stock market by the Federal Reserve.

Prices of all kinds of items – in many cases, starting with essential commodities like energy and grains – have gone up over the past year at a scale not seen in 40 years. And they're still on the rise today, even as the values of stocks and bonds have been falling...

Take a look at this two-year chart of the Invesco DB Commodity Index Tracking Fund (DBC). It tracks futures prices on 14 of the most heavily traded and important physical commodities in the world – like gasoline, crude oil, wheat, corn, and copper...

Yes, this is a chart from this year!

In a year where "everything is down," this basket of commodities is bucking the trend. It's up roughly 35% year to date... and more than 50% over the past 12 months.

Please note that I'm not officially recommending DBC. This is for informational purposes only. I simply want to help you see the commodity boom. But of course, you could consider this exchanged-traded fund for commodities exposure in a well-diversified portfolio.

In the meantime, stocks and bonds are selling off...

As we've written more times than we want, the Fed is busy making dollars more "expensive."

The central bank – the biggest financial string-puller in the land – is reducing the size of its balance sheet, raising interest rates, and making the cost of borrowing higher in an attempt to at least say it's doing something to fight inflation and slow economic growth... It's in pursuit of "stable prices," one of its two Congressional mandates.

It might work, it might not.

But the U.S. stock and bond markets have already reacted in anticipation of a higher-inflation (a rate greater than what bonds yield), lower-growth environment (for stocks, that means lower earnings and share prices) ahead... as far out as they are looking.

U.S. stocks and government bonds – considered by many people to be a "safe haven" – have sold off in tandem in 2022. (That's a rare occurrence... But it's an outcome we warned about nearly a year ago, in this Digest from our colleague Dr. David "Doc" Eifrig.)

And as our colleague Brett Eversole wrote in today's free DailyWealth e-letter, nearly $81 billion exited stock and bond funds in April. That's the largest move since March 2020, during the height of pandemic fear.

In the article, Brett considered when we might see the "bottom" in this year's sell-off. (We could be getting closer if the data he shared is any indication.) From the DailyWealth article...

The chart below shows the combined flow of U.S. stock and bond funds. And this is where the real craziness appears...

We can't say for sure when this trend will turn around. But we can say that commodities over history have provided important, "uncorrelated" exposure to stocks, in particular.

By that, we mean they don't go up or down together. They typically trade opposite each other... and they can lower your overall portfolio risk as a result.

That's good news in a volatile market for stocks, like we're seeing today.

Then, consider the bigger picture... As the Fed makes economic conditions tougher and the U.S. dollar stronger by raising rates and pulling back on economic stimulus, the values of foreign currencies compared with the dollar are falling as well.

All in all, it could mean stuff produced overseas or stateside – even if you can find it – is going to cost more in dollars.

Said another way... Expect higher prices to continue. And expect to keep paying a premium for "real things."

Take oil, for example...

Over the past week, oil prices have surged back above $110 per barrel. That's an increase of about 11% in that span.

The rapid jump is likely due to news about China easing COVID-19 lockdowns. Folks believe that will lead to increased oil demand. Plus, rumblings continue about European nations agreeing to ban Russian oil.

But in reality, the reason for higher oil prices goes deeper than that...

It goes all the way back to good ol' fashioned supply and demand. Among other factors, it involves years of underinvestment in the industry.

The point is... there's not enough supply to meet demand.

We've said this many times before – like in an August 2021 Digest, when oil traded closer to $60 per barrel. As much as people may want to erase carbon emissions from the surface of the Earth, we won't kick our oil habit overnight...

Given the infrastructure of the world today, it's just not possible – that is, unless you really want to see business grind to a halt or see people freeze during the winter.

We may get to a "green powered" world one day... but it won't be tomorrow.

Back in August 2021, we cited research from Doc about electric vehicles ("EVs")...

He said the current annual vehicle turnover rate in the U.S. is around 7%. That means it would take about 15 years to replace all the vehicles on the road today as they break down and people buy new vehicles.

And considering EVs account for only 2% of new car sales today, it would take about 700 years to replace all gasoline vehicles. Doc acknowledged the market share of EVs will grow in the years ahead... But it won't happen at a rate to get us off oil in sooner than 30 years.

And as we wrote in the Digest at the time...

Think of how long it might take the same "turnover" from fossil fuels to alternative energy to happen across other industries, like homebuilding... or in the making of materials that are used in so many people's everyday lives.

Oil is used to make plastic and other common materials. And as much as some people might not use plastic straws anymore, we still use a lot of plastic for other items. As I sit at my desk right now writing today's Digest, I see many...

Basically everything allowing me to write this essay is connected to plastic... parts of the computer... much of the screens in front of me... pens... my phone...

So, oil is still needed. The rising numbers at the gas station as you fill up your tank surely tell you that in a simpler way as well... And yet, not enough is being produced right now.

Supply still hasn't caught up to demand...

Our colleague Steve Sjuggerud covered this concept most recently in the May issue of True Wealth Systems...

Steve showed that the U.S. oil rig count – which measures how many rigs are actively pulling oil out of the ground – still isn't close to its recent multiyear highs. As he wrote...

The lower the number of rigs, the less supply will come to market. The higher the rig count, the faster supply can catch up.

Today, we're at 552 rigs. And that's still a long way off from recent highs. Check it out...

As you can see, hundreds of rigs shut down during the great oil bust of 2020...

Oil prices were way below the "breakeven" price at which oil companies can start to turn a profit. So instead of running at a loss, it made more sense to close up shop.

That year, the active rig count fell below 200 for the first time in at least a decade.

We've improved from that extreme low today. But the number of active rigs remains below average... And it's still well below 2018 highs.

The rig count is still below its pre-pandemic levels.

Meanwhile, demand for oil shows an estimated 100 million barrels per day. And as Steve noted, industry analysts expect that number to keep climbing in the coming decade.

Say it with me, that means higher prices...

As Steve wrote...

In short, we likely won't get enough supply online to outpace demand anytime soon. And that means prices could stay where they are – or go even higher.

That's the simple fundamental story for oil and gas prices. It means that high prices are here to stay.

This all might sound overly simplistic... But sometimes, the most powerful ideas are just that simple.

Oil prices are still going up. And market fundamentals suggest there's more room to run higher.

To take advantage of this trend, in True Wealth Systems, Steve and his team recommended a leveraged play on energy companies, which make more money when prices climb above a certain level. As they wrote...

We're buying into a trend that has been going strong, even during today's tough environment. Prices in this sector have been rising for more than two years now... and are up hundreds of percent. Naturally, many investors are scared that the rally is on its last legs.

The fundamentals tell a different story. Now isn't the time to bail on this part of the market. Instead, we're likely just halfway through a megatrend. And that means we could make triple-digit gains from here.

Existing True Wealth Systems subscribers shouldn't miss the full issue. You can read it right here. Brett, who is Steve's longtime right-hand man, also just sent a more general market update to subscribers last week as well. If you're a subscriber, read that update right here.

The more I think about it...

The more I think the market is indicating we might be setting up for a massive, long-lasting run for "real economy" commodities – much like we wrote about in the April 19 Digest.

Oil is the headline commodity, of course. And oil prices are up 52% since the start of the year, for example. But other commodities are soaring as well – in the opposite (higher) direction of most other assets...

Natural gas is up 120% year to date. And wheat is up 65%.

You might think these are short-term spikes tied to the conflict in Eastern Europe. However, they're longer-lasting trends than just 2022...

Oil is up 72% over the past 12 months, while natural gas is up 165% and wheat is up 81% over that span. Perhaps most stunning... coal is the biggest winner of the major commodities over the past year. It's up an incredible 320% in that span – and 144% since the start of 2022 alone.

It's not a coincidence that stocks in the energy sector are blowing away every other sector this year... The Energy Select Sector SPDR Fund (XLE), for example – of which oil majors ExxonMobil (XOM) and Chevron (CVX) account for 44% of the allocation – is up 46% on the year.

So... there's something that's working.

If you want to learn more, I encourage you to check out Stansberry's Financial Survival Program...

In the second part of our seven-part course, our colleague and Commodity Supercycles editor Bill Shaw looked deeper into the commodities boom.

In short, he calls it the most "asymmetric setup in the world today" – meaning low risk, high reward. He believes the next great bull run in commodities is getting ready for takeoff. And he explained that when these cycles start, they really move big and fast.

As Bill wrote...

Commodity prices tend to move as a group through long markets (bull or bear) called "supercycles."

The following table shows the major commodity supercycles dating back more than 200 years.

As you can see, the average bull market in commodities lasts around 17 years and gains around 250%.

Of course, commodities often have their own individual cycles. But supercycles occur when all or most of them move together.

The last bull cycle came in the early 2000s. And after more than a decade in a bear market, all signs are pointing to commodities breaking out on a multiyear run higher.

These bull cycles are typically set off by some sort of catalyst that causes a shock in supply or demand – such as war. The last bull cycle was spurred by Chinese demand as the nation aggressively built out its infrastructure.

This time around, we have several catalysts.

By catalysts, he's talking about everything from the COVID-19 pandemic – and ensuing responses to it... to the global supply-chain breakdowns... to the war in Eastern Europe, which isn't over yet and could escalate further in the "breadbasket" of Europe.

Any one of these things could lead to higher commodity prices on its own. Put them all together – and add in the broader supply-and-demand imbalances in the case of oil – and we're seeing what happens.

One way to ease the pain and potentially grow your nest egg or hard-earned savings in these times is to have exposure to commodities in your portfolio. You can learn more about why... and how to do it in our Financial Survival Program. Click here for more details.

Don't Be a Cowboy With Your Money

This year has presented a difficult trading environment for nearly everyone...

However, subscribers to our colleague Greg Diamond's Ten Stock Trader advisory have been making a killing. He has a recent win rate of nearly 80%. What's the secret?

In the latest episode of the Stansberry Investor Hour with Dan Ferris, Greg says it all boils down to making sure you have two crucial items in your trading toolkit. Both items have led his subscribers to consistently make money, regardless of what the market is doing...

Listen to this episode right now. And if you want to get more great insights from Greg – as well as details on what he says is the "aftershock" about to hit the markets – click here.

New 52-week highs (as of 5/16/22): Suncor Energy (SU).

In today's mailbag, we're sharing some feedback for Ten Stock Trader editor Greg Diamond, who we featured in yesterday's Digest. Plus, a subscriber wrote in with kudos for our Stansberry NewsWire team. Do you have a comment or question? As always, e-mail us at feedback@stansberryresearch.com.

"[I] read tonight's Digest as well as your follow-up Ten Stock Trader subscriber update on the 'model' you had referenced.

"You never cease to amaze or provide value, man. Very exciting stuff. I never cease feeling like a kid in a candy store being a Ten Stock Trader subscriber! Thank you so much my friend!!" – Paid-up subscriber Ryan R.

"Just a line to say how much I appreciate NewsWire. Gives me a lot of relevant info in a very quick read. Thanks again." – Paid-up subscriber Brian C.

All the best,

Corey McLaughlin
Baltimore, Maryland
May 17, 2022