Summary3 min read

Hidden Forces, Episode 13 Highlight Reel

Revenge of the Old Economy & How to Invest in the Commodity Supercycle — Jeff Currie

Host: Demetri Kofinas
Guest: Jeff Currie
Date: August 12, 2022

Episode Overview

This episode explores the forces driving the current commodity supercycle, focusing on macroeconomic trends such as income inequality, cycles of regulation and deregulation, deglobalization, and their impact on inflation, asset allocation, and the broader investment landscape. Jeff Currie, a prominent commodity strategist, shares insights on how historical cycles inform today’s economic environment and what that means for investors.

Key Discussion Points & Insights

1. Historical Cycles & Income Inequality

Peak Equality & Interest Rates
- Currie draws parallels between cycles of income inequality and macroeconomic policy, noting the correlation between peak equality and high interest rates, particularly marked in 1979.
- Quote:
  
  “Where was peak equality in the United States? 1979, right at peak interest rates, peak real commodity prices—they go all hand in hand.”
  — Jeff Currie (00:00)
Wealth Concentration & Financial Assets
- The current environment is compared to post-World War I, with maximum income inequality and low interest rates, driven by wealth accumulation in financial assets.
Cyclicality of Regulation
- Currie explains how increased regulation in the early 20th century reduced inequality, which was later undone by deregulation under Reagan and Thatcher, leading to new waves of inequality.
- Quote:
  
  “And then the Reagan and the Thatchers came in and tore down all that regulation… The cost of it was income inequality over that time period. And we’re now at the turning cycle.”
  — Jeff Currie (00:55)

2. Solving Inequality: The Role of Inflation

Inflation as a Redistributive Force
- Currie challenges the conventional wisdom that inflation disproportionately hurts lower-income groups, arguing instead that it monetizes the savings of the wealthy, providing capital to lower-income groups and stimulating demand.
- Quote:
  
  “Never in the history of mankind have we solved income inequality by bringing the low income groups up to the high income groups... We bring the high income groups down to the low income groups through inflation.”
  — Jeff Currie (01:44)
- He emphasizes inflation as a mechanism that reallocates capital, thus increasing demand for essentials like food, fuel, and capital goods.

3. Deglobalization, Redistribution, and Inflation

Converging Dynamics
- The trends of redistributive policy, deglobalization, and increased government spending are described as fundamentally similar in their macroeconomic effects.
- Quote:
  
  “But they’re really one and the same. They’re all doing the same thing because redistribution applies. De-globalization is all the same, which is going to create that demand and it’s going to reduce that savings. That savings gets spent. And as it gets spent, it creates inflationary pressures.”
  — Jeff Currie (02:25)
Implications for Commodities and Interest Rates
- With less savings and greater consumption, Currie explains there's upward pressure on interest rates and commodity prices.

Notable Quotes & Memorable Moments

On the Inevitable Cyclical Shift:

“All of this is kind of teed up to go one direction. And the structural forces for higher commodity prices is there.”
— Jeff Currie (00:44)
On Resolving Inequality:

“Ultimately, the whole idea of inflation is you’re giving capital to the lower income groups, they spend it, which creates the demand for food, fuel, capital goods, and these types of commodities.”
— Jeff Currie (01:59)

Timestamps for Key Segments

00:00 – 00:55: Historical parallels—peak equality, interest rates, and the cyclicality of regulation/inequality.
00:56 – 01:43: Impact of deregulation, globalization, and the current turning point in the economic cycle.
01:44 – 02:25: Rethinking inflation—redistribution, who really suffers, and historical mechanisms for resolving inequality.
02:26 – End: The convergence of redistribution, deglobalization, and their shared role in fueling the commodity supercycle and higher interest rates.

Episode Tone & Style

Jeff Currie’s analysis is data-driven, historically grounded, and challenges mainstream narratives about economic cycles and the consequences of inflation. The tone is direct and explanatory, blending economic theory with practical investment implications.

Conclusion

Listeners are offered a nuanced view of how historical economic cycles, policies, and inflation mechanisms are shaping today's commodity markets and investment opportunities. Currie’s assessment encourages reconsideration of who benefits and suffers during inflationary periods and underscores the importance of understanding cyclical macro forces in building resilient investment strategies.

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Transcript2 lines

[00:00]
A
Where was peak equality in the United States? 1979, right at peak interest rates, peak real commodity prices, they go all hand in hand. And so we're now an extreme like we were in 1920. We're at max income inequality, extremely low interest rates. You know why? Because the wealth, you plowed all the money into financial assets. Because you think about the capital holders in Europe were the huge benefactors of the globalization that essentially ended in the 1910s, 1920. That's why income and wealth inequality, the robber barons in the U.S. all of it, we're very similar type of dynamic as we were at that point in time. And so in 1979 and 1980, when this current cycle started, where interest rates declined and deflationary pressure started, you were at max equality. You had fixed the problem in 1920 by call it 1980. But the cost of fixing that problem was barriers to trade and regulation. And the list goes on and on and on. And then the Reagan and the Thatchers came in and tore down all that regulation and then you got the benefit of it. But the cost of it was income inequality over that time period. And we're now at the turning cycle. And you look at that, you say, hey, all of this is kind of teed up to go one direction. And the structural forces for higher commodity prices is there. Because any way you solve income inequality means it's going to be more demand because you're making them better off. I realized this a year ago, somebody asked me and go, well, isn't inflation bad for low income groups? No, it's not. It's bad for the higher income groups. In fact, another client pointed this out to me. Never in the history of mankind have we solved income inequality by bringing the low income groups up to the high income groups. We do it the other way. We bring the high income groups down to the low income groups through inflation. Because what is inflation monetizing? The savings of the high income groups. But I think the key point there is ultimately the whole idea of inflation is you're giving capital to the lower income groups, they spend it, which then creates the demand for food, fuel, capital goods and these types of commodities. If we're talking about, we ran this cycle deglobalization, by the way. That's why I use these three things, the red lighting demand to split these three dynamics up.
[02:26]
B
But they're really one in the same. They're all doing the same thing because redistribution applies. De globalization is all the same, which is going to create that demand and it's going to reduce that savings, that savings gets spent. And as it gets spent, it creates inflationary pressures. Less savings puts upward pressure on interest rates, commodity prices and everything else as you go through that cycle. So whatever you want to name it, it's all pretty much the same thing.