Positive returns from stock market investments continued to flow in the third quarter of 2021.  At this point, we must wonder how much of these gains are evidence of global asset price inflation, rather than of improved business conditions.  Be that as it may, the opportunity cost paid by people on the outside holding cash and looking in on rising stock and real estate markets has never been greater.  Skeptics, market-timers, and even the most conscientious of risk-averse savers have been losing ground and may never catch up.  Current events confirm our strategic resolve to own stocks for the long haul.

         Jim Grant of Grants Interest Rate Observer (my favorite investment resource) is fond of citing information from A History of Interest Rates, by Sidney Homer and Richard Sylla.  Grant emphasizes that we are experiencing some of the highest bond prices (and lowest interest rates) in 4,000 years.  This environment of free and easy money is overlaid on “an economy whose current job openings, according to Evercore ISI, ‘are beyond anything ever experienced.’” Grant adds that investors under sixty years old have not experienced an environment of dramatic inflation and rising interest rates.  Perhaps it turns out that recent inflationary pressures turn out to be “transitory,” but I would not bet my client’s money on it.  Instead, I have been doing extensive research to determine how best to position client portfolios to resist inflationary pressures.  It turns out that the only surefire guard against unexpected inflation is some direct exposure to commodities.  Research from Vanguard suggests that a 1% rise in unexpected inflation would produce a 7% to 9% rise in commodities. Meanwhile, a 1% rise in interest rates would produce a 10% decline in the price of a typical ten-year bond. With this in mind, I have made a shift of ~10% of each typical client portfolio from bonds to commodities ETFs.  Owning a commodities ETF is virtually the same as yours truly showing up in a truck to store barrels of oil, bars of gold, chords of lumber, livestock, etc. in your basements. In the context of a balanced and diversified portfolio, having a moderate amount of direct commodity exposure is now an essential hedge against the biggest risk on the investment horizon.

          Clients often ask me about renewable energy and about how we are positioned to profit from changes related to climate.  Fortunately, we have been invested in an ETF containing all of the largest solar energy companies (symbol is TAN, as in “suntan”) for the last several years.  TAN has been one of the best performing stocks in our portfolios.  We also own Cameco, the world’s largest producer of uranium, which I bought in late 2020 on word that the U.S. was planning to establish a national strategic uranium reserve to support clean electricity production.  Cameco stock has nearly doubled in price since our purchase last year.  Rest assured that we are executing an effective ongoing process to identify actionable investment opportunities.

Mark Lloyd, Ph.D.

Vice President & Portfolio Manager