Chris’ note: Yesterday, we looked at the growing opportunity in clean energy as Uncle Sam pours hundreds of billions of dollars into the sector via the Inflation Reduction Act. But it doesn’t mean fossil fuels such as oil and natural gas are going away.
I recently spoke with hedge fund manager and newsletter writer Chris MacIntosh for subscribers of our Legacy Inner Circle advisory. He’s zeroed in on commodities at his hedge fund, Glenorchy Capital. And he’s published some of the best research I’ve read on why the energy transition depends on fossil fuels.
Chris lays out his case below. Plus, he shows why a diversified portfolio of commodities is set to deliver triple-digit gains over the next decade. That’s based on his research of 100 years of market history.
Chris Lowe (CL): You’re one of the biggest commodities bulls I’ve spoken with. We’ll get into why in a moment. First, how did you get into money management?
Chris MacIntosh (CM): I worked as an investment banker many years ago, including a stint at Lehman Brothers. Then, in the early to mid-2000s, I built a venture capital firm. It deployed about $30 million into private companies.
In 2016, I sold that company and began managing money for high-net-worth folks at my new firm, Glenorchy Capital. We’re long-term, deep-value investors. We expect to hold positions for at least five years.
Right now, we’re heavily invested in commodities. We’re not commodity guys, per se. But that’s where our research has led us.
CL: Folks who invest in this sector tend to be specialists. As more of a generalist, how did your research lead you here?
CM: There’s been a decade of underinvestment in the commodities sector. There’s not enough new supply coming onstream — from anywhere – thanks to the push for renewables.
International wars are brewing – not only between Russia and NATO, but also between China and the U.S. And wars are never bearish for energy assets.
On top of that, we have record inflation. We’ll see the inflation rate drop, then rise, then drop again. But it will remain far above where the Fed sets interest rates. So cash is trash. You’re losing more from inflation than you’re earning in interest.
As long as that’s the case, we’ll hold on to our commodities positions. This asset class benefits from persistent inflation.
CL: During the first six months of the year, commodities ripped higher. Then the sector started to drop around June. The Invesco DB Commodity Index Tracking Fund (DBC) – a good stand-in for the overall sector – is down 15% since its peak that month. What do you make of that dip?
CM: I’m a long-term investor. I think in periods of five years or more. So I don’t really care what prices are doing now or what happens in the next six months.
What will the Fed do? What’s going to happen with the futures curve on wheat? I don’t care.
The long-term upward trend is obvious. Everything that happens in between is largely noise.
Imagine you’re the CEO of a Western energy firm. You hear that by 2030, energy firms like yours won’t be around anymore. That the world will run on wind and solar instead.
Building out more capacity typically has a payback time of about 10 years. So as CEO, you don’t invest your capital in more production even though prices are high.
That’s what makes this time different from past commodity booms. We’re not seeing as much new investment in production as we did in past cycles. This means we can’t rely on new supply to bring down prices, which happened in past cycles.
CL: This is an important point. We have an energy transition underway. But you say we need fossil fuels to power that transition. We can’t build out the capacity to power the world on renewables without tapping energy from fossil fuels. Why?
CM: The renewables we’re talking about are mainly wind and solar. Day turns to night. And the wind doesn’t always blow. So we need batteries to store power from these sources and feed it onto the grid consistently.
And to make those batteries, we need cobalt, copper, nickel, and other metals. To mine them, we need, among other things, diesel-powered excavators and trucks. We then need to load those metals from these trucks onto container ships that burn bunker fuel to take them where they need to go.
Or think about farming. As a farmer, you have two major costs – diesel and fertilizer. Without these two inputs, you can’t grow at scale.
You can’t make diesel without crude oil. And you can make enough fertilizer to feed the world without natural gas. We feed more than half the world’s population with crops that grow using these fertilizers.
And that’s before we the consequences of supply chain disruptions. Farmers can’t get tractor tires or machinery parts right now. Chips for farm vehicles and machinery are also in short supply.
CL: For someone trying to make sense of all these shifts in the world, where is a good place to start in your portfolio?
CM: My team and I looked at three past crises to answer this question. Those were the Great Depression, which was deflationary… the 1970s, which were inflationary… and the 2000s, which were a hybrid.
Each time, a basket of commodities massively outperformed not only cash, but the S&P 500 as well.
It’s an even split among agriculture, precious metals, energy, and base metals.
From 1929 to 1940, during the Great Depression, this model portfolio returned 122%. The stock market, meanwhile, lost half its value.
From 1970 to 1980, the same portfolio gained more than 400%. So even though inflation wiped out 80% of your buying power that decade, you still stayed ahead.
And from 1999 through 2010, which included the dot-com bust and the 2008 crash, you’d have made about 360% on a commodities portfolio.
That compares with a 35% return for the S&P 500 over that time.
We’ll see something similar play out now… but on a grander scale.
So I suggest your readers make commodities part of their portfolios. For the reasons we’ve gone into, that’s where they want to focus for at least the next few years to protect themselves. If history is any guide, we’re looking at triple-digit returns for that simple four-way commodities split.
CL: Thanks, Chris.
CM: Sure thing. Any time.