U.S. companies have so far been able to push higher costs onto the consumer. There hasn’t been much of a decline in profit margins yet—they’ve remained above all the previous cyclical peaks going back to 1947. But we suspect that margins are on the cusp of substantial erosion. It’s typical for profit margins to decline well before an economic recession materializes.
We’ve been adding to long commodity positions given the recent downturn in prices. Going back to late 2020, we contended that commodities were moving to a more balanced market after a long period of disinvestment and capital discipline by producers.
We continue to believe in a persistent tailwind for commodity prices given the sustained supply disruptions around the world and chronic underinvestment in infrastructure over the last several years.
In addition, the unprecedented monetary and fiscal response to the pandemic could prove inflationary and commodities could provide a potential hedge.