When my son was in first grade, he’d come home from school eager to play “monkey in the middle,” with his mom serving in the role of monkey. Today, we have a game of monkey in the middle playing out on a global scale … and we’re the monkeys.
The Fed has now given us assurances that US interest rates are pretty much super-glued to the zero bound until 2023 or beyond. In Europe, meanwhile, monetary officials are now talking about attacking their own currency - the euro - to offset US dollar weakness that’s has pushed up prices across the Continent.
And that means we – investors – are now caught in the middle of two powerful forces in a race to drive their currencies lower. And how does one win a game of monkey in the middle? Well, to steal and rephrase a quote from hockey great Wayne Gretzky, you go to where the puck is going to be.
In this case, that’s likely to be commodities – and in particular, I’d say Archer-Daniels-Midland is well-placed to be a beneficiary.
When central banks are brawling over their currencies, you can run to a couple of places: stocks, gold, and commodities.
Stocks might not be so bad, in general, but at a time of excessive valuation in the Dow, the S&P 500 and the Nasdaq, I’d be extremely cautious about what stocks to own. The safest destination on the Street would seem to be dirt-cheap companies with solid demand and which pay a dividend (and, yes, those do exist, including ADM).
Gold is already proving its mettle and it has much farther to run ($5,000 isn’t out of the question). I don’t include gold in the commodity universe, however, because it’s much more a hard currency – the anti-fiat currency – than it is a traditional commodity such as nickel, wheat, or hog bellies.
Which brings us to commodities proper.
In a world where paper assets – dollars and euro and yen and whatnot – are backed by nothing more than government, hard assets are going to be the winner. That seems especially relevant today when Western debt has reached a point where governments are in “deep dookie” (that’s an official term).
Fed Chair Jerome Powell reflexively understands this, which is why he’s telling Americans to expect 0% interest rates for years, and higher inflation. He wants to inflate away as much of America’s debt as possible. As a result, the value of the dollars in your wallet will weaken.
But that means the value of others currencies will strengthen, by definition. Yet other countries don’t want that, because it makes the good and services they export more expensive in dollar terms. So, they will fight back by undermining their own currencies, as the euro zone is now talking about.
Ultimately, that’s good for hard assets such as commodities. They tend to hold up well because investors want to preserve their spending power in some form. I mean, a currency note can fall so far in value that it’s truly worthless and people will only use it for crafts projects (see Venezuela). But hard assets hold their value because in the worst possible scenario, someone always needs wheat, and someone else always needs adzuki beans and, thus, both commodities have a tangible value.
You could own a broad-based commodity ETF, but there are challenges to this in that such ETFs face storage costs if they own certain commodities outright, or they have cost issues with contango, backwardation and rolling over contracts if they own commodity exposure through the futures market.
I prefer owning a company such as ADM, which has been moving opposite the dollar in the post-Covid universe, as you can see in this chart. (The dollar is the blue; ADM is red.)
ADM processes everything from oilseeds to corn, soy, cocoa, and wheat. You’re not going to find tech-like growth here. But you will find consistent demand in just about any economy because of the human proclivity toward continued existence by way of eating.
You’ll also find good value and relatively cheap play on commodities. ADM currently trades at a mild 15 P/E, while price-to-sales is a miniscule 0.4. Price-to-book is an untaxing 1.4. And on top of that, you’re picking up a dividend yield right at 3%, which will serve an investor well in a 0% world.
If we’re all going to get stuck now playing monkey in the middle, then we might as well chase a ball that’s going to give us the best opportunity at winning as currencies race to the bottom.