The magnitude of the stimulus over the past year may be driving inflationary expectations. This, combined with potential synchronized global growth and supply constraints may all serve as tailwinds for commodity producers.
Jenna Dagenhart: It's difficult to exaggerate the magnitude of liquidity being injected into the system. We're getting it on both fronts with several rounds of coronavirus relief bills in the trillions of dollars, and with aggressive monetary stimulus measures, including pledges to keep rates near zero, and $120 billion of bond purchases each month. Joining us now to talk about rising inflation expectations and some of the implications is VanEck Commodity Strategist and Portfolio Manager, Roland Morris. Roly, what do these developments mean for the macro story?
Roland Morris: Jenna, I think it's really important to understand what you mentioned: the magnitude and how unique this is really for all history of fiscal and monetary policy response. The fiscal response is roughly five times what we did following the '08 crisis, and it was all front-loaded within one year. So, the fiscal response from the government has been remarkable. In fact, about 25% of U.S. GDP has been added to the economy over the last year, in direct fiscal stimulus.
And on the monetary side, it also was historic, and the timing of both of these events was simultaneous. If you remember in the '08 crisis, first we lowered rates, and then we had a fiscal package that was roughly $800 billion in March of '09 that was passed. And then the monetary stimulus in the form of QE 1, 2, 3 and 4, came spread out over the next four years.
So, the stimulus was added very slowly, even though it seemed large at the time. This has all been in one year. In fact, the Fed bought more Treasuries within just a six-week period last year, than [Ben] Bernanke and [Janet] Yellen did in an entire 10-year period.
Well, in fact, the size of the stimulus, both fiscal and monetary, has been so large that there is currently a debate that the stimulus has been too much for the economy. And that's another factor driving inflationary expectations, which have been rising.
Jenna Dagenhart: That really puts it in perspective when you compare it to Bernanke and Yellen. Now because of inflationary pressures, bond markets are making a lot of noise. What's happening with rate expectations and the yield curve?
Roland Morris: So far, the rate backup has been orderly, although it was a little bit choppy recently. Yield curves tend to steepen when growth expectations rise. This is actually a good thing. And we just need to have that transition as we hand over to the real economy to support growth. If rates were to back up in an unorderly way, or if yield curves were to steepen to far, it could inhibit growth. So, it is a tough balancing act, but the Fed has made it clear that they're focused on unemployment and that's their priority. And they're actually shooting to have inflation higher than 2% for an extended period of time. So really, they've made it clear that they want inflation higher, and they're going to focus on unemployment.
Jenna Dagenhart: So what are the implications for gold?
Roland Morris: Recently, it's been a little bit tough. Gold's been pulling back. There's a couple of influences here. The excitement over reopening of the economy and the potential strong growth we're going to have has sort of calmed fears of any sort of financial disruption. So gold, which is also a safety asset, has been under a little bit of selling pressure, because maybe we don't need that safety against the financial system in the short term. Longer term, I think gold will do very well, because I do think we are risking some potentially much higher inflation over the next decade. And gold traditionally has protected investors from those inflationary pressures.
Jenna Dagenhart: In a nutshell, how will the macro forces impact demand for commodities and pricing outlook?
Roland Morris: I mean this anticipated economic boom and this fact that it's going to be synchronized globally as we come out of the pandemic, is likely to increase demand well beyond the supply factors, which are already constrained from the long bear market we had over the last 10 years. So, producers have constrained their supply by reducing investment. At the same time, we're going to have a potentially booming global economy driving demand for all of these natural resources. On top of that, there is a long-term, particularly for industrial metals, new demand factor, as we start to transition away from fossil fuels, towards more renewable sources of energy.
Jenna Dagenhart: Well, Roland, thank you so much for joining us. Great to have you.
Roland Morris: Thank you, Jenna.
Jenna Dagenhart: And thank you for watching. That was VanEck's Roland Morris. I'm Jenna Dagenhart with Asset TV. To receive regular updates from VanEck's experts, please visit vaneck.com/subscribe.
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