How Biden’s plans might direct trillions into one sector … a company poised to benefit … how it all fits into a major investment thesis from Eric Fry
Want to hitch your investment dollars to a $4 trillion bazooka of capital?
If President Biden’s legislative priorities play out, that’s what he’s going to offer investors.
From Reuters:
U.S. President Joe Biden next week will travel to Pittsburgh … to unveil a multi-trillion-dollar plan to rebuild America’s infrastructure, choosing a backdrop of an American city with a long union history.
Biden is expected to push for a “Build Back Better” plan that could have a price tag as high as $4 trillion to pay for traditional roads and bridges while also tackling climate change and domestic policy issues like income equality.
It’s believed the plan will be split into two parts, with the first focusing on U.S. infrastructure projects. The second will target Biden’s domestic priorities, such as universal prekindergarten, national childcare, and free community college tuition.
It’s the first part we’re focusing on.
For more on that, here’s the Washington Post:
Biden’s proposal is expected to center on infrastructure spending, with hundreds of billions of dollars to repair the nation’s roads, bridges, waterways and rails.
It also includes funding for retrofitting buildings, safety improvements, schools infrastructure, and low-income and tribal groups, as well as $100 billion for schools and education infrastructure …
The infrastructure component is expected to include $400 billion in spending to combat climate change, including $60 billion for infrastructure related to green transit and $46 billion for climate-related research and development.
The plan also would aim to make electric-vehicle charging stations available across the country. The measure would also include $200 billion for housing infrastructure, including $100 billion to expand the supply of housing for low-income Americans.
Bottom line, if Biden gets his way, we’re about to build and repair an enormous amount of infrastructure … and that should put one asset class on your radar …
Commodities.
***Biden’s plans could serve as an additional tailwind to an investment trend that Eric Fry has been profiting off of in recent months — the “commodities supercycle”
For readers less familiar, Eric is InvestorPlace’s global macro specialist.
This means he starts his investment analysis by looking at the big-picture forces that are driving global markets.
That could lead him to, say, a frontier-market stock … or possibly an opportunity in South American currencies … or in this case, a possible boom in commodities.
Now, commodities work differently than stocks. So, when investing in this sector, it’s important to understand how their cycles play out.
Here’s Eric analysis of the supercycle from back in September:
Unlike stocks, which tend to move higher over time, commodity prices cycle through powerful multiyear booms, followed by spectacular multiyear busts.
These are called “supercycles.”
No two supercycles are identical. But they all share two distinct traits:
1. In their youth, they produce huge investment gains.
2. In their advanced years, they produce huge investment losses.
That’s why it’s so important to pay attention to them early on. They grow up so fast.
Eric believes the previous commodity supercycle lasted 21 years … and ended roughly one year ago.
You can see the rise and fall of this supercycle below by looking at the TR/CC CRB Commodity Index (CRB).
Notice how CRB quadrupled between 1999 and 2008, only to then lose 77%, which completely erased all its prior supercycle gains.
Back to Eric:
Obviously, without the benefit of hindsight, no one can be certain that this year’s commodity rally is the birth of a new supercycle.
But the devastating commodity bear market of the last decade was exactly the sort of event that creates conditions for a new bull market.
Fast-forward to today, and here’s the same chart from above, updated. We’ve circled what’s happened in green …
Eric’s Speculator subscribers have already benefited from this surge, as they recently closed out a gain of 1,350% on commodities mining company, Freeport McMoRan (FCX).
Now, why has FCX done so well? And why might it be poised to continue benefiting if Biden’s infrastructure plans come together?
Because Freeport McMoRan is one of the world’s largest, and best-run copper mining companies, and copper is basically the go-to metal when it comes to building.
***Copper is a critical commodity when it comes to an infrastructure build-out
Copper is the must-have metal when it comes to electrical wiring. It’s also a major component of plumbing. Frankly, if you’re building something, copper probably plays a role.
In fact, about 43% of all mined copper is used in building construction. Another 20% or so goes to transportation equipment — and that figure will only climb as our world increasingly turns to electric vehicles.
Copper.com reports that electric vehicle sales growth will increase demand for copper by 1,700 kilotons by 2027.
You can get a sense for the enormity of that demand in the chart below.
Sources: International Energy Agency (IEA); IDTechEx 2017; EEI/IEI; Bloomberg New Energy Finance
***Keep in mind, copper is a huge part of another one of Biden’s initiative’s — green energy
From The Verge (bold added):
Something does not come from nothing. That fact can be easily forgotten when it comes to seemingly abstract concepts like “energy.”
As the climate change crisis worsens, more politicians are starting to underscore the importance of transitioning to clean energy.
More clean energy means more solar panels, wind turbines, electric vehicles, and large-scale batteries. But it also means more demand for the materials that make those technologies possible.
In some cases (like silicon for solar panels), higher demand is unlikely to be an issue …
But our supply chains for other materials — like neodymium for wind turbines, lithium and cobalt for batteries, and copper for basically everything — may need to shift.
And this is from Axios:
The world’s transition to renewable energy and electric vehicles will require unprecedented amounts of copper from potentially new mining operations …
The global need for copper could increase by an estimated 350% by 2050, with current reserves depleting sometime between 2035 and 2045, as wind and solar energy generate an increasing percentage of electricity and more people adopt electric vehicles.
***But if copper and Freeport McMoRan are poised to do so well, why did Eric recently close out a position?
Because that’s what veteran investors do to protect outsized gains. It doesn’t reflect a shift in Eric’s beliefs about FCX or the commodities supercycle.
Here’s what he wrote to his Speculator subscribers when recommending the closed position:
To be clear, I still like this position and I expect it to continue working its way higher over the next few months.
That said, I would repeat the trader’s aphorisms I cited yesterday:
“Little pigs get big, big pigs get slaughtered.”
And …
“You never go broke taking a profit.”
With the Freeport trade, we have been very successful “little pigs.”
To me, the analogy is that of waves lapping the shore as the tide comes in. Overall, the tide is rising, but each specific wave has its own ebb and flow, and some waves may not break as high up the beach as others.
Similarly, even within a secular growth trend in commodities, there can be mini-outflows for a variety of reasons.
On this note, look again at the long-term chart of CRB Index we highlighted earlier. Below, we’ve circled the succession of ebbs-and-flows that characterized the last supercycle.
If you look closely at the far-right edge of this chart, you’ll also see a slight downward jut.
I reached out to Eric to get his thoughts on this pullback — specifically, whether it was just a normal ebb/flow or if it might be something more significant.
His take was “I don’t think the recent commodity ‘pause’ is anything more than that.”
At the end of the day, the most important thing is the big trend. And that appears to remain in a strong upswing.
From Yahoo! Finance earlier this month:
Richard Adkerson, chief executive officer and chairman of top publicly traded producer Freeport-McMoRan Inc., said the surge in (copper) prices to above $4 a pound isn’t just a spike and is supported by fundamentals — with scarce stockpiles, strong demand and dearth of big new projects waiting in the wings.
For 74-year-old Adkerson, the 2020-2021 upswing has “a degree of an echo” with a decade ago, when prices hit record highs after Chinese industrialization outpaced supply growth.
While “you never know what’s around the corner,” the latest rally is supported by even fewer prospects to bring on new supply, he said.
“If copper were to go to $10 tomorrow, it would take us seven, eight years to get new production to the market,” he said during the Fastmarkets Copper Seminar on Friday.
Wrapping up, we’re not wild about the government creating and blowing through another $4 trillion. There will be long-term consequences to this degree of wild spending.
But perhaps the best way to prepare for “then” by is taking advantage of “now.” And “now” is setting up to offer investors big returns in the commodities sector.
We’ll keep you up to speed here in the Digest.
Have a good evening,
Jeff Remsburg
