Senior commodity trader: "Second wave" of inflation concerns emerge, the inflation wave of the 1970s may repeat

A former commodities trader warns that a similar inflation pattern to that of the 1970s may be brewing. Responding to a "second wave" of inflation may not be easy. Although U.S. stocks are less than 1% away from hitting new highs, this trader believes there is one issue that could make investors uneasy in the coming year—inflation making a comeback. This warning comes from Fred, a former energy trader and current investor who writes a blog called "Fred’s Corner" on Substack and has long focused on commodities. In short, Fred is concerned that inflation may experience a "second wave" rise similar to that of the 1970s. He acknowledges that the current environment is not entirely the same as it was back then: 50 years ago, the U.S. faced an oil supply shock, while today, global crude oil is generally still in a relatively surplus state; moreover, the end of the gold standard back then also "affected the shiny metal in a special way." Fred compared the performance of U.S. stocks since June 2015 with the inflation cycle that began in 1967 during the 1970s. He analyzes that what was previously seen as the "ceiling" for inflation at 2% may now have become the "floor." Fred believes there are multiple reasons behind this change, and the resurgence of inflation is not coincidental. Fred stated, "Market conditions are always changing, but certain periods resonate with each other." First, he pointed out that rising international tensions and trade barriers, including tariffs, are pushing prices higher. Some countries are ideologically distancing themselves from globalization and encouraging the return of manufacturing to their home countries, which is weakening the cost benefits brought by comparative advantages, thereby pushing up inflation. However, in Fred's view, the most significant factor may be "massive fiscal stimulus." For example, in the U.S., this year's budget deficit is expected to reach 6.5% of GDP; meanwhile, the German government, known for its fiscal prudence, is also planning nearly €1 trillion (about $1.2 trillion) in spending. Against the backdrop of a constrained supply system, such fiscal stimulus could significantly boost overall demand, leading to price increases. Fred does not assert that this "second wave" of inflation will return to the extreme highs seen at the end of 2021. However, he emphasizes that inflation does not need to reach such heights to pose a serious shock to financial markets. Not optimistic about long-term bonds, stocks are a "decent safe haven" So how should investors respond? Fred believes that in an inflationary environment, long-term bonds may be the worst-performing asset class. In contrast, short-duration bonds are more attractive, such as the 2-year U.S. Treasury bond currently yielding about 3.5%. Stocks remain "a decent safe haven," but industry differentiation is necessary. He stated: "Commodity producers are clearly good inflation hedges, as are the infrastructure and industrial sectors. But valuations must be reasonable, and in times of tight supply in the commodity market, an asset accident (such as a mining disaster) could be a 'double whammy' for some producers." He also pointed out that the current dividend yield of the S&P 500 index is only 1.15%, close to historical lows. "At the current valuation levels, allocating a portion of cash-like assets with yields is not a bad idea." In addition, allocating so-called 'hard assets'—especially real estate—is also crucial. Fred stated that the correlation between real estate price increases and official inflation indicators is quite high, and its average yield often compensates for the underestimation of real inflation in official data. The best inflation hedge tool remains commodities However, in Fred's view, the best inflation hedge tool in the current portfolio is still the commodities themselves. (He also admitted that he has previously engaged in commodity trading, which inevitably leads to some bias.) He reminded investors not to focus solely on crude oil—although he believes that given the generally bearish market sentiment, the risk-reward ratio for oil prices in 2026 is not bad—and precious metals; they should also pay attention to industrial metals (such as copper) and agricultural products. However, he also cautioned that holding typical commodity funds has cost issues because futures contracts need to be rolled over continuously. Currently, the annual roll cost of the Bloomberg Commodity Index is about 2.9%. Fred revealed that his current portfolio allocation is: 65% stocks (of which 5% is hedged through one-year put options); 20% cash and short-term bonds; 20% commodities. But since about a quarter of his stock allocation is related to commodities (including oil producers, fertilizer manufacturers, broad industrial metal miners, and lithium-related investments), his overall commodity exposure is actually close to 35%