Authored by Lance Roberts via RealInvestmentAdvice.com,

The commodity supercycle thesis is everywhere right now. Bank of America’s Michael Hartnett, one of the most widely read strategists on Wall Street, recently declared“commodities the biggest trade of the next five years,”anchoring the call on deglobalization, chronic capital underinvestment, and a world drifting away from dollar dominance. As is often the case, the narrative is extremely compelling. However, it’s also internally contradictory in ways that most investors aren’t stopping to examine.

After three decades of managing money, I have learned to be THE most skeptical of the trades that feel the most inevitable. That skepticism isn’t contrarianism for its own sake, but rather the recognition that when a thesis achieves consensus, the crowd has usually already priced the easy part of the move, and the hard part is what comes next.The commodity supercycle argument has real structural legs. But it also carries a reflexivity problem, a dollar mechanics problem, and a catastrophist assumption problem that, taken together, make the clean “go long commodities” conclusion far messier than the headline suggests.

Let’s work through each one carefully, and as always, with the data.

The most straightforward critique of any commodity supercycle thesis is that a sustained commodity rally is, by definition, inflationary. And sustained inflation is demand destruction. Before we get to the counterarguments(there are legitimate ones), it’s worth mapping out the feedback loop precisely, because the mechanism is more complex than the simple“inflation is bad for growth”headline suggests.

Commodity bulls offer a legitimate counterargument here. First, they distinguish between demand-pull inflation, where a hot economy bids up prices, and supply-constrained inflation. The latter is where chronic underinvestment means the world can’t produce enough regardless of demand levels. Hartnett’s case leans heavily on the supply side, and that’s the more defensible version of the argument. A decade of ESG-driven capital withdrawal from energy and metals, combined with the shale revolution’s diminishing returns, has created real supply deficits in several commodity markets.

The data below illustrates the scale of that underinvestment. Global upstream oil and gas capital expenditure peaked around 2014 and remained roughly 40% below that level as recently as 2023, even as demand returned to pre-pandemic levels. That is a genuine structural story, and certainly is worth paying attention to.

But even granting the supply-side framing, the reflexivity problem doesn’t disappear. This is a point that is often forgotten in the“heat of the moment”of a profitable trade. The markets are not static, but dynamic, and, as the old saying goes,“high prices are a cure for high prices.”There are two reasons why that is true.

First, high commodity prices are a tax on growth by transferring wealth from consumers and manufacturers to producers. That transfer compresses the demand on which commodity producers depend. Governments and central banks respond asymmetrically to commodity inflation by releasing strategic reserves, imposing windfall taxes, or accelerating substitution. The 2022 oil spike is a perfect case study: WTI briefly hit $130 per barrel, the Biden administration released over 180 million barrels from the Strategic Petroleum Reserve, and demand destruction combined with a Fed tightening cycle broke the trade within months of the initial spike.

Secondly, high prices bring more supply online. When prices rise, producers are incentivized to produce more products. When that increase in supply collides with the collapse in demand, the cycle reverses quickly due to the supply glut. As shown in the chart below, the commodity market is notorious for booms and busts precisely because of this.

Source: ZeroHedge News