Christine Benz: Hi, I'm Christine Benz for Morningstar.com. I'm here at the Morningstar Ibbotson Conference and today I had the opportunity to sit down with John Hussman. He runs very wide-ranging portfolios and we got his opinions on a broad swath of different asset classes.
John Hussman: Yes about commodities, well, if you're holding cash and cash isn't earning anything and again somebody's got to hold this $2.4 trillion worth of non-interest bearing stuff. If they're also looking at some positive rate of inflation, they say well, all right I am going to be paying more for goods a year from now, two years from now, but the money that I'm holding is earning no interest. So I'm not going to make it up that way. So what's the natural inclination of people to do when essentially real interest rates are negative, right, you've got positive inflation, you're not making it in interest. What you want to do is you want to get goods now and that's a function that the commodity markets typically have had. When real interest rates go negative commodities surge and they surge to the point where if you were to buy a commodity you would expect a negative return versus the CPI and in fact you see that historically. If you look in 1975 commodity surged relative to the Consumer Price Index. Commodities are much more volatile than overall consumer prices.
But once they did that, commodities actually even during the ravaging inflation of the late 70s and early 80s commodities actually underperformed the Consumer Price Index. The CRB Index actually didn't advance as fast and the reason is because commodity is sort of front-load of that. That's what commodities have kind of done now. I mean a good part of this is there is a long-term story in China and in India and that sort of thing, but we had that long-term story back in 2007 and that didn't prevent commodities from plunging, oil plunging from $140 or so a barrel to down as low as $35. So commodities are much more volatile, they're forward-looking, especially with in terms of inflation and they try to move before the general goods and services of consumer prices.
So I don't think actually, what's funny is, I don't think commodities are a particularly good hedge against long-term inflation once inflation is actually anticipated. Commodities are hedge against inflation only when real interest rates have gone negative and interest rates haven't adjusted to the inflation expectations.