MW How this commodity trader is preparing for a second wave of inflation
By Jamie Chisholm
A similar pattern to the 1970's may be on the cards, says this former commodity trader
It's going to be difficult riding the second wave
Stocks are starting the holiday-shortened week less than 1% from a fresh record high. But there's one issue that may cause investor conniptions in the coming year: a resurgence of inflation.
That's the concern of a former energy trader and now investor blogging on Substack as Fred's Corner, with a focus on commodities. Fred, as we shall refer to him and whose identity is known to MarketWatch, sets out why price pressures may be revived, and what to do about it.
Simply put, Fred fears a second wave of inflation like that seen in the 1970's. He accepts elements are different now: there was an oil supply shock 50 years ago, whereas we currently have a surplus; also the end of the gold standard back then "impacted the shining metal in a specific way."
"Markets are always different, yet some periods rhyme," he says, presenting the following chart, which overlays the recent period starting in June 2015 to the period of the '70s (starting in 1967).
Source: Fred's Corner
Note how the green circles indicate that the previous inflation ceiling of 2% "has now become a floor," suggests Fred, and he cites a number of reasons why inflation may pick up again.
First, he notes that China's exporting of deflation has faded. Increased international tensions, including tariffs, are increasing prices. An ideological move away from globalization by some countries and the encouragement of reshoring that denudes comparative advantage benefits may also lift prices.
But arguably the biggest influence will be what Fred calls "fiscal largesse" as the U.S., for example, is expected to run a budget deficit of 6.5% this year, and even the usually parsimonious German government is eyeing a roughly one trillion euro ($1.2 trillion) spending splurge. All this may boost aggregate demand while supply systems remain constrained, bumping up prices.
Now, Fred does not appear to be suggesting that the second inflation wave this time will take levels back to those highs at the end of 2021. But they don't have to get that high to cause problems in markets.
So, what should investors do?
Longer-term bonds are likely the worst asset classes to hold in such an inflationary environment, according to Fred. Better to consider shorter-duration bonds, with 2-year Treasurys BX:TMUBMUSD02Y for example, currently offering a yield of 3.5%.
Stocks are "a good refuge," yet require some differentiation of sectors. "Commodity producers are obviously acceptable inflation hedges, and so are infrastructure plays and industrials. Yet valuation needs to make sense and asset failure [such as a mining accident] for some producers can be a double whammy in a tight commodity market," he says.
It's also the case that given the S&P 500 SPX currently has a near-record low dividend yield of just 1.15%, "having a pocket of yielding cash equivalent is not a bad idea with current stock valuations," says Fred.
Having so-called hard assets, like real estate, is a must. "The price appreciation of real-estate correlates quite well with official measures of inflation. And the yield on average makes up for what official figures underestimate real inflation by," he says.
However, Fred reckons the best hedge for a portfolio right now is commodities themselves. (He accepts that his former job may make him a bit biased in this regard).
Don't just consider oil - for which Fred notes there's a good risk/reward for 2026 because everyone's bearish - and precious metals, but also look at industrial metals like copper and grains. He presents the table below to show how various commodities performed in the first and second wave of 1970's inflation.
He does warn that holding a typical commodity fund incurs a cost as futures are rolled over, currently around 2.9% for the Bloomberg Commodity index XX:BCOM.
Fred's says his current portfolio is 65% stocks (which are 5% hedged with one year out put options); 20% cash/short-term bonds; and 20% commodities.
However, given that a quarter of his equity allocation is commodity-related (oil producers, fertilizer manufacturers, broad industrial metal miners and a lithium play), his total commodity exposure is more like 35%.
Examples of broad commodity vehicles include the iShares S&P GSCI Commodity-Indexed Trust GSG and the Invesco DB Commodity Index Tracking Fund DBC.
The markets
U.S. stock-index futures (ES00) (YM00) (NQ00) are up as benchmark Treasury yields BX:TMUBMUSD10Y rise. The dollar index DXY is lower, while oil prices (CL.1) rise. Gold (GC00) and silver (SI00) futures hit fresh record highs early Monday.
Key asset performance Last 5d 1m YTD 1y S&P 500 6834.5 0.26% 1.93% 16.20% 14.40% Nasdaq Composite 23,307.62 0.48% 4.64% 20.70% 19.08% 10-year Treasury 4.166 -1.50 13.40 -41.00 -42.70 Gold 4441.8 2.48% 7.46% 68.29% 68.93% Oil 57.03 0.62% -3.16% -20.65% -18.00% Data: MarketWatch. Treasury yields change expressed in basis points
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Wells Fargo's economics team has listed its favorite charts of 2025, and this one may partly explain why consumer sentiment surveys remain dour even as the stock market has surged to record highs this year. "A buoyant stock market is cold comfort to most of the U.S. population. The 6% of households earning $250,000 or more per year own nearly 80% of all equities in the United States," they say.
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-Jamie Chisholm
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December 22, 2025 06:47 ET (11:47 GMT)
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