Are commodity constraints shifting capital from financial to physical investment?
Core argument: Commodity capacity constraints, worsened by the "weaponization" of the periodic table, raise prices and shift demand toward physical over financial capital, which the author argues pushes interest rates higher and creates an inflation-duration trade-off.
Given the capacity constraints many commodity markets face today, which are made worse by the “weaponization” of the periodic table, as the global economy grinds against physical constraints and prices rise, the need for physical capital over financial capital leads to higher interest rates, creating an inflation-duration trade-off. As the cost of capital falls and investors expand their horizons, they become more focused on duration and longer-term growth opportunities. As longer duration financial returns become more attractive than physical ones, capital is redirected into the financial economy, i.e. the Nifty Fifty, Dot-com Boom and FAANG/Mag Seven Boom. Note that these were all ‘asset-light’ booms. The Nifty Fifty was about brands like Coca-Cola or McDonalds that were asset-light scalable franchises in the same way that Microsoft software was in the 1990s or Google was in the 2010s. Eventually, however, demand catches up to physical capacity constraints, creating better returns in the physical economy than the financial economy, motivating the redirection of capital back into the physical economy, i.e. 1968-1980 and 2002-2014. The higher cost of capital simply reflects the better returns in the physical economy and the need to attract capex to expand production capacity, which is where we are today.
