Join us for an insightful exploration of the fascinating world of commodity futures with Kurt Nelson, co-founder and Managing Partner of SummerHaven Investment Management. Kurt shares his unique perspective, honed over decades of experience, on the rich history and evolution of commodity markets – from the Dojima Rice Exchange in 16th century Japan to the modern-day cocoa futures trading. Discover how SummerHaven’s research-driven approach, including the firm’s dynamic commodity index, aims to uncover the elusive commodity risk premium and provide investors with diversified exposure to this complex asset class. Kurt offers insights on the challenges and opportunities presented by factors like inflation, supply chain disruptions, and geopolitical tensions, and explains why commodities deserve a place in a well-balanced investment portfolio. Whether you’re a seasoned commodity trader or just curious about this unique asset class, this episode is packed with engaging anecdotes, market analysis, a glimpse into the future of the commodity landscape, and trading history you might have missed out on! Don’t miss this captivating conversation with one of the industry’s leading experts in Commodities – SEND IT!
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From the Episode: WHITEPAPER – The Commodity Futures Risk Premium* 1871 – 2018
Check out the complete Transcript from this week’s podcast below:
Unlocking the Commodity Risk Premium with Kurt Nelson of SummerHaven
Kurt Nelson 00:06
We ventured into the index and ETF space, we thought to ourselves, Well, there’s a lot of investors who can’t do a separate account or can’t invest in a private LP, but they deserve to have well designed vehicles and opportunities to access the asset class, but what we brought was diversified commodities and a what’s now. You know, it wasn’t really a term of art back then, but think of like a smart beta or an enhanced beta. We were we could bring our research edge and gears research and his his credibility in the space. And so we launched an index, which is the SummerHaven dynamic commodity index.
Jeff Malec 00:43
Welcome to The Derivative by RCM Alternatives, send it!
Kurt Nelson 00:49
Hi. I’m Kurt Nelson. I’m a co founder and Managing Partner of SummerHaven investment management. We started in 2009 and are focused in commodity futures, which we think are a unique asset class different from your traditional futures markets and financial assets. It’s where we specialize and happy to speak with with Jeff in the podcast today.
Jeff Malec 01:23
What’s going on behind you on the wall there looks interesting.
Kurt Nelson 01:28
So my, my partner and co founder is Yale professor, Garret Rowan horse, so he’s Dutch, so he always reminds me that what we think is old in the United States is still pretty new in Europe. But you know, commodities are as as old as human civilization, and even commodity futures, interestingly, date back to over 500 years ago in Japan. So we have these. This history is to remind ourselves and visitors to summer haven that there’s a rich history to commodities. They’re not they may be new in portfolios, but they’re certainly not new even as commodity futures Dojima rice exchange was started in 15 9090s, or so in Japan, because Rice was money to the Japanese economy with the samurai and the feudal lords. And so they actually had not just a spot exchange, but a futures exchange. We have, interestingly, an image from 1830 it’s a painting. It’s not a photograph, because we didn’t have cameras then. But the exchange was already, you know, a few 100 years old, and it shows people running around the floor. But there’s even, there’s a back office in the corner, and you can see men carefully scribing on paper, you know, doing operations. That was the ops room. So, you
Jeff Malec 02:40
know, that’s Chicago. Guys don’t like to hear that. We think we were first in the commodity. The Board of Trade history files won’t like that.
Kurt Nelson 02:49
Yeah, we do have things going back to the, you know, obviously the 1800s because, you know, commodity started in Chicago around 1870s so even there, we’ve got 150 years of rich history.
Jeff Malec 02:58
So you got your own little museum there. Love it. What’s you have a favorite piece?
Kurt Nelson 03:03
I think it’s, it’s the piece from state of Massachusetts Bay, because just important to American history. But you know, when the country started and we were in a war with England, we had something called colonial pounds. We didn’t have dollars yet. They weren’t British pounds and, and we were a rough credit, right? We were a startup country at war with our, you know, with our founding owner. And inflation was 100% plus per year in the United States. What was to become the United States at that time, soldiers would usually sign up for three years and, and many of the colonies would do a fixed payment system, and I guarantee a certain amount of wages if you survived, and three years later, you could collect from your colony. So Massachusetts came up something really creative. We think it’s the first commodity index. They said we’re going to pay you in pounds, but whatever will buy this basket of goods. Think of it as CPI at the time. And it was a certain amount of Bucha corn, pounds of shoe leather, pounds of beef and and and wool. And roughly, interestingly, we got prices from that time Jeff, it was roughly equally weighted across those four and looking at prices and inflation at that time, it actually did a good job of immunizing those soldiers from the, you know, the cost of inflation while they were sacrificing their lives to try to create our new country. So we have an actual original bond is used to pay somebody. And it was so fun to see commodities back there when you’re starting our country shoe.
Jeff Malec 04:40
But we don’t have shoe leather futures anymore.
Kurt Nelson 04:43
Unfortunately, no, yeah, but you know, that’s the other thing that’s interesting. If you think about, if you looked at the Dow 30 from the 80s, it would have like Sears and Woolworths and just companies that, you know, kids that have no idea they think, really, that’s the dinosaurs, right? That you had people. Only into this, you know, into department stores and giving catalogs that were print every Christmas to or holiday period to order from. It’s the same thing with commodities, but it’s just, just because they they aren’t relevant today doesn’t mean that they weren’t commercially really important. You know, 50 or hard years ago, one example that we found in our historical dive was silk futures. You know, silk is still, it’s not, maybe, as common, still used in certain fabrics and clothes today. It was really big in the first half of the 1900s and it was largely came from Japan, and they had a very liquid, important futures market that traded, you know, for decades in 1940 or so, early 41 it stopped trading because FDR, could, you know, we were kept beginning to have tensions with Japan, right? We were halting oil shipments. There it was the precursors to to Pearl Harbor. And so he, he stopped the entire silk trade with Japan, which made the futures go away. But
Jeff Malec 06:05
it was Japanese futures. What’s that? They were Japanese futures as well.
Kurt Nelson 06:11
There was a market in Japan and in the US. Yep, I love it. So interesting things over time. So, yeah, I mean, so futures today, no, but you know, we don’t trade. We used to trade mess pork because we didn’t have refrigerated rail cars yet. And it was like they were, like, 50 pound wooden barrels of salted, cured pork, but they were deliverable against the future. And mess pork, mess, yeah, I had to look it up. Jeff, like, and then, you know, you had pork bellies, and now it’s lean hogs, but it’s all pigs, right? So things change over time too.
Jeff Malec 06:48
Now it’s the custom cut out thing that they’re doing, but it’s a separate conversation. Awesome. Well, I’m gonna cut where are you guys at in Connecticut? Right? We’re in Stanford, Connecticut. Yep, all right. Next time I’m out there. I’m going to come visit the museum. Hey, Steve, yeah. So let’s go into how did you get started in this whole world? What’s your background? Sure,
Kurt Nelson 07:13
I, I came out of a school with a bachelor’s in statistics and math, and I had, I was fortunate that I met a postdoc, kind of PhD. I was at William and Mary in Virginia, and at the time I wanted to do business in math, and I was thinking actuary. And this woman, thank God I met her. She’s like, No, no. I you know about derivatives, right? And I said, I have no idea what you just said. Just said. And so she gave me John Hull’s book. She had been a quant at O’Connor in Chicago, and she turned me on. I was hooked. She was a professor there. She was a Yeah. She was Yeah, essentially an adjunct professor finishing up some postdoc research. And those you know, you meet people in life, right, that that kind of can change or influence your course. And she saved me from, you know, calculating mortality tables in Hartford in a closet. And, yeah, and I was destined to go to Wall Street, so, but
Jeff Malec 08:17
she still ended up in Connecticut.
Kurt Nelson 08:21
So I did end up in Connecticut. And so I went to, started with AIG trading, great proving ground, and then UBS back, pre merger with Swiss bank back in the city. I spent, I was recruited from there to go to a really great lab for derivatives, which was AIG Financial Products. And you know, there were a few of those. There’s a credit Swiss financial products genre had one. They were multi asset, mostly over the counter derivative groups. And so for me, it was the best learning environment where I got exposure to rates, FX, equities, commodities.
Jeff Malec 09:02
And they were doing commodities as well. Well. We
Kurt Nelson 09:05
weren’t initially. So what happened is Hank Green burger and AIG had, they had AIG trading group, which had commodities and FX, and then then we were more in rates and in equities, and more in other financials, and in 2003 2004 Hank Greenberg said, I don’t want to financial products or financial services companies anymore. You’re going to merge financial products and in Westport, you guys make a lot more money and are a lot smaller. So I’m going to let you guys drive the combination and just keep what you want, and get rid of what you don’t, and just make everything one firm and run better, which was quite a mandate, but Hank was that way. And so one of the things we inherited was something called the Dow Jones AIG index, and had about a billion dollars in it, and it was trying to compete with GSCI. And this is important. Kind of the history of summer Haven too, because we, we, we sort of scratched our heads. Said, Okay, we’re not sure we know enough to say whether we invest in this or shut it down. Let’s get let’s do some work. And we brought in Geert as a consultant, and he helped to co author some research to study commodities as an asset class, like, is this a gimmick, or is this something real? And what came out of that was a paper called facts and fantasies of commodity futures, and it really gave not just AIG but the street and allocators and consultants a leg to stand on to understand commodities as an asset class. What does that even mean? And so it was the first really rigorous and deep study of diversified Commodities Futures compared to like, things like stocks and bonds, and trying to understand, why is there a risk premium? What? How big is it? How risky is it? And real
Jeff Malec 10:56
quick was AIG trade group, basically, hey, we have all this excess cash from insurance premiums. We need to invest it somewhere.
Kurt Nelson 11:03
It actually was, you know, the what I understand. It was a team that left Goldman Sachs and said, We can do something better, like we helped to build the GSCI, but it was really designed to be a matched book against all the producer hedging we do. So we’ve got a ton of oil because our book is full of oil. So okay, we’re like, doing all these hedges with the street, yes, sir, production liquidity weighted. So we’re going to sell an index and sit in the middle. And I think there’s some truth to that, but, but it wasn’t designed with investors. That’s the GSCI. And if you look at it today, you know, 65% petroleum and energy. And so it’s got some really huge commodities. And this, it does have a number 20, over 20 commodities in it, but some of them are just de minimis, you know, less than 1% weight. So B Com said, This is it, by the way, Dow Jones AIG today is the Bloomberg commodity index. It’s one of the it’s probably the premier benchmark for indexing performance. So the new index was going to be, we’re going to have sector caps and floors, and we’re going to have individual commodity caps and floors. So we are going to be liquidity and production oriented, but we’re going to do some sensible things for investors to help diversification. And so that was the Dow Jones AIG index that we inherited. You know, we there were probably 100 to $200 billion that came into commodities as an asset class, from oh four to oh eight, just
Jeff Malec 12:33
before the goal to gather assets, to invest in it, or to invest
Kurt Nelson 12:37
these were directional assets. You know, I think at AIG, our book, you know, grew to, you know, over 20 billion. But you know, at the time, you know, Goldman was raising assets, JP, Morgan, Barclays, and it was all, you know, swaps, typically structured notes, swaps, you know, coming from a derivatives desk to offer an investor exposure. So you saw pensions coming into the asset class, and they were looking, for the first time, I think investors saw commodities, diversified commodities, as something in the pie chart of asset allocation, right? Yeah. Okay, so fast forward to the financial crisis. It suddenly became, you know, not as fun to work for a large financial institution.
Jeff Malec 13:20
I was trying to get it. Were they trying to, like, spend this premium money, and then they ran out. And,
Kurt Nelson 13:26
I mean, like, AIG had its own set of issues right back then. And the I had gone to UBS, AIG actually sold its commodity index business to UBS, and I helped to acquire it for UBS. So it briefly became Dow Jones UBS, and then the index business was sold to Bloomberg, and now it’s Bloomberg, my index all the same index over that time. But I just I wanted to do something entrepreneurial. I wanted to do something with investors, and I didn’t want it to be synthetic. I wanted to be a fiduciary. I wanted to be a co investor and a manager. And so talked to Geert about this, and there was a group of us that wanted had this idea that, let’s do this as a create an investment manager. It’s the market is underserved. In general. There’s just not that many independent, commodity focused managers. And we have ideas that really don’t belong in a swap or an index, that really belongs in a fund. And so we started summer Haven together in 2009 and, and, have, you know, steadily learned and and grown the firm over that
Jeff Malec 14:34
right after commodities have gotten taken to the woodshin. Were you ever like, oh, we sure we want to do this. You know, did that help the thesis of like, hey, look, look what we did during that crisis period.
Kurt Nelson 14:45
It’s funny, Jeff, you knew that old joke about, you know, my mom always said I should have gone to Trucking School. And, you know, we had a, you know, we had a, a fork in the road in our careers in 2009 and, you know, in hindsight, probably. Would have been, you know, a very different experience if I had gone into private equity. You know, you’ll need both, right? And, you know, what we did is that it was really a trial, trial period. It was a proving ground for us, because commodities started a 10 year bear market. Yeah, you know, 2000 10s were not kind to commodities, and yet we survived, and we’ve succeeded. And I think the reason we did that is for a few reasons. One is we were really committed to doing this. You know, we were all in and people understood that, and they liked that specialty focus. We had, you know, good performance in the kinds of strategies that we tried to deliver in. So if we were in a long only mandate, you know, it might be trying to perform relative to a benchmark or relative to our peers. How did we do so if the asset class went down 10% but we went down five. Some allocators viewed that as a big win, right? Because it was their decision to invest. It was our job to manage money in the best way we could. The other thing that I think we learned as a firm is something that it’s a free lunch that almost no one takes enough advantage of which is diversification, right? And so what does that mean for a manager? Well, it means perhaps you do absolute return, but also you do long only or directional. And another way a manager can diversify is that you might focus on the large family offices and institutions. But also think about, how do you reach the high net worth or mass affluent? And so
Jeff Malec 16:47
you’re saying diversification on your business? Not exactly so diversification
Kurt Nelson 16:52
the lower case d, you know, it’s just like in general. It’s a good idea, yeah. And so what, what we did is we, we did grow our institutional business, and that that is still alive and well today, at the same time, we ventured into the index and ETF space. And so we, we thought to ourselves, well, there’s, there’s there’s a lot of investors who can’t do a separate account, or can’t invest in a private LP, but they deserve to have, you know, well designed vehicles and opportunities to access the asset class. How else? How can we reach those people, those allocators, those investors. So what we didn’t want to invent this ourselves from scratch. So what we did is we partnered with another firm, USCF investments. And you know, you may be familiar with them from as innovators and commodity ETFs. They brought out the first oil ETF uso, first natural gas ETF ung, and they’ve done other things. And we the kind of it was a two way street. They had a recognizable platform that investors, you know, were familiar with and had pipes to the street, but what we brought was diversified commodities and a what’s now. You know, it wasn’t really a term of art back then. But think of like a smart beta or an enhanced beta. We were, we could, we could bring our research edge and gears research and his his credibility in the space. And so we launched an index, which is the summer Haven dynamic commodity index. That’s a, you know, it’s got 15 year track record now is is done very, very well. It’s a long only commodity futures. But with this dynamic, basically long flat, it’s not long flat, it’s always long only, so it’s fully invested. But what, let me describe real briefly, what we do, because I think it gives you a lens into how we are different from maybe some others in this space. So we kind of look at 27 markets that are all the large commodities that would be in a Bloomberg commodity index or in GSCI, and we rank those on indications that we believe are correlated very much with scarcity and low inventory. And so we cross sectionally sort those at the end of each month, and we come up with out of these 27 commodities, 14 that we think are relatively more attractive and 13 that are less so. Think we kind of cut in half, right? And those 14 that we like get equal weight, and then the 13 get zero. It is sort of long, flat in that sense, but we do fully invest. If you put $100 into this index, then $100 would be allocated to these 14. There are some minor kind of guard rails on diversification, like we do require one petroleum one. Mean, one precious, one industrial metal, but otherwise we allow these to float, you know, and it doesn’t have this production liquidity constraint that that traditional benchmarks have, and, and that’s had really great performance. And it’s kind of how we bring our our research to bear, to try to to, you know, create some increased risk adjusted returns and and so that that approach of being research driven and then figuring out how to represent that in a effective way in a product or a fund is something that we just do across the board. You
Jeff Malec 20:44
let me back up a hair, right? So we had, what was it going into? 07 Jim Rogers is on TV and his bow ties and China commodity super cycle, right? Yeah. Ci was huge. So all those assets are flowing into commodities. Institutions were saying, Yeah, we need to have five, 10% in long only commodities where, like, just take me through that progression from, say, 2000 to the 2000 10s to today, of where you see institutions, whether they have that long only mandate at all, whether it’s all shifted to absolute return with commodity exposure. Like, how did you see that evolution?
Kurt Nelson 21:25
Yeah, I mean, our I think what we saw, you know, as an industry, there were still concerns about what happened during the financial crisis, but that affected all assets that de leveraging took, you know, it sucked assets out of fixed income, equities, out of commodities, out of credit, and then it kind of came back with a vengeance. Right? Every risky asset rallied hard until kind of mid 2011 I think the expectation of everyone, including Ben Bernanke and Janet Yellen, who, I think, you know, was, you know, and Stan Fisher and you know, these, these great minds, as well as people in administration. It’s in, you know, on the street, everyone thought inflation is going to come back with the benches too, because we just printed $4 trillion QE is not fictional, like we printed this money. It’s got to be inflationary, if inflation is a monetary phenomenon. And what did we have? We had disinflation, and we had, you know, drag a worry in Europe, worrying about a deflation trap. We, God help us if we get into Japan’s trap? So not only was it not inflation, it was disinflation and lower inflation. And commodities represent, you know, they reflected that. You know, commodities as an asset class probably went down 20, 30% during the decade when equities were, you know, going to the moon, and they didn’t slow down. So then I think that that what, what we witnessed, and this is across the board, you know, across other managers, peers, just a general, there was a general weakening desire to be long. Only commodities. Yeah, we were. There were fewer and fewer investors who wanted to be long, we still managed to find them, and we still had assets, but it was there wasn’t as much conviction with with some of the and we saw consultants start to give up on commodities as an asset class. So I think that that that trough was in like 2020, and and I think that was true, if you look when oil went negative, yeah, yeah. And we had that crazy moment like this, who to thunk it, right? You know, minus 36 $37 for that short term print.
Jeff Malec 23:53
But so you think it went like, from zero? I mean, no more than 2000s were, was anyone trying to have
Kurt Nelson 23:59
commodities? Yeah? No, I think, I think, as a let’s think about commodities as an asset class. So I’m thinking not long short here. I’m thinking long right? Because CTAs, as you know, have been active in commodities for decades, right? And so they commodities have had a representation even, even among trend followers. But I would say, you know, there was 10s of billions in the like early 2000s I think by the end of two by 2010 I think even with the sell off and and the financial crisis, I think there was still, you know, around a couple 100 billion, maybe two 50 billion in directional commodities. So that’s across kind of ETFs, private funds, separate accounts, various ways to try to measure that and track that. And I just think that number sort of as assets. So you had a 30% decline in performance. So you just had negative performance, which reduced assets. And then some people gave up, so that that. Number probably came down to somewhere between 50 to 100 billion by early by 2020, yeah.
Jeff Malec 25:06
And curiosity is whether it went from we need 10% now we only want 2% or zero. But who
Kurt Nelson 25:12
knows they had, they had zero, and then they went to, you know, three to 10. And then I think a number of them went back to zero, yeah,
Jeff Malec 25:21
or to trend followers, or other commodity adjacent stuff, as you’re saying,
Kurt Nelson 25:26
yeah. And we would hear messages like, Well, I’m not sure about the Commodity Futures risk premium we were, but you know, some of the investors might be skeptical, or their board might be, and it was just hard to defend. And so they would say, well, I’ll do natural resources equities, you know, like timber or farmland or, you know, gas, oil and gas, you know, private, yeah, some of them would say, I’ll just buy gold, or I’ll buy, you know, public equities and resources, because it’s easier for me to defend.
Jeff Malec 25:57
Let’s I want to take into all this, yeah. So what like? What do you say? Right? If I run the stats, and maybe you’re saying this because you’re using the wrong index, but if you line up any, most any commodity index, I think I have used the Dow Jones AIG before, but Right? It’s more volatile with lower return than almost anything, then bonds, then stocks, then combos. So I guess that’s the argument some of these guys are making. Like, I don’t understand the thesis here. You could What’s your argument for? Like, no, this is why it still needs to be in a portfolio.
Kurt Nelson 26:29
Yeah, for us, it’s a data problem. So when you think about Jeremy Siegel or Roger Ibbitson, what they one of their major contributions was just their empirical studies, like collecting all the stock data back 150 200 years, and that’s that led to stocks for the long run. So we actually undertook that project. So the original facts and fantasies paper went back to 1959 and it covered 59 to 04 and that was when it was initially published. We actually took it upon ourselves to do a 10 year update in the late teens, and to say, Okay, there’s all this skepticism about the commodity risk premium. And let’s look at the out of sample 10 years. And it turns out there was still a positive risk premium that it was, you know, orders of magnitude, not dissimilar from the scale and the vol of what was found in the original study, in some ways that that did something to assuage people, but there was still a lot of negative bias against commodities. So, you know, being kind of, you know, nerds about history and really passionate about kind of understanding the history of commodities. We went back and collected all the Commodity Futures data to the beginning of time. So we went, you know, through a number of of paper sources, newspapers, you know, university libraries, spent, you know, a number of years, and we collected data going back to 1870s and it’s all exchange traded commodity futures. So these are, and these were all the major ones that were worth reporting, you know, in the Wall Street Journal or in the, you know, the Boston Globe or The Philadelphia Inquirer.
Jeff Malec 28:21
And so we’d waited a couple years. And hey, I could have done all that work. And Right,
Kurt Nelson 28:26
exactly, yeah. So the what that gave us was a time series now that we could compare to stocks and bonds over over 150 years. And in fact, we wrote a paper which is available, called 1871 to 2018 we’ve now updated it to 22 commodity risk premium. And the fact the findings there were striking. You know, when you look at the like on a log scale, you know the returns to stocks, bonds and commodities. You know bonds are at the bottom. They have a lower vol, lower return, but you can definitely see the bill Gross’s career on Wall Street. You know, long term bonds just going straight up. You know, it’s the whole line took a different slope for the last 40 years as rates, you know, fell after the after the OPEC inflation. But interestingly, you know, equities have this, you know, volatile, but, you know, steadily growing upward sloping line to the right, which is the equity risk premium. And it turns out to be sort of a mid teens vol with an excess return of about, you know, five to 7% so you get a sharp of point four. Yeah, on, just on, just a vanilla like S, p5, 100, over 150 years, you look at commodities, it sort of ends up in a similar place. After 150 years, it’s got a similar return capture and a similar vol turns out the sharp to commodities is point four. Hmm. Is that that’s sort of sensational, and, you know, kind of, I
Jeff Malec 30:04
would assume it had a much larger ball, but you’re saying over that huge period, no, it’s because,
Kurt Nelson 30:09
if you eat, because what’s interesting is we’ve seen that that equities have a much higher correlation with each other now than they used to. It used to be you could diversify US stocks with equities in Europe and in Japan, and that doesn’t work. That’s they’re still very correlated. Even emerging markets have become and frontier markets have become correlated. So, but there’s still a really low correlation between corn and oil and copper, yeah, and fundamentally, fundamentally, and that still stands true today. Jeff, so you get great diversification benefit by having an equally weighted index over a long period of time. And so there’s no optimization yet, but it is rolling front month futures. It captures things like roll yield and contango and backwardation. And so it’s an investable time series based on exchanges that were liquid and open for the last 150 years, and so that that that was fascinating, just that fact alone, yeah, because you think, Okay, I just, we just to revisit a comment we had earlier on our discussion. You know, a lot of investors have a ton of equity right now. They have public equity, they have private equity, but their commodity futures allocation might be zero, and one of the things we say is, well, it might be something that you have an aversion to. It’s a futures market which might be a little unfamiliar to you, but if you look at the facts, if you look at the returns, the correlations, the volatility, zero can’t be the right number, right? Any optimizer will tell you that.
Jeff Malec 31:50
So it has to be optimizing for pure return, maybe. But even then, yeah,
Kurt Nelson 31:54
but it must be a recency bias or, you know, a behavioral bias against them. We respect that, and that’s real. The best fix for that is to generate returns for people so it shapes them out of their complacency. Ironically, you know, COVID did that. You know, we commodity returns are difficult to forecast, right? You can get a long term average, but you know, if you say what our commodity is going to be up next? To be up next year or the year after? That’s trickiest. It’s as easy in commodities as it is in stocks, right? Which is to say, it’s not easy. Inflation turns out to not be easy to forecast either. And so we came out. One of the reasons why commodities behave so poorly and why investors weren’t that worried about them is inflation was almost zero for, you know, most of the 2010s right? And the shocks to supply chains and, you know, shifts in supply demands, you know, trends from consumers created some pretty intense shortages during the period right after COVID. And
Jeff Malec 33:06
what, what do you say?
Kurt Nelson 33:07
We did not see? You know, inflation of 9% coming, no one did. And you had the, what I call the immaculate disinflation right after no one saw that inflation was just going to naturally fall to 3% it’s like the whole ride was just, it was a shock to our confidence about being able to predict these things. But what we saw was commodities did what they’re supposed to do. They just responded really strongly. You saw stocks and bonds go down at the same time, and you saw commodities go up, you know, scream high across the board. So that was a great reminder to everyone, you know,
Jeff Malec 33:44
well, it’s not that’s an interest, right? It’s not that they’re rallying because there’s inflation. There’s inflation because they’re rallying,
Kurt Nelson 33:50
right? Yes, there is, yeah, you’re exactly right. And some people say, Well, why is there a connection between commis and inflation? So we’ll just just think about what inflation is to an economist. It’s the consumer price index. And so it’s the price of, you know, goods that the consumers paying for, and it’s their prices going up. Well, if you go back one step, then you’re in the PPI, you’re in the Producer Price Index. So it’s the the kind of prices that of finished goods that producers are, you know, like things like, you know, rolls of copper, or, you know, corn that they can use to make corn flakes, or wheat for Wheaties. And you go back a step further, and you’re in the raw good, you’re in the actual, you know, bushels barrel or barrel of oil, you know, raw copper ore before it’s been refined. And that’s commodities. So I almost think, like the these price shocks. I’m not sure exactly the lag, maybe a few months, but first it hits commodities, and then it goes to the producer, and then the producer tries not to increase price until he hits a pain threshold, and then he does, and then it passes it on to consumers. And so those, those, those makers of finished goods, you. Try to not raise rise prices, but eventually they kind of have to, and they, as a group, kind of raise prices, and then then it shows up in CPI. And so, like, maybe,
Jeff Malec 35:09
unless they ignore a few pieces, but, yeah, but there’s other
Kurt Nelson 35:12
things, like, you know, healthcare or rent equivalents. There’s some goofy things in the way we calculate CPI, but there is a direct drive relationship, and that seems to be intact over time, real
Jeff Malec 35:31
quick, just because you mentioned the timber, right? Family Offices, institutions love timber, real estate, all this. So what’s your thing of like you don’t need to go? Is that too specific? It’s not diversified enough. What’s your argument for against that and resource companies of like, why own the copper miner when you can own the copper right? I think
Kurt Nelson 35:52
what I would say to someone is there’s nothing wrong with owning to own real estate, or owning tips or owning commodity equities. Like, that’s okay, but understand that commodity futures are different. And so in in the commodity equity space, you know, I think that some people that have an aversion to futures, even if there’s an easy product that’s, you know, that they can use, they might say, well, I’m going to buy oil companies instead of buying oil. And so, you know, 1015, years ago, you might have bought a huge company like British Petroleum and said, That’s just, that’s oil, you know, Exxon Mobil, you know, these are oil companies. And the problem is that for several months or a year you didn’t buy an oil company. You buy an oil you bought an oil spill in the Gulf. And, you know, the price of BP fell 50% oil didn’t move at all. And so clearly, commodity equities, we think, are just that you buy debt, equity, brands, you might manage, right? Yeah, yeah. And in fact, you know, as you probably know, that you know some, some big commodity firms hedge their their production is sort of, they’re running a business. So, yeah, you might sell futures. Farmers do it. Some producers do it, you know, and that’s been back and forth debated in the gold mining space. You know, people want it makes sense to hedge the price of gold, but investors share want you to actually be that. Yes, actually,
Jeff Malec 37:21
we don’t want you to be this very profitable company with low volatility. We want you to be a gold proxy.
Kurt Nelson 37:26
And in fact, looking back at the 2010s what you saw was that, you know, commodities fell 30% commodities as a commodity, equities went up maybe 50% and then the stock market broadly went up 300% so you kind of had this. You had the negative returns from commodity beta and the positive returns from equities. And so they kind of have our 5050, the I just think they’re different animal. I think gold, for example, you know, you can buy gold as a GLD, you can buy it physical. There’s different things you can do. You can, in fact, that’s been something that’s been flying off the shelves at Costco. If you’ve read that story, they’ve sold something like $500 million of physical gold. They can’t they run out of stock. You know, it’s like, it’s so funny, you get coins or whatever, like, yeah, they’re coins gold and silver, and so I’m sure there’s like a 40% markup on it, yeah, you get your, you know, 18 rolls of of of paper towels, and you get five pounds of trail mix. And then you get, you know, your your little, big guards and so. But commodity futures are, are different, and they, why are they really exciting to us? Well, number one there, they’ve been around for a long time, right?
Jeff Malec 38:48
One of the usually not, what gets people excited? Well, okay,
Kurt Nelson 38:52
but they have, they do have this risk premium, which is positive, and it’s different in nature than the equity risk premium or credit risk premium. And I think it really is. We’ve done a lot of work studying this, and their their price risk exchanges, where, generally, a producer, a hedger, comes from the market. And Keynes wrote about this. You know, 100 years ago. This is why commodity futures exist and exchanges exist. Is a farmer want owns corn, and he wants to sell his production, and so he goes to the futures market. He sells forward.
Jeff Malec 39:32
They should be called nows instead of futures, right? Because that farmer wants to lock in a price now, now. But you’re right, he’s he’s deliver it in the future, right but he’s demanding a price right now. He’s demanding liquidity. And so whenever I try and explain what I do to people in their futures, I don’t get it. I’m like, just think about as nows and they want to get a price right now. And like, what do they have to give up to get the price right now?
Kurt Nelson 39:54
You asked me to kind of, you know, explain, like, why commodity futures when there’s commodity equity? These are real estate or just what, and so I agree that those are options. And why would an investor, if you can own equities or real estate or hedge funds or gold, why would an investor, or what Keynes call a speculator, come to the Commodity Futures market? Because what’s different about a speculator or investor is that you don’t have that physical and you’re not running a matched book, you’re running a naked long or a naked short, right? You’re so an example if you, if you go long hog futures to provide a price hedge to someone, and you say, I want to run a matched book, that you have to cash short, how short sell hogs. And there’s no way to do that. If you turn that on its head and you say, well, if I’m going to short future, can’t borrow their hogs slide. You can’t borrow their hogs and sell them short and
Jeff Malec 40:50
then redeliver them. Yeah.
Kurt Nelson 40:54
The if you flip that on its head, you say, Well, I can buy, I can invest cash in hogs and sell futures. It’s like, well, kind of but you’re, you’re probably buying a farm in Iowa or North Carolina or something, and you know, that’s a very different thing. And if it’s a mining company, or if it’s cocoa or corn, like cash carry, is really
Jeff Malec 41:14
right back, you’re taking on that idiosyncratic risk, yes.
Kurt Nelson 41:18
So what you the speculator investor, is actually wearing the price risk, and our belief is that that’s why there’s a risk premium that to get
Jeff Malec 41:27
paid. To do them, you got to
Kurt Nelson 41:29
get paid. Another way to say it is, imagine that you’re providing flood insurance or hurricane insurance in Florida, and the premium gets driven away by competition, so that you can’t make money on it anymore. Well, I think the insurance goes away.
Jeff Malec 41:46
I think the work is happening right now and
Kurt Nelson 41:48
but what have, but often, what you do is that market participant, your people, offer it, the ones who remain, they offer it, and they get paid a lot. They take a lot of risk, and they get they earn a lot for it. If you’re offering flood or hurricane insurance in Minnesota, you might have a market for it, but you’re probably taking very little risk and getting very little return. And we think that that is a that is a dynamic that exists in commodities that the
Jeff Malec 42:16
other way to say it right, the producers not profit motivated. I mean, they are in a weird way, but they they’re willing to give a discount on their price because they have other needs that they’re meeting,
Kurt Nelson 42:27
right? They’re managing risk in a different way. And so I did a, you know, one of the benefits of having been both in the index and public space as well as in the private as a firm, this was something I didn’t know going in, but it was a wonderful kind of added benefit, which is that I can, because these are registered products, and I’m managing an index which is rigorous and public and has a, you know, returns that are on online, on Bloomberg, etc, I can talk about that, and so I can talk about our index and how it was, how it dynamic, and we’re at one and our story, I just did a webinar last week for several 100 people, and what we talked about was our Public Index did really outperform last year, And two of the big winners were cocoa and coffee. And so there’s soft that are overlooked by many, but they’re relevant and interesting to us. And the reason why I’m mentioning this is I was, I got a lot personally out of researching, you know, these markets for the webinar, much like the, you know, historic wall behind me I dove into, like, the history of cocoa in the US, the New York cocoa exchange was started in 25 so it’s having its 100th anniversary now. They were located in a building called the beaver building, which had, it was a flat iron style, style building that had the tip, that little point, like the flat iron building, and, you know, in lower Manhattan, it was located that tip was on Wall Street, and it’s still there. The building’s still there, and it’s like two blocks from the New York Stock Exchange. And the New York cocoa exchange was the set prices for Cocoa globally. And I think still is really important, right? It’s successor exchange that’s on ice. But for 50 years, the exchange was there, and the quote in the times from 1931 from the president of the exchange said this, it was very important to establish a market for businesses in the cocoa industry that needed a hedge market to protect their business and enterprise. And it was like, I extracted that and highlighted it for this webinar, because that’s exactly what we think, that this is why my futures exist. The funny thing that I think tickled me too, is that I have you seen the John Wick movies?
Jeff Malec 44:57
Or you know of them? I know of them. Yeah, so there’s a. Hotel,
Kurt Nelson 45:00
the continental that all of the the assassins hang out in, which is iconic, that that’s the beaver building. That’s where the exchange was. They filmed it there. So I just thought, what a rich history there’s like, okay, so Coco did well last year, and so a bunch of people are noticing it and looking at it. And I think you have an
Jeff Malec 45:20
severely underrepresented in most other industries and even some trend follower portfolios of like this, thing’s never done anything. Why is it in the portfolio? So,
Kurt Nelson 45:30
yeah, just a fun and, you know, funny anecdote on that, when we used to manage the the Dow Jones AIG index, Coco was one of the 20, you know, or 24 commodities that was in the index, and the Oversight Committee removed Coco just because of its smaller scale and liquidity. They removed it from the index about six or eight years ago. It’s still something that you can they track and observe, but it’s not in the index anymore, and so but
Jeff Malec 45:58
not to bash the Oversight Committee, but there’s no way if it had been up like it has been the last four years, they would have removed it from the index, right, correct, yeah. So it’s like, oh, the liquidity in this. Well, really.
Kurt Nelson 46:15
Getting back to something I said before, you know, predicting the future is is hard and, I understand, if you’re trying to run an index designed to track 200 billion that you have to make, you know, judgment decisions, and you end up with a lot of petroleum, a lot of natural gas, a lot of gold, and even, you know, cocoa is not any But even other smaller things like sugar and cotton and coffee are in the index, but they’re much, much smaller weight. Our view is, you know, you don’t know what’s you know in advance, what’s going to win, where you’re going to have a shortage, and so kind of spread your bets,
Jeff Malec 46:56
and we buried the lead here. We forgot to talk about your so you do have a long short strategy also, right? So, yes, sir. Part of me is thinking, Okay, over time, you’re like, hey, it’s actually better to be long short commodities than just long only or long flat. Was that the logic, or just meet the investors halfway, some of them want this short side exposure also, right? That’s been my personal experience of like commodity buy and hold. Commodities is very volatile, low, sharp, trend following commodities only is better, but still pretty volatile and not as high of a sharp commodities only inside of me a main trend following portfolio, they look great, but then long, short commodities starts to look even better, if you’re talking compared with just trend following,
Kurt Nelson 47:43
yeah, yeah. No, you’re absolutely right, Jeff. And so we have been doing this for the last three years. And I think the motive was that there is it’s a different investor sometimes. So an investor that might want long only commodities has their, you know, head around the risk premium. They’re often looking for an inflation hedge. And so some of our, I think, some of our and others investors in long only commodities maybe have a healthy skepticism about whether it really is a point four, like, is there really a persistent risk premium to capture? But I do know that when inflation spikes, I have strong belief that that commise will go up, and I That’s why I have it in my portfolio, along with tips and real estate and other things. So that’s, that’s one reason why you might be in long only. But for those that aren’t as maybe they’re not at that threshold. They’re still on the fence. They many investors are looking for uncorrelated return streams, often market neutral or absolute return. That is a very rich environment to try to compete in and and so our thought was that long short commodity futures, it was fairly unusual. The fact that we do not include financial futures like rates and currencies and equities, kind of separates us from many CTAs that are doing trend following.
Jeff Malec 49:16
And to be clear, it’s not trend following on how the longs and shorts are chosen.
Kurt Nelson 49:22
No, it’s really more of a, you know, we take a fundamental approach, driven originally from, you know, our research about why these markets work and and where compensation to a speculator is higher or lower as a fundamental matter, and that informs our view. So we also have, you know, the benefit of having, you know, today we have firm AUM, about 1.2 billion, you know, we have over a decade of experience at summer Haven trading in these markets and sort of seeing how they behave, how they work. Um. Our research approach and trading approach seems to apply more or less effectively, and so we’ve learned from that, and we’ve said, Well, if we’re if an example in the long only space, an objective would be to be delivering sort of beta, plus you’re trying to deliver some kind of a benchmark that someone might have, and then you’re trying to outperform that. And if you can demonstrate a steady out performance in different markets, different market environments, and driven by different sources of return, and you really have a robust outperformance, it’s, I think, a natural extension, then to say, Okay, how do I take that in and convert that into a long short that’s not it’s just portable alpha, in a sense. It’s just a it’s just an uncorrelated Alpha stream. And I think that drove it more than anything for us, Jeff, was we have investors who we’re not going to reach with long only commodities, at least not today. And so what is it that they are looking for? And they’re looking for a diversifier. They’re looking they’re pulled up on lots of equity, private equity, public equity, tech, VC. You
Jeff Malec 51:12
gotta get, I mean, loaded up on trend. All this. I want a little wrinkle out of my commodities, of something not price driven, something fundamentally driven.
Kurt Nelson 51:22
And so my thought is that one of our goals is to be distinct and differentiated. So it’s not that nothing against successful trend followers. You know, I’ve met some of them and have respect many of them who have been at this for a long time. We’re doing something we believe different. And so, you know, it sits really interestingly alongside other absolute return streams.
Jeff Malec 51:50
And so talk a little bit as much as you can share without giving away the secret sauce of how these longs and shorts are identified, right? So you’re kind of trying to see where the shortages are where? What I’ll let you take,
Kurt Nelson 52:04
yeah, I think what we’re trying to do is find markets where there’s your risk of a stock out, where there’s a potential shortage
Jeff Malec 52:15
stock, explain a stock out from my hand, sorry. George, real quick.
Kurt Nelson 52:19
Yeah, absolutely. So stock out would be like, you know, a risk that you’re gonna run out of something that the global economy needs desperately, you know, like, Coco, like, well, what were you what was interesting is that with this price run up, there hasn’t been a lot of demand destruction and the so, you know, when you start to run out of something, you know you what you think that
Jeff Malec 52:46
is, because it’s not elastic, you can’t substitute whatever orange is for
Kurt Nelson 52:51
chocolate, certainly in the near term, what gives us price right now? What happens is that over longer periods of time, there can be some demand destruction, there can be substitutes. So in the case of like, a cooking oil, right? You can use canola oil, soybean oil, canola oil. I mentioned rapeseed in Europe is more of a biodiesel. There’s palm oil in Malaysia. But in the short term, like the sunflower shortage, driven because of Ukraine and the conflict there just was wreaked havoc in Europe, not as much in the US, because we don’t depend on it as much. So the short term, you see an amplification of volatility and price action. You also have the ability, over a longer period of time, to kind of develop new sources, right? So in oil, you can, or in mining you can, you can develop more mines, more extraction. You know, in Canada, you might kind of bring online some of the tar sands When oil gets high enough in price, but there’s a delay. There’s a lag, and so you’ll see a sharper response at the front end. And I would highlight that, you know, it could be supply driven, but it could also be demand driven. You think about what like the construction demand and what we saw in lumber. Post COVID didn’t affect all commodities equally, right, right? And eventually these things, high prices eventually solve high prices, low prices eventually solve low prices. And so there’s different frequencies to this, but it kind of wax and wane over time. Each commodity has this different cycle. Some of them are seasonal. Some of them are not.
Jeff Malec 54:31
But so you Are you saying you seek out these commodities where you see these patterns, versus, I have a portfolio and I’m trading,
Kurt Nelson 54:38
yeah, we’re seeking commodities where you know, where you know, a scarcity led risk premium is greater and and then looking for those others that are in full carry, full storage, you know, ample supplies. If you think about if you’re providing price insurance to a market, I’ll say. Example would be, you know, say, crude oil during the fracking period, like we just were getting more and more and more oil and storage, we weren’t exporting that much yet. In many cases, we had contracts to import still that we had to honor while we were creating more and more domestically. Storage at Cushing, at some point was almost full, right? We’ve seen this natural gas too, where during the injection period, sometimes all the salt mines and everything the caves where we store gas or reaching capacity, if there’s a during that once you have that big buffer stock, it could be grains and silos, and you have an increase in demand or a decrease in supply, you get a muted effect, but you aren’t that worried, because you can deliver out of inventory, yeah, but when like, like Coco right now, where inventories are super low, there’s, you know, we haven’t had that much demand destruction, and so the only thing to give is price. There’s no inventory to pull from in the near term. And I highlight cocoa as a story because it isn’t really a high frequency thing. It’s, we’re not talking about trading on, you know, microseconds or nanoseconds, or trying to be smarter than the market. This is intrinsically a a a dynamic in commodity futures markets in the 90s. So, so this, this movie that we’re seeing right now in cocoa. I joked during the webinar, this was a 2020, sequel to a 1970s movie. So Coco futures are 100 years old in the US, and you can actually pull up on Bloomberg, the Bloomberg commodity cocoa index, and they have returns going back to the 1960s the 1960s were really boring for Cocoa. Nothing really happening. And starting around 71 they had something very similar to what we’re experiencing right now. They had a series of of poor annual crops. They had lower and lower harvestable land that was dedicated to cocoa still subsistence farmers. Wasn’t organized or supported by a trade group or by government coming from West Africa, and they were getting hit with secret series of disease, weather events and other things, so that inventories just got very depleted in cocoa, cocoa, investable cocoa, if you look at the index, from the 71 to 78 went up 8,000% 88 zero times, 80 times. There’s a reason why people don’t go, you know, long only just Coco, because you can imagine the volatility of that experience. But if you map what we’re experiencing right now, in the last two years, on top of that seven year time series, we’re right on top of it. We’re up seven times in two years, which is basically where CoCo was in 73 and if you read the news stories about the time, you know kind of a few years into it, the news story said, well, prices are really high, but we really haven’t seen demand destruction. Crops are still challenged coming out of West Africa. And there’s definitely a thought among speculators like, is this, is this a bubble that’s going to break, or isn’t it overdone, and yet, we still don’t have equilibrium in price, and it keeps going higher. So this was kind of two, three years before the peak price in cocoa. And so I don’t know if that’s going to happen, but it has happened before. And so those are really
Jeff Malec 58:54
amazing things. This time is different, and this is so unique. It’s grown in West Africa, and they have their political issues, and so,
Kurt Nelson 59:01
yeah, some things are different. Like, for example, you know, we have genetically modified crops, right? We, you know, we can, you know, we have arable land in the tropical regions that aren’t being focused on cocoa, and they could potentially grow that cocoa. Those are all hypotheticals, but it needs to happen. And it takes, you know, a few years to get, you know, a plant ready for harvest.
Jeff Malec 59:26
So 1000s of acres to coca. Yeah,
Kurt Nelson 59:29
I think, you know, we’ll wait and see what happens. But we those are all good, important lessons for us, and so we’re not really, I think there’s some tourists in cocoa. There are some managers who have picked it up and found it interesting to trade, but I you know, we’ve been trading it for 15 years, and we’re trading it before summer Haven, and I think it’s important to have that long experience and to be humble that we’re not trying to hang our hat on one commodity, but we’re trying to trade, you know, as. Any as we can.
Jeff Malec 1:00:07
Anything else you want me to touch on?
Kurt Nelson 1:00:10
No, I think what I would say is the things that have worked for investors over the last 10 to 15 years, I think are going to be, you know, different for the next 10 to 15. I think 2010s were an odd, odd decade, right? With, as I mentioned, with the QE, and inflation went to zero, and credit spreads went to zero, and, and I’m, you know, I started my career in the mid 90s, so I watched the internet bubble, and I remember that it took, like, for example, the NASDAQ after it corrected in 2000 Oh, one. It took it, you know, I think 13 years to get back to break even. Yeah, I’m not forecasting that that will happen, but I think that this is a different market, and it will be a different decade. And so I think it’s going to be a very interesting time for commodities. I think that there’s there. This administration is bringing in a lot of of shocks to the marketplace that will affect commodities and other financial assets too.
Jeff Malec 1:01:14
In general, you want and like the volatility like climate change administration, political, foreign, unrest, whatever that ideally gonna create an opportunity. The
Kurt Nelson 1:01:27
reason, I think, what’s interesting is, when you think about, like a normal distribution of returns, you know, often, like, for example, equities tends to have a fatter left tail that that Monday morning event is often an accounting scandal, or, you know, something negative. And so you’ll see a stock just gap down 20% you can have it go the other way, but you know, more than half the time is this. That is sort of a fat tail to the left. Interestingly, commodities, if you look at the data, it tends to be more on the right side. Those, those those surprises of negative news, hurricane, drought, war, supply chain disruptions tend to be positive for price, yeah, and so. And I think it’s positive revolt, sure, but they create opportunities. So we think this is going to be a rich decade. And I think, you know, without forecasting precisely what’s going to win, I think there’s going to be a rich environment to transact in,
Jeff Malec 1:02:30
and that will be the hot take award of the year that the next 10 years won’t look anything like the last 10. But as we were talking about before, a lot of people just can’t see that, right? What do you comment? Why would you do commodities? Why I’ve been saying more and more of like, why would you do anything except us? Equities? I think,
Kurt Nelson 1:02:49
I think recency bias is, you know, it’s a big deal. It’s just a human condition is, you know, it’s something to be aware of. And if you left business school, you know, around the financial crisis, say you started in 2010 you’ve been on Wall Street 15 years. I remember when I had 15 years under my belt, I thought I knew a lot. I’d seen a lot. If you had been on Wall Street from 2010 to 20 or, yeah, 2010 to 25 that’s 15 years. You’re like, it’s all equities, it’s all us, equities, it’s leverage, tech, it’s, you know, and definitely not commodities. And you know, private is better, illiquidity, risk premium. There’s all these kind of stories that have worked out for you, but you know, the risk premium to equities over the trailing 15 years is something like, I don’t know, 10 to 15% per annum, actually higher than 1012, to 14, 15% per annum. We know that that’s twice normal.
Jeff Malec 1:03:51
But my counter argument would be, but maybe they’ve figured it out. The Fed’s more transparent. Companies are like, are they? They’re tricking us, right? They’re making that happen by making sure earnings come in a penny or two exact and all that stuff. Of course, you can do that for so only so long, but I think that’s
Kurt Nelson 1:04:12
what it is. And I think I’m not sure that there’s a Fed put anymore, you know, with this administration and with the amount of debt that we have, and the burden of financing that debt, which is is non zero now, right? You know, with interest rates, where they are rolling over, debt is not, not nearly as cheap as it used to be. So I just think it’s going to be different. And I understand that if you’ve been on the street for 15 years, you haven’t seen it yet, but try talk to the guys with gray hair like me, looking around a little bit longer, because it’ll give you some lens, a window into a different market. And
Jeff Malec 1:04:51
what’s your go to, like, how much and come out? So, okay, yeah, I agree all this is going to be crazy. Okay, I think. Might be inflation. I want to get commodity exposure, whatever your reasoning, how much
Kurt Nelson 1:05:05
so, you know, in the long, short space, it’s really, you know, it’s what you would put into alternatives, you know, and to other hedge funds and CTAs. And I think you compare it on a fair basis against those other kind of absolute return Alpha streams in the directional space, which I think is what you’re asking Jeff, you know, I guess I have two answers. I’d say that the street right now, the common wisdom is zero in commodities. We’ve found exceptions to that, but that’s a very commonly held belief, because I don’t have anything in commodity futures. Yeah, if you put the correlations, the variance, covariance matrix, the volatility, return expectations, and put it alongside equities and real estate and fixed income and other things, you’d get a number that was surprisingly high. You’d get probably something like order mag, 215, 20% I think that that’s unrealistic for an investor who’s coming off zero, I think what we find is five to 10% in commodities is sort of a comfortable zone for many allocators, and then that gives you the ability, maybe from that base to tactically overweight or underweight, depending on your views on inflation and the opportunity set, and I think that Commodities Futures can sit alongside, you know, commodity equities or gold or real estate or other things that you might hold. But I think that what all of our research has shown us is that the right answer in a diversified portfolio can’t be zero, yeah.
Jeff Malec 1:06:38
It seems the right answer is rarely zero. We’re gonna end it up with little fun culinary corner we caught so great. Give me your Mount Rushmore, your four favorite around the world. In New York City, where do you want to go? In Connecticut? Restaurant spots. Restaurant
Kurt Nelson 1:07:05
spots. Well, one of my family favorites, this is hard because it pleases everybody, which and very distinct tastes in my family. I love it.
Jeff Malec 1:07:19
And there’s a, don’t say Olive Garden,
Kurt Nelson 1:07:23
but I will say there’s a modern Indian place in New Haven called Shark keen, S, H, A, r, k, e, e, n. It’s right next to the the bookstore for Yale, kind of near campus. Yeah, but it’s like, it’s like a modern take, not stuffy, but like, like, modern take on Indian. And if you’ve had Indian food in most American sort of, like Tex Mex or Chinese American food, you know, it’s like, the same things, Kung Pao, chicken, you know, etc. This is really unique Indian. We go there a few times, several times a year, and we drive. We’ll drive, you know, what’s really crazy is that we’ll drive 40 miles or 40, you know, whatever, to New Haven to have this food. And then we’ll kind of come up, for some reason, with some reason to be in New Haven. But that’s like the pizza mecca of the world. So we could be going to Pepe or Franks or colony pizza, and we go to get, you know, Indian in in New York, you know, along the commodity theme, I think I give a shout out to this restaurant called coat, C, O, T, E, I think it’s a Korean barbecue. My son found it, and we went there when he graduated from high school last year. It was his, like, the one place he wanted to go. And I think it’s the only Korean barbecue with a Michelin star. But if you want to have extraordinary beef, and it’s
Jeff Malec 1:08:49
fun, it’s the commodity tie in. I missed that beef, beef. Okay, where did your son end up going to school?
Kurt Nelson 1:08:57
He’s at Babson, and so he I had to ask him, What Babson like? What do they do? Yeah, that’s how ignorant I was. I was about to ask him. And then my colleague, who’s a Yale Business School professor, said, Oh, Babson is really great. I said, Well, if you know it and you think that, then I need to respect this choice and investigate. So what Babson is really neat about is they’re all about entrepreneurs, and they’re not about, you know, there are some people that will go into finance to Wall Street or to, you know, consulting firm, but many of them are trying to start something from scratch. And that’s neat that they take that as a as an art form. The things that you can learn, whether it’s starting a restaurant or a clothing company or any business, like, how do you do it? How do you get capital? What are the things that are so hard? Why do people make it? Some people don’t. So you
Jeff Malec 1:09:50
think you can teach them. I’m always dubious whether you can teach I guess you can. But it’s like, at some point, it’s also like, I gotta think outside the box and think of so. I guess better to. Some base to then go think outside the box.
Kurt Nelson 1:10:02
Just speaking from personal experience, you know, I’ve, I’ve done two things that I think of, like this, like when we, we bought an old house, it used to be a cares barn, and literally have, like farm animals in it, and then it was restored, but we, but hadn’t been worked on in 50 years, and we bought this thing seven years ago, and historically renovated it and made it bigger, so kind of kept the character of it, but made it modern. And by the time the project was done, I knew everything I needed to know before I started it. And I think now I’m 15 years into summer Haven, and it’s like, wow, if you know, having been all of us, all this largely came from Wall Street, right? We didn’t, we hadn’t cut our teeth in a small investment manager before. And so I’ve learned through trial and error what works. And you know, the leadership style that works for me. I wish I would have had four years at Babson, right for running a small investment management company. But do
Jeff Malec 1:11:03
you I’ve found that the small guys aren’t all that different than the big banks, like once you get down to actually doing the work. And I don’t know if you agree or disagree, but maybe they have more expensive Bloomberg subscript terminals, and right, they kind of spend more money. I don’t know if they’re really I
Kurt Nelson 1:11:20
think what I would say is, whether you’re a small company or a big company in our in my ecosystem, the main thing is, don’t take your eye off the ball. Remember why you do what you do. Don’t forget about investors. Don’t forget about risk and return. Don’t forget about taking care of your people. And understand, you know, control it. You can control and understand that there’s going to be some things that you can’t, you know, make yourself, you know, as resilient as you can. There’s a quote that I enjoy. I heard from, I heard it from General Petraeus. I think it was after, right after he got out of the army, he may have gone to Carlisle, I think that’s where he went. But anyway, he said, you know, luck is when opportunity meets preparation. And I was like, I like that. You know, there, there will be luck, but you need to be ready to take advantage of and if it’s bad luck, be ready for that too.
Jeff Malec 1:12:19
Yeah, that exists. Awesome. I think we’ll leave it there. Unless you got one more restaurant burning a hole in your in your pocket. No,
Kurt Nelson 1:12:26
- I just, I really enjoy your podcast and the opportunity to speak with you and your audience, Jeff and I really enjoy this. Love it. Kurt, um,
Jeff Malec 1:12:33
we’ll talk to you soon. Saw you in Miami, and now freezing cold, we need to get back there. Let’s do that again. Definitely. All right. Thanks so much. We’ll talk to you soon.
This transcript was compiled automatically via Otter.AI and as such may include typos and errors the artificial intelligence did not pick up correctly.
