Commodities: backwardation, supply shocks, and skewed returns

This episode of Excess Returns features Aahan Menon of Prometheus Research breaking down the growing risk of an inflation shock driven by energy markets and what it means for investors. The discussion explores how a potential shift toward stagflation could challenge traditional stock and bond portfolios and why commodities, trend following, and systematic frameworks may be better suited for the current environment.

Prometheus Research
https://www.prometheus-research.com

Aahan Menon Twitter
https://twitter.com/AahanMenon

• Why the current inflation shock may be one of the most significant in recent history

• How oil prices and geopolitical conflict are reshaping macro expectations

• The growing risk of a stagflationary environment and what it means for portfolios

• Why traditional 60/40 portfolios may struggle in sustained inflation regimes

• How expected returns differ across equities, bonds, commodities, and FX

• Why commodities and energy markets offer the most attractive opportunities today

• The role of backwardation and supply shocks in driving commodity returns

• Why consensus earnings expectations may be too optimistic relative to macro reality

• How inflation flows through the economy from energy to consumer demand

• The Fed’s dilemma between inflation control and economic slowdown

• A simple rule for when to own treasuries based on inflation trends

• Why correlations across asset classes are breaking down in crisis environments

• How systematic investors manage risk when markets are driven by news and geopolitics

• The case for trend following as a core portfolio strategy

• How Aahan’s free trend system works across stocks, bonds, gold, and Bitcoin

• The behavioral advantages of systematic investing during volatile markets

• Risks of trend following including whipsaws and false signals

• How portfolio construction is evolving to include crisis protection and energy overlays

00:00 Inflation shock and why equities and bonds may struggle
01:03 Setting up the macro backdrop before the oil shock
03:12 Labor market slowdown vs strong GDP divergence
04:45 Consumer spending driven by de-saving
05:35 Oil-driven inflation shock as a recession catalyst
07:32 Preparing for stagflation vs disinflationary growth
09:18 Why commodities outperform in inflation regimes
10:45 Expected returns framework across asset classes
12:05 Why commodities and FX offer the best opportunities
14:05 How commodity carry and backwardation work
16:42 Trend following and commodities as pro-cyclical exposures
17:43 Ranking expected returns: energy, FX, bonds, equities
18:51 Challenges of systematic investing in news-driven markets
20:15 Extreme correlations and oil dominating asset pricing
23:47 Earnings expectations vs macro reality gap
28:30 Why the Fed faces an impossible policy tradeoff
30:00 Real-time CPI estimates and inflation pressure
32:00 A rule for when to own treasuries based on CPI
37:30 Stock-bond correlation regime shifts
39:34 How the trend following system works
45:10 Benefits and limitations of trend strategies