From Reflation to Stagflation
Why the next macro regime could send energy and commodities much higher.
Every time oil rallies, the same argument appears.
“This move won’t last.”
“Energy has already had its run.”
“Commodities are extended.”
I’ve heard the same thing over and over again since the beginning of this cycle.
But when you step back and look at the data, the message from the market is very different.
In this post I want to walk through three charts that explain why the energy trade may only be getting started.
We’ll look at:
• A historic volatility squeeze in commodities
• Why long-term yields are pushing liquidity into real assets
• Why energy stocks are breaking out after nearly two decades of going nowhere
And most importantly…
Why the macro regime is shifting from reflation to stagflation — an environment where commodities historically outperform.
The Commodity Complex Is Breaking Out
Let’s start with the big picture.
CRB Index — Historic Bollinger Band Squeeze
The CRB Index tracks a broad basket of commodities including energy, metals, and agriculture.
The lower panel shows the Bollinger Band width, which measures volatility compression.
When this indicator falls to extremely low levels, it means markets have been coiling for a long time.
Historically, these types of squeezes precede large and sustained moves.
We saw this before:
• The early 2000s commodity supercycle
• The post-2008 recovery
• The 2020 pandemic fall and rebound
Every time volatility compressed like this, the next move was violent.
Right now we are seeing another squeeze resolve higher.
That suggests something important:
The commodity cycle likely has much further to run.
Rising Long-Term Yields Are Fueling Commodities
30-Year Treasury Yield vs Fed Funds Rate
Now look at what is happening in the bond market.
Long-term yields — particularly the 30-year Treasury yield — continue pushing higher.
But the Fed funds rate has stopped moving higher.
That divergence matters.
When long-term yields rise faster than policy rates, it effectively creates more liquidity in the financial system.
Capital begins rotating away from financial assets and toward real assets.
Historically this environment favors:
• Commodities
• Energy
• Materials
• Hard asset producers
Which is exactly what we are starting to see.
For the past couple of years we have been operating in a reflation regime, where many asset classes could rise together.
But the signals are beginning to shift.
Our regime model suggests we are moving toward stagflation.
A world where:
• Inflation remains persistent
• Growth slows
• And commodities outperform financial assets
That’s historically one of the best environments for energy.
The Oil Futures Curve Is Telling Us Supply Is Tight
Another signal most investors are ignoring is the structure of the oil futures curve.
Right now, oil is trading in backwardation.
Backwardation means near-term oil contracts are priced higher than contracts further in the future.
In simple terms:
The market is willing to pay more for oil today than oil next year.
This happens when physical supply is tight.
It signals that:
• Inventories are constrained
• Demand is strong
• Buyers need oil immediately
Backwardation also creates something called positive roll yield, which makes holding oil futures more attractive for investors.
Historically, strong backwardation has been a hallmark of tight energy markets and sustained rallies.
And right now that structure remains firmly in place.
Add to that the geopolitical environment.
The situation in Iran is historic, and conflicts in that region rarely resolve quickly. (We talked about this on The Holy Macro Show today)
Energy markets are extremely sensitive to disruptions in the Middle East.
I’ll likely dig deeper into the history of Iran and oil markets in a future post, but the key takeaway is simple:
This geopolitical backdrop adds another layer of structural pressure on energy supply.
Energy Stocks Are Breaking Out After 18 Years
Energy Select Sector SPDR (XLE)
Now look at the energy sector itself.
This is the long-term chart of XLE.
Notice the massive resistance level around $50.
Energy stocks have essentially gone nowhere for almost 18 years.
Nearly two decades of sideways movement.
That kind of base is extremely important.
Because the longer an asset consolidates, the more powerful the eventual breakout tends to be.
And now XLE is pushing above that level.
Yet everywhere you look people are calling this move a bubble.
After nearly twenty years of going nowhere.
That logic makes absolutely no sense.
If anything, this breakout suggests the energy cycle may still be in its early stages.
The Regime Shift Is the Key
When you put all of these pieces together, a clear picture emerges.
• Commodities breaking out of a historic volatility squeeze
• Long-term yields rising and pushing capital into real assets
• Oil markets signaling tight supply through backwardation
• Energy stocks breaking out after an 18-year consolidation
These are not signals of a trade that is ending.
They are signals of a cycle that may only be getting started.
The macro regime is shifting.
We are moving from reflation toward stagflation.
And in that world…
Energy becomes one of the most important trades on the planet.
If this commodity cycle continues the way the data suggests, energy may only be in the early innings.
At Against All Odds Research, we track these macro shifts in real time and build portfolios around the sectors showing the strongest momentum.
Subscribers get:
• My portfolio positioning
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• Macro regime analysis like the reflation → stagflation shift
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If you want to follow this cycle as it unfolds, you can join us here:
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