00:00Jeff Curry of ABEX Markets writing,
00:02Capital has chased the AI trade while ignoring the physical assets it requires to run.
00:07Assets that have quietly become the best performing asset class of the decade.
00:11Jeff joins us now for more.
00:12Jeff, welcome to the program.
00:13I've been excited to catch up with you, Seth.
00:15I think we need to take a giant step back and think about the mining bust post-China boom.
00:20We need to think about the shale bust of a decade ago
00:23and why that set the stage for this period of what you call capex starvation.
00:28Just where are we and why?
00:30Well, when you look at history, going back to the entire post-war area,
00:35there's two sectors that lead the equity market.
00:39One is energy, the other is tech.
00:40If you can't turn on the lights, nothing happens.
00:43If you can't innovate, you never progress.
00:45And that's what you see.
00:46So we go back, tech was a leadership in the 90s all the way up to 2002.
00:51Then we transitioned into energy, 2002 to 2014.
00:5614 to now has been technology.
00:58And the way you think about it is in those periods when energy lead and commodities lead,
01:03you build over capacity.
01:04That lowers the overall price.
01:06Inflation gets low and stable.
01:08Interest rates drop.
01:10And investors chase duration, which is growth stories, tech, and the rest of it.
01:14But eventually you run out of energy, run out of commodity capacity.
01:18And that's where we are today.
01:19With this geopolitical event, it just pulled forward.
01:23Jonathan, we've been on here talking about the revenge of the old economy over and over and over.
01:28This rotation out of tech into hard assets, that was already underway before this happened.
01:35What this did is just accelerated.
01:37As you know, Jeff, discipline is really hardened at some of these C-suites.
01:40What will it actually take to break out of this CapEx starvation phase that we're currently in?
01:45And do you see us breaking out of it anytime soon?
01:49Higher prices, higher returns.
01:52But ultimately, you ask, what creates that huge upward trend in prices that you saw in the 70s and you
01:59saw in the 2000s?
02:00It's once investors take capital out of tech, dump it into commodities, they begin to spin, and then you get
02:07cost inflation.
02:08The PPI that came out last week at 5.1% is telling you you're already seeing signs of it
02:14combined with a huge supply shock that you're seeing in the Middle East.
02:17So in terms of thinking about where we are on that, we are just in the, I'd say, the bottom
02:24of the first inning of the super cycle.
02:25Despite the fact commodities are the best performing asset class this decade.
02:29So you're already six years into it in terms of pricing.
02:33And when we think about the forward, you've probably got another decade to 12 years left just looking at history.
02:38Jeff, this is important.
02:39Let's just compare what's happening with tech then.
02:40So I imagine you think as capital intensity picks up, CapEx intensity picks up at the tech players, we get
02:45a re-rating.
02:46And then you get the rotation into the more energy-sensitive parts of the market, the mining sector, the energy
02:51sector.
02:52We're not seeing that equal and opposite move, though.
02:54In fact, Jeff, those particular parts of the market have lagged so far.
02:58That's interesting to me that the energy names haven't done much at the moment.
03:01What gives?
03:03I think right now there is no concern about the supply of energy and commodities, even with the largest supply
03:13shock the world has ever seen, 2x what we saw in the 1970s.
03:18And I think there's three reasons why they're not concerned.
03:20One, we're in the middle of the shoulder months.
03:23This is the weakest demand that goes down and then back up.
03:26We're in that weakest demand part of the entire year right now.
03:30So there's no stress on the system.
03:32The second reason is right now we're in a deficit, meaning that demand's up here, supply's down here.
03:39We're drawing inventories.
03:41Once you exhaust inventories, boom, you have to push demand down in line with supply.
03:45That's when the shortage hits.
03:47That's when the pain hits.
03:48And that's when prices go nonlinear.
03:50The third point I want to talk about is that every policymaker, macro forecaster, central banker, tech promoter is telling
04:01you right now there is no problem.
04:04Every commodity CEO, commodity trader, anybody who gets their hands dirty is telling you you have a problem.
04:11You have seen this movie before back in 2020, 2021.
04:15When, remember, inflation is transitory.
04:18And then, you know, a few months later, boom, you hit the wall and, you know, we went to double
04:22-digit inflation.
04:24And I think you're seeing the same dynamic here.
04:26You know, one last point, though.
04:29Carter, in 1977, made a fatal mistake.
04:32It was the sweater speech.
04:33It was, you know, February 1977.
04:36He's wearing a sweater kind of like this.
04:37Went out, she was burr, and told everybody, turn your thermostats down, and then prices of commodities explode.
04:44And I think every policymaker has learned from that, you know, you don't want to create fear.
04:49My job is, you know, if I was advising the president, telling him to do the exact same thing, keep
04:54everybody calm.
04:55But my job is telling you how to make money.
04:57And, you know, at this point right now, this is really serious.
05:00Yeah, Trump definitely doesn't want to come out, especially with the 95-degree weather saying, don't put your air conditioners
05:05on.
05:05But, Jeff, you say that at this moment, supply has never been more constrained, yet Brent can barely hold on
05:11to 110.
05:13You have that seasonal weakness right now.
05:17You're not in a shortage.
05:18But another really important point here is because nobody is buying the energy companies.
05:24And the back end of that forward curve is anchored to the cost of capital of those companies.
05:30It is too low.
05:31And, you know, I call this the biggest asymmetric trade in modern finance in historical terms.
05:39Why?
05:40When you look at the free cash flow yield of the oil companies, they're 15.5%.
05:46The hyperscalers are zero.
05:48Let me say that again.
05:4915.5% free cash flow yield for the oil companies, 0% for the hyperscalers.
05:57We call those oil companies the munificent seven.
06:00What does munificent mean?
06:02Giving you lavish gifts.
06:04And at 15.5% free cash flow yield, I'd call that a lavish gift.
06:09And just when it comes to supply and demand, you mentioned this.
06:11It's going to get rough when inventories are drawn down.
06:14When will we hit tank bottoms in your analysis?
06:19It depends on where you are in the world and what products.
06:22Some products, you're already there, like motor oil in the U.S.
06:26And by the way, motor oil in the U.S. is critical because you couldn't even turn on your car
06:30without motor oil, even if you had gasoline.
06:33Items like sulfuric acid, you're out.
06:36What does that cause?
06:37That's why copper hit an all-time high last week because you need the sulfuric acid to produce copper.
06:43But when we think about diesel, jet fuel, gasoline, those parts of the world, jet fuel, you're there.
06:49We would expect to see here in Europe diesel and jet fuel run into very serious problems by the end
06:55of this month.
06:55The United States, gasoline by July.
06:58And at that point is when you start to get to that nonlinear part and see prices go higher.
07:03But I want to emphasize, when we look at the spread between spot prices and the back end, this spread
07:09has never been higher.
07:10And everybody goes, oh, we had, you know, prices were at $122 in the Russian invasion.
07:16By the way, the back end of the curve was $10 lower.
07:19And then everybody goes, you know, we saw $147 in 2008.
07:23By the way, the back end was at like $140.
07:25So $147, $140.
07:27What is mispriced here right now is the back end of the oil sitting somewhere around $70, $75.
07:33This is a long-term problem.
07:36The cost structure is going to go up.
07:37There is no spare capacity left.
07:39It's going to take a long time to reestablish it.
07:42We need to reprice that market.
07:43That's going to reprice the munificent seven.
07:46That's why I tend to think the trade here, you know, just looking at pure economics has the most upside
07:51to actually own these oil companies.
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