WEBVTT - Why Investors Are Rotating Into Commodities with BlackRock's Evy Hambro 0:00:02.720 --> 0:00:22.720 Bloomberg Audio Studios, Podcasts, Radio News. Welcome to Merrin Drug's Money, 0:00:22.720 --> 0:00:25.360 the podcast in which people who know the markets explain 0:00:25.440 --> 0:00:28.400 the markets. I am meren' sumset Web and this week 0:00:28.400 --> 0:00:31.240 we welcome back Evy Hambroke, Global Head of Thematic and 0:00:31.280 --> 0:00:34.760 Sector Investing. I think it last one about eight months ago, right, Yeah. 0:00:34.600 --> 0:00:36.920 It was definitely some middle of last year. Yeah. 0:00:37.000 --> 0:00:39.160 Yeah, quite a few things have changed since then, right, 0:00:39.560 --> 0:00:41.600 So we've got a lot to talk about when it 0:00:41.640 --> 0:00:45.360 comes to the commodity markets. But listen, I want to start, 0:00:45.400 --> 0:00:47.400 and not everyone will agree that this is a correct 0:00:47.400 --> 0:00:50.080 place to start, but I know what our listeners hold 0:00:50.080 --> 0:00:52.720 in their portfolios, and it's an awful lot of gold. 0:00:53.040 --> 0:00:55.160 And you know, I was speaking at the weekend at 0:00:55.160 --> 0:00:57.360 this thing called the Weekend of the Mistakes in hay 0:00:57.400 --> 0:00:59.680 on Y and I did an investment breakfast chat for 0:00:59.760 --> 0:01:01.920 the audience and I asked them to put up their 0:01:02.040 --> 0:01:04.640 hands if they held more than five percent of their 0:01:04.640 --> 0:01:07.000 portfolio in gold, which is a pretty unusual, right, The 0:01:07.040 --> 0:01:09.400 average of wealth manager will hold maybe two percent of 0:01:09.440 --> 0:01:12.160 a portfolio in gold. At five percent, pretty much everyone 0:01:12.200 --> 0:01:14.000 put up their hands, So I'm like, okay, all right, 0:01:14.040 --> 0:01:17.200 ten percent, A lot of people still hands up, fifteen percent, 0:01:17.440 --> 0:01:19.759 a lot of people hands up, twenty still a lot 0:01:19.760 --> 0:01:22.120 of hands, twenty five, lot of hands, thirty, lot of 0:01:22.160 --> 0:01:24.600 hands around thirty it starts to go down. I'm actually 0:01:24.600 --> 0:01:26.640 beginning to like an auctioneer as well. But when I 0:01:26.680 --> 0:01:30.880 got to fifty percent of their portfolio, there were still 0:01:31.240 --> 0:01:35.880 two people with their hands up. Wow. Yeah. And that's 0:01:35.880 --> 0:01:38.280 effectively what they call over it gave cal they call 0:01:38.360 --> 0:01:42.480 the Turkish portfolio half equities, half gold. So someone who 0:01:42.520 --> 0:01:45.200 has that amount of gold in their portfolio, even the 0:01:45.200 --> 0:01:49.120 people who have ten percent or fifteen percent, they would 0:01:49.160 --> 0:01:53.240 have expected over the last three weeks for that goal 0:01:53.320 --> 0:01:58.040 to have protected them from the volatility in particular of 0:01:58.320 --> 0:02:00.400 the markets over the last three weeks. So what we 0:02:00.520 --> 0:02:04.360 around began absolutely hasn't happened. In fact, gold and silver 0:02:04.600 --> 0:02:08.080 have both behaved like volatile financial instruments, and they haven't 0:02:08.120 --> 0:02:09.720 done the job that I think a lot of people 0:02:09.760 --> 0:02:12.160 would have expected them to do. So we're going to 0:02:12.200 --> 0:02:14.640 start by me asking you to explain what on earth 0:02:14.720 --> 0:02:15.240 is going on. 0:02:16.480 --> 0:02:19.120 That is the question that we are asking ourselves, and 0:02:20.400 --> 0:02:23.640 let's think about it in steps. I think the first 0:02:23.720 --> 0:02:25.480 step to think about it is if we go back 0:02:25.520 --> 0:02:30.600 to points in history where we've had similar heightened volatility 0:02:31.000 --> 0:02:34.480 and I don't know, shocks or surprises and so on, 0:02:34.919 --> 0:02:38.680 the first reaction for most investors is to raise liquidity, 0:02:39.280 --> 0:02:41.680 and so there was a rush for cash. And in 0:02:41.680 --> 0:02:46.200 that scenario, there's a very high correlation across asset classes 0:02:46.320 --> 0:02:49.160 as things are sold, and that would be a pretty 0:02:49.160 --> 0:02:53.560 standard reaction in those environments. I think what's peculiar about 0:02:53.600 --> 0:02:56.120 this one, which would be the second point, is that 0:02:56.320 --> 0:03:00.120 going into this crisis, there was I think, as we 0:03:00.120 --> 0:03:05.360 spoke about maybe last time, an increased allocation to commodities 0:03:05.600 --> 0:03:09.320 within people's portfolios for many of the reasons that we 0:03:09.440 --> 0:03:13.240 discussed the ongoing devaluation of paper currencies, a positive view 0:03:13.240 --> 0:03:16.360 towards general commodities and materials related to cap expend and 0:03:16.400 --> 0:03:18.919 so on, so that if you had a commodity allocation 0:03:19.000 --> 0:03:22.360 in your portfolio, it didn't have energy in it. And 0:03:22.400 --> 0:03:25.480 so what we've now seen is the commodity the desired 0:03:25.480 --> 0:03:28.680 commodity mix has a much higher energy component in it 0:03:28.680 --> 0:03:30.840 because of the disruption that we've seen in the Middle East. 0:03:31.040 --> 0:03:33.400 So there would have been a liquidation of areas that 0:03:33.440 --> 0:03:36.280 you would have had historical profit on from the allocation 0:03:36.400 --> 0:03:39.000 you would have had relative to everything but energy, and 0:03:39.040 --> 0:03:43.000 then the switch out of that into energy related exposures. 0:03:43.160 --> 0:03:46.160 So you might be keeping the commodity sleeve the same size, 0:03:46.200 --> 0:03:48.920 but the components within it would have adjusted away from 0:03:49.120 --> 0:03:52.200 areas like gold and copper and other things and towards 0:03:52.200 --> 0:03:54.520 oil and gas and so on. So that's the second 0:03:54.600 --> 0:03:57.880 point that we would mention. I think the third thing 0:03:58.000 --> 0:04:00.360 is that there is, without a doubt, and you're a 0:04:00.440 --> 0:04:02.880 better expert on this than me, that there is going 0:04:02.920 --> 0:04:06.120 to be ongoing disruption to energy markets. Even if there 0:04:06.200 --> 0:04:08.720 was a cease fire or a victory or whatever a 0:04:08.800 --> 0:04:13.040 standown today, there would be ongoing disruption to energy markets 0:04:13.080 --> 0:04:15.720 for a period of time into the future. And I 0:04:15.720 --> 0:04:18.200 think Iran probably doesn't want people to forget that they 0:04:18.240 --> 0:04:21.200 have the ability to disrupt energy supplies. So there might 0:04:21.279 --> 0:04:23.000 be even if there was a cease fire, there might 0:04:23.040 --> 0:04:26.839 be some form of provocation or some kind of reminder 0:04:26.880 --> 0:04:28.960 that they're still around and they have the ability to 0:04:28.960 --> 0:04:32.200 disrupt things. So the premium that remains in the energy market, 0:04:32.440 --> 0:04:35.000 in oil premium or gas premium is likely to remain 0:04:35.040 --> 0:04:38.080 elevated and on that scenario, then we have to price 0:04:38.120 --> 0:04:40.600 in a higher degree of inflation prospects and therefore a 0:04:40.640 --> 0:04:43.280 higher degree of rates. So could he risk premiums will 0:04:43.279 --> 0:04:45.880 have gone up, and so in those things, then you've 0:04:45.880 --> 0:04:48.000 got the prospect of higher rates. If you've got higher rates, 0:04:48.000 --> 0:04:51.480 that's normally negative for gold. So to us, without saying 0:04:51.560 --> 0:04:54.200 it's one of those three things, it's probably a combination 0:04:54.320 --> 0:04:56.599 of all of those three things. And then the last 0:04:56.600 --> 0:04:58.720 one is just probably some profit taking. People have made 0:04:58.720 --> 0:05:01.480 a lot of money in gold for a relatively short 0:05:01.520 --> 0:05:04.520 period of time. It probably got to an outsized level. 0:05:04.760 --> 0:05:07.640 You mentioned fifty percent in two people's hands going up 0:05:07.640 --> 0:05:09.839 at your event. If you used to have five and 0:05:09.880 --> 0:05:12.120 it doubled, you would be at ten. If your model 0:05:12.200 --> 0:05:14.640 was five, maybe you'd probably kick yourself and not taking 0:05:14.640 --> 0:05:16.640 some profits and bringing it back down to five. So 0:05:16.960 --> 0:05:19.240 there's probably a fifth or fourth element as well to 0:05:19.560 --> 0:05:21.599 that mix. So those would be the things that I 0:05:21.600 --> 0:05:24.679 would explain when I think about the gold market. Though, 0:05:25.080 --> 0:05:28.200 looking forward into the future, in just about all time 0:05:28.240 --> 0:05:31.080 frames going forward from now, apart from the very short term, 0:05:31.360 --> 0:05:34.080 the ongoing issues at government haven't disappeared. If anything, they're 0:05:34.120 --> 0:05:35.920 going to be spending more money on defense. They're going 0:05:35.920 --> 0:05:38.520 to have higher interest bills on their debt. They're going 0:05:38.560 --> 0:05:41.640 to require greater amounts of overall funding for everything that's 0:05:41.640 --> 0:05:44.880 going on, which means more indebtedness, it means more devaluation 0:05:44.920 --> 0:05:47.400 of paper currencies and better returns for real assets. 0:05:47.920 --> 0:05:50.520 Let's look at some of those reasons for gold volatility. 0:05:50.680 --> 0:05:53.080 One of the things, and I think suggest is that 0:05:53.160 --> 0:05:55.200 you'd have a lot of effectively gold tourists have been 0:05:55.240 --> 0:05:56.800 in the market over the last little while. If you've 0:05:56.800 --> 0:05:58.839 had your long term gold holders who imagine they're going 0:05:58.880 --> 0:06:01.120 to be staying in this market, the hold for all 0:06:01.160 --> 0:06:03.279 the long term reasons that you and I've discussed, But 0:06:03.360 --> 0:06:05.040 then you have people who've come in quickly, they've made 0:06:05.040 --> 0:06:07.240 a lot of money, and they've gone out again. And 0:06:07.279 --> 0:06:10.440 there's also maybe this time around there's more people using 0:06:10.839 --> 0:06:13.880 various instruments to buy gold, and previous gold ball markets 0:06:13.920 --> 0:06:16.440 people are being buying gold actual gold, and now we're 0:06:16.440 --> 0:06:20.080 buying gold ETFs and other instruments that represent gold. So 0:06:20.400 --> 0:06:22.520 maybe the market is a lot more financialized than it 0:06:22.600 --> 0:06:25.200 used to be, so it's less likely to work as 0:06:25.240 --> 0:06:26.520 a steady head for you. 0:06:27.320 --> 0:06:30.880 Maybe I think you've definitely had financial additional sources of 0:06:30.920 --> 0:06:33.719 financial capital added to the market, so you've got greater 0:06:33.800 --> 0:06:36.360 leverage behind the scenes. So people would have been having 0:06:36.400 --> 0:06:38.320 a five percent waiting and then borrowing two and a 0:06:38.360 --> 0:06:40.200 half percent against it, taking it to seven and a 0:06:40.240 --> 0:06:42.640 half and whatever the mass might have been, and so 0:06:42.720 --> 0:06:45.440 that financial leverage would up to the exposure, which is 0:06:45.440 --> 0:06:47.719 good in a rising market, but obviously very bad in 0:06:47.760 --> 0:06:50.520 a falling market. So the pressure a margin call or 0:06:50.520 --> 0:06:52.719 whatever might to be able to reduce your position would 0:06:52.720 --> 0:06:55.800 have prompted some action. I think algorithmic training as well 0:06:55.800 --> 0:06:58.039 would definitely have been a factor. When things fall or 0:06:58.040 --> 0:07:00.680 companies miss earnings or whatever. The computers got involved, and 0:07:00.960 --> 0:07:03.320 the volatility is normally far greater than you would have 0:07:03.360 --> 0:07:06.480 expect without that kind of part of the market being present, 0:07:06.760 --> 0:07:08.920 so I think that would have extended the returns. 0:07:09.320 --> 0:07:12.480 Yeah, and there's always also a suggestion that the last 0:07:12.520 --> 0:07:15.960 few years, we've always had central banks as their last buyer. 0:07:16.040 --> 0:07:18.280 There's always this backup from the central banks who've been 0:07:18.280 --> 0:07:20.480 buying and buying and buying, and that we might now 0:07:20.520 --> 0:07:21.960 be at a point where they might think, like lead, 0:07:21.960 --> 0:07:24.000 do you know what, Maybe that's enough gold, and particularly 0:07:24.080 --> 0:07:26.960 under these circumstances, is maybe we'll hold some different commodities 0:07:27.000 --> 0:07:30.240 as well, and also that perhaps that the central banks 0:07:30.280 --> 0:07:32.720 in them add least, might no longer want to keep 0:07:32.720 --> 0:07:34.320 buying gold when they've got an awful lot of other 0:07:34.680 --> 0:07:35.480 things to worry about. 0:07:35.880 --> 0:07:38.360 So I think central I don't see central banks changing 0:07:38.360 --> 0:07:40.800 course in terms of adding to gold holdings. The ones 0:07:40.800 --> 0:07:43.640 that have been buying have got aspirations in terms of 0:07:43.640 --> 0:07:47.240 percentage weights far higher than their current holdings. So if anything, 0:07:47.320 --> 0:07:50.320 price weakness normally triggers that as an opportunity for them 0:07:50.360 --> 0:07:53.040 to be able to step up some activity. We won't 0:07:53.080 --> 0:07:55.080 know whether they've done so for a few months until 0:07:55.080 --> 0:07:57.640 the official data comes out, but I'd be surprised that 0:07:57.640 --> 0:08:00.120 if you'd had that. I think the point about selling 0:08:00.160 --> 0:08:05.760 some gold or assets, or liquidating treasuries or equity positions 0:08:05.960 --> 0:08:08.280 to be able to fund spending on defense in the 0:08:08.280 --> 0:08:10.360 Middle East might be the case. And at the end 0:08:10.360 --> 0:08:12.960 of the day, these economies are not thriving right now. 0:08:13.040 --> 0:08:16.160 Your tourism's gone, the airport's are shut, the hotels will 0:08:16.160 --> 0:08:18.120 be empty, and you're not exporting a lot of the 0:08:18.160 --> 0:08:20.320 things that you were the foundation of your economy, which 0:08:20.400 --> 0:08:23.080 is the petroleum revenues. So these countries are going to 0:08:23.080 --> 0:08:25.360 be really suffering and so for them to raise some 0:08:25.400 --> 0:08:27.400 capital to be able to cover their needs is probably 0:08:27.440 --> 0:08:29.280 a likely outcome. But I would have thought that won't 0:08:29.320 --> 0:08:32.040 just be gold specific. It would be across a range 0:08:32.040 --> 0:08:34.520 of different financial assets that they might have, and they 0:08:34.520 --> 0:08:36.280 will be obviously reaching for the liquid ones. They're going 0:08:36.320 --> 0:08:38.160 to be able to sell a port very quickly, or 0:08:38.200 --> 0:08:40.480 to sell a property in London or whatever it might be. 0:08:40.880 --> 0:08:43.000 If you can't be selling a property in London these days, 0:08:44.080 --> 0:08:45.559 that's very a liquid stuff though. 0:08:45.720 --> 0:08:49.280 That ship definitely sailed. But gold you can sell, yeah, well, 0:08:49.320 --> 0:08:51.400 you definitely can. And there clearly has been more sellers 0:08:51.440 --> 0:08:53.160 and buyers in the last few weeks. But it wouldn't 0:08:53.160 --> 0:08:55.600 surprise me if we saw more buyers and sellers at 0:08:55.600 --> 0:08:57.520 the end of the day. This is a very big retracement. 0:08:57.520 --> 0:08:59.439 We've dropped over one thousand dollars in ads in a 0:08:59.520 --> 0:09:01.920 number of DEAs and it wouldn't surprise me to see 0:09:02.000 --> 0:09:03.240 quite a lot of that put back on. 0:09:03.840 --> 0:09:06.000 Yeah, and interest rates are a big deal, aren't they. 0:09:06.000 --> 0:09:08.160 I mean a month ago in the UK everyone was 0:09:08.200 --> 0:09:10.559 busily pricing and rate cuts through the end of the year, 0:09:10.559 --> 0:09:13.080 and now everyone's begun to price in rate rises, which 0:09:13.080 --> 0:09:15.319 may or may not be the correct strategy. But as 0:09:15.400 --> 0:09:17.400 is always the case in a crisis, our central banks 0:09:17.400 --> 0:09:20.320 will be busily fighting the last war. And they didn't 0:09:20.360 --> 0:09:22.680 raise write nearly soon enough last time. And they're never 0:09:22.720 --> 0:09:25.760 going to utter the word transitory ever again, and probably 0:09:25.840 --> 0:09:29.079 never ever utter the words look through this inflation that 0:09:29.240 --> 0:09:31.800 these things simply can't be said again. So they're more 0:09:31.960 --> 0:09:34.760 likely to make a mistake on the upside than the downside. 0:09:34.920 --> 0:09:36.800 Yeah, it is going to be interesting in the restoric 0:09:36.880 --> 0:09:39.560 this time. Remember all of the inflationary chat last time, 0:09:39.640 --> 0:09:42.319 and the government's had a control with the previous government 0:09:42.440 --> 0:09:45.560 being criticized by the current government inflation's crazy, look at 0:09:45.559 --> 0:09:47.720 what you've done. And I think was that Rishie Sunak 0:09:47.800 --> 0:09:50.079 was getting all of the jabs in the side and 0:09:50.240 --> 0:09:53.000 that was Ukraine related and now we've got Middle East related. 0:09:53.040 --> 0:09:55.400 Does the current government get the same kind of pain 0:09:55.880 --> 0:09:58.480 verbally from the opposition parties on the back of what 0:09:58.520 --> 0:10:00.800 we look to see is high gas prices and so 0:10:00.840 --> 0:10:02.600 on today, I sh'd think. 0:10:02.640 --> 0:10:04.680 So, now we're going to come onto energy in a minute, 0:10:04.679 --> 0:10:07.360 although it's your core area, but we must side swipe 0:10:07.400 --> 0:10:10.360 silver before we move on from prescious metals, which has 0:10:10.400 --> 0:10:12.920 been even more dramatically throwing itself around the place. 0:10:13.000 --> 0:10:15.679 And gold right, yeah, I know. Silver's absolutely been a 0:10:15.720 --> 0:10:17.960 hell of a roller coaster prices as well, above one 0:10:18.040 --> 0:10:20.920 hundred and come back down again. It's definitely been one 0:10:20.920 --> 0:10:24.920 that's it was long overdue the industrial imbalances in the market, 0:10:25.000 --> 0:10:27.559 so we needed to see higher prices. The demand of 0:10:27.559 --> 0:10:30.319 supply situation was completely out of kilter. Did it get 0:10:30.320 --> 0:10:32.520 a bit too far? Probably, as it now come back 0:10:32.559 --> 0:10:35.640 to levels which look very attractive again. Absolutely, and that's 0:10:35.640 --> 0:10:37.839 how we're certainly positioned in the portfolio for some kind 0:10:37.840 --> 0:10:38.640 of recovery there. 0:10:39.440 --> 0:10:42.679 The dop ten shareholdings are very heavily weighted toward precious metals, 0:10:42.720 --> 0:10:44.800 and you appear to be completely happy with that. 0:10:45.040 --> 0:10:46.800 Yes, I mean, across the range of funds we have 0:10:46.840 --> 0:10:49.199 different exposures, but in the world mining Trust be out 0:10:49.200 --> 0:10:51.240 with the core of Some of the absolute return that 0:10:51.280 --> 0:10:53.200 we generated in twenty twenty five, which was one of 0:10:53.200 --> 0:10:55.560 our record years, a lot of that came from precious metals, 0:10:55.600 --> 0:10:57.640 but it also came from copper as well. That was 0:10:57.679 --> 0:11:00.920 another key contributor, and those two fat plus the gearing 0:11:01.000 --> 0:11:03.240 and some of the other things around royalties and other 0:11:03.280 --> 0:11:05.720 areas in our encoached sleeve delivered a lot of value 0:11:05.720 --> 0:11:06.520 in twenty twenty five. 0:11:07.600 --> 0:11:12.560 Okay, So energy is such a tiny part of everyone's 0:11:12.559 --> 0:11:15.960 portfolios and about the three percent of the global markets 0:11:15.960 --> 0:11:19.400 for its absolutely nothing and as a proportion of the 0:11:19.480 --> 0:11:21.520 US market of any of the big markets against small 0:11:21.559 --> 0:11:23.679 of them. It's been for such a long time, so 0:11:23.720 --> 0:11:26.040 we can expect that to change, Right, where does that go? 0:11:27.920 --> 0:11:30.600 Yeah? So I think this topic that you touch on 0:11:30.640 --> 0:11:33.880 with energy is one example, has a multitude of examples 0:11:33.880 --> 0:11:36.840 that could sit withinside that. So it's been fascinating for 0:11:36.880 --> 0:11:38.800 me to read the reports that have been written. I'm 0:11:38.840 --> 0:11:41.199 sure you've seen similar ones underneath the kind of title 0:11:41.240 --> 0:11:44.720 of this halo trade hard assets and low obsolescence. So 0:11:45.080 --> 0:11:47.320 that was in motion prior to the events in the 0:11:47.360 --> 0:11:50.080 Middle East. And just to remind everybody, there's obviously a 0:11:50.120 --> 0:11:53.520 threat around AI and disruption of existing business models, and 0:11:53.559 --> 0:11:55.959 many of the existing business models that are under threat 0:11:56.040 --> 0:11:58.880 are areas where people have large amounts of exposure in 0:11:58.880 --> 0:12:01.960 their portfolios and have had for many decades. Because they've 0:12:01.960 --> 0:12:06.040 been consistent, high growth, high margin, successful tech companies and 0:12:06.160 --> 0:12:08.720 so on. There are some now question marks about the 0:12:08.720 --> 0:12:11.360 future value of those business models, and so there is 0:12:11.400 --> 0:12:14.760 a rotation of capital. And as you completely rightly point out, 0:12:15.040 --> 0:12:16.920 if you looked at a pie chart of the global 0:12:16.920 --> 0:12:19.920 economy and broke it down into segments, there are areas 0:12:19.920 --> 0:12:23.319 that are stand out within there as being really important. 0:12:23.600 --> 0:12:25.800 Now when you compare that to the market cap of 0:12:25.840 --> 0:12:29.320 the world economy, the shape of the slices is completely different. 0:12:29.720 --> 0:12:32.080 So as you say, the market cap of energy is tiny, 0:12:32.120 --> 0:12:36.440 but it's relevance in GDP for the global economy is enormous. Now, 0:12:36.520 --> 0:12:38.680 is it right that you've got a market cap that's 0:12:38.720 --> 0:12:42.319 so low relative to such an important part of today's economy. 0:12:42.559 --> 0:12:45.400 There's clearly an imbalance there, and so there is likely 0:12:45.480 --> 0:12:49.080 to be this rotation of capital back towards areas that 0:12:49.160 --> 0:12:53.959 are geopolitically important, industrially important, and like the backbones of 0:12:54.000 --> 0:12:57.040 the global economy, away from areas that maybe have some 0:12:57.080 --> 0:12:59.360 threats to their business model. And people have made a 0:12:59.360 --> 0:13:01.920 lot of money in and so that rotation, that halo 0:13:02.320 --> 0:13:05.760 strategy rotation was in motion before the Middle East. I 0:13:05.800 --> 0:13:08.680 think the Middle East is an accelerator with a focus 0:13:08.720 --> 0:13:12.480 on energy. But I think the overall trend where you 0:13:12.559 --> 0:13:14.840 have a lot of the companies that sit in I 0:13:14.840 --> 0:13:18.360 would describe them as second and third order beneficiaries of 0:13:18.400 --> 0:13:22.720 the Hyperscala capex spend. That rotation again is going to 0:13:22.720 --> 0:13:24.600 be part of that. So you've got a kind of 0:13:25.000 --> 0:13:27.400 high growth in those businesses that have been quite sleepy 0:13:27.440 --> 0:13:30.040 for a long time because of the capex spend and 0:13:30.440 --> 0:13:33.760 less probability of disruption to their business models, which means 0:13:33.800 --> 0:13:35.800 they might look relatively safe compared to some of the 0:13:35.920 --> 0:13:37.520 uncertainties that exist elsewhere. 0:13:38.640 --> 0:13:41.400 Yeah, there's been a long period where there's been an assumption, 0:13:41.559 --> 0:13:44.280 both in stock markets and at a political level, that 0:13:44.480 --> 0:13:47.360 energy is available whenever you want it and in whatever 0:13:47.440 --> 0:13:49.839 volume you wanted, that you could trade cats for energy 0:13:49.880 --> 0:13:52.320 at any point. And it's quite a wake up call 0:13:52.360 --> 0:13:55.800 for those who didn't quite hear the siren blaring during 0:13:55.800 --> 0:13:58.000 the beginning of the Ukraine War, who are now hearing 0:13:58.000 --> 0:14:01.079 it blaring very loudly now finally getting for a bit 0:14:01.120 --> 0:14:04.880 where everyone across the market understands those business of Ed 0:14:04.920 --> 0:14:07.520 Conway's wonderful phrasen. The difference between the ethereal world and 0:14:07.559 --> 0:14:10.640 the material world. Anyone who didn't get it now surely 0:14:10.679 --> 0:14:14.080 gets it now, so that rotation must be under away 0:14:14.120 --> 0:14:14.959 at some speed. 0:14:15.200 --> 0:14:18.200 Yeah, he's fantastic and I love reading his book. One 0:14:18.240 --> 0:14:20.440 of the words that's missing in the conclusion part of 0:14:20.440 --> 0:14:24.960 that is complacency. There is a widespread complacency on supply 0:14:25.080 --> 0:14:27.600 of things that we take for granted, and whether that's 0:14:27.640 --> 0:14:31.200 agricultural products, whether it's commodities, whether it's energy and so on. 0:14:31.440 --> 0:14:34.760 The amount of work and effort that goes into delivering 0:14:34.800 --> 0:14:38.360 these things for society. How dependent we are upon them, 0:14:38.600 --> 0:14:41.840 but how little we're prepared to pay for them is extraordinary, 0:14:42.000 --> 0:14:44.400 whereas we pay a lot more for something that's probably 0:14:44.480 --> 0:14:47.680 less essential to our daily lives. And I think that 0:14:47.720 --> 0:14:50.760 and as a result, you've seen the profitability of those 0:14:50.760 --> 0:14:54.880 industries decline through time, and therefore they've been disincentivized to 0:14:54.920 --> 0:14:59.080 invest in future supply opportunities, which means when events come 0:14:59.080 --> 0:15:02.560 along to disrupt supply, either because there's too much demand 0:15:02.640 --> 0:15:06.320 or supply itself it gets physically disrupted. There's a significant 0:15:06.320 --> 0:15:09.200 price outcome. Because the world is set up to be 0:15:09.320 --> 0:15:12.320 very finely balanced between supply and demand, and so that 0:15:12.400 --> 0:15:15.400 kind of complacency both in how people will invest but 0:15:15.480 --> 0:15:18.360 also what people take for granted does play out with 0:15:18.480 --> 0:15:19.400 extreme outcomes. 0:15:20.000 --> 0:15:22.080 Yeah, I mean fertilizer has been the other rig bit 0:15:22.200 --> 0:15:24.920 of that, hasn't it. Everyone suddenly realizing how you need 0:15:25.080 --> 0:15:28.080 sulfuric acid and those other inputs which I don't think 0:15:28.120 --> 0:15:30.880 anyone ever thought about before, and suddenly realizing that without 0:15:30.920 --> 0:15:33.600 the fertilizer inputs that come through the Middle East, maybe 0:15:33.600 --> 0:15:35.200 you won't have quite as much food as you thought 0:15:35.200 --> 0:15:37.840 you would have. And so the impact of these last 0:15:37.880 --> 0:15:39.800 three weeks will be seen in food prices at the 0:15:39.880 --> 0:15:40.880 end of this growing season. 0:15:40.920 --> 0:15:43.360 That's what I mean when we said about inflation earlier on. 0:15:43.400 --> 0:15:45.480 There are going to be profound impacts from this, and 0:15:45.520 --> 0:15:48.840 whether it's through direct energy costs, whether it's through fertilizers, 0:15:49.000 --> 0:15:52.240 whether it's through the manufacturing of chips, in the availability 0:15:52.240 --> 0:15:53.920 of helium for a lot of these countries. 0:15:54.120 --> 0:15:56.800 Been fascinating watching people learn that helium is the cooland 0:15:56.800 --> 0:15:59.200 and MRI machines. We too, I didn't know that helium 0:15:59.200 --> 0:16:00.560 was the cooland and MR. Yeah. 0:16:00.600 --> 0:16:03.640 So there's a huge disruption across the kind of spread 0:16:03.680 --> 0:16:06.920 and It's not just barrels of oil. It's a whole 0:16:06.960 --> 0:16:08.680 bunch of things that come from that. And then you've 0:16:08.680 --> 0:16:10.440 got the disruption to the supply chain of all of 0:16:10.440 --> 0:16:12.400 the different fuels that we use and so on. So 0:16:12.720 --> 0:16:14.680 I think the inflationary impact on this is going to 0:16:14.680 --> 0:16:15.520 be around for a while. 0:16:37.680 --> 0:16:42.000 I suppose shorter term all this is quite deflationary. It 0:16:42.240 --> 0:16:44.560 suggests if it goes on much longer. And I know 0:16:44.600 --> 0:16:46.680 we hum and heart between are we negotiating or are 0:16:46.720 --> 0:16:49.520 we escalating? We can possibly know. But if it goes on, 0:16:49.720 --> 0:16:52.800 it becomes a bit of a recessionary influence as well, 0:16:53.160 --> 0:16:56.280 and that presumably hits demand for commodities across the board 0:16:56.320 --> 0:17:00.000 and maybe at the very least delays the supercycle that you're. 0:17:00.320 --> 0:17:02.680 Yeah, I don't think we necessarily thinking about a supercycle. 0:17:02.720 --> 0:17:04.520 I just think we're going to be in a period 0:17:04.520 --> 0:17:06.400 of time. You probably get the clue. I don't really 0:17:06.440 --> 0:17:08.440 like supercycle. We had a China cycle in the early 0:17:08.480 --> 0:17:09.440 two thousand. 0:17:09.160 --> 0:17:12.840 I know, but everyone likes to talk about commodity supercycles. 0:17:12.880 --> 0:17:14.520 Remember the last time around, When was the last time 0:17:14.520 --> 0:17:15.720 we all got very excited about a. 0:17:15.680 --> 0:17:17.920 Commodity two thousand and one to two eleven. 0:17:17.680 --> 0:17:19.760 Two thousand exactly, and that was great. 0:17:19.880 --> 0:17:21.320 It was good. It was good, and I think we do. 0:17:21.480 --> 0:17:23.719 We're definitely at the foothills of a cycle now, and 0:17:23.760 --> 0:17:26.000 it's a cycle link to capex spend and you know, 0:17:26.080 --> 0:17:29.040 and they're the same foundations are there about the under 0:17:29.040 --> 0:17:32.520 investment into supply and the price elasticity that this doesn't 0:17:32.560 --> 0:17:34.480 exist to be able to turn the ups and produce 0:17:34.520 --> 0:17:36.920 more of these commodities. And we've got a decade plus 0:17:36.920 --> 0:17:39.840 of if high spend. I think it's say one caveat 0:17:39.880 --> 0:17:42.760 to that would be if equity prices fall too far. 0:17:42.880 --> 0:17:45.080 I'm sure that some of the hyperscalers are going to say, look, 0:17:45.080 --> 0:17:47.200 it must make more sense to buy shares back again now, 0:17:47.560 --> 0:17:50.040 and maybe there's a little bit of reallocation of capital 0:17:50.040 --> 0:17:52.159 towards that. That would be one of the kind of 0:17:52.240 --> 0:17:55.280 only risks I see to that hyperscale spend generally. Absolutely, 0:17:55.320 --> 0:17:57.360 we're at the foothills of a cycle. It's very exciting. 0:17:57.720 --> 0:18:00.440 As I mentioned, the sector trades on low multiple and 0:18:00.480 --> 0:18:02.679 it's completely out of balance relative to its kind of 0:18:02.840 --> 0:18:06.240 geopolitical significance, and it's significance too extand of living and 0:18:06.359 --> 0:18:07.360 in the overall economy. 0:18:08.080 --> 0:18:10.320 I'm just sticking with the negative brief shocation. We have 0:18:10.359 --> 0:18:11.960 to do that. We have to do that. The other 0:18:12.320 --> 0:18:14.480 possible thing that could hit demand, the demand that we 0:18:14.480 --> 0:18:16.080 talk about so much, and when we talk about rare 0:18:16.119 --> 0:18:17.639 earth metal, then we talk about copper, and we talk 0:18:17.680 --> 0:18:20.120 about silver. We're very awful talking about the energy transition. 0:18:20.800 --> 0:18:24.560 And there are two views here on where the war 0:18:24.600 --> 0:18:28.200 in Iranch should make people head on the energy transition. 0:18:28.280 --> 0:18:31.120 One is further faster and the other is, for heaven's sake, 0:18:31.960 --> 0:18:35.200 slow this down and keep using the oil and gas 0:18:35.240 --> 0:18:38.399 that you've got, or focus on that, etc. So there 0:18:38.400 --> 0:18:40.240 are two views, either slow it down or speed it up. 0:18:40.280 --> 0:18:42.119 And I suspect that the slow it down view is 0:18:42.119 --> 0:18:47.120 gaining traction here. So if the energy transition drive slows, 0:18:47.560 --> 0:18:49.720 that also affects demand for a lot of the things 0:18:49.720 --> 0:18:51.240 that you're quite bullish on. 0:18:51.320 --> 0:18:53.520 Yeah, potentially, But I actually think the answer is the 0:18:53.600 --> 0:18:56.359 third scenario, which is all of the above, because we 0:18:56.440 --> 0:19:01.240 do have a changing energy demand graph. We've been flatlining 0:19:01.280 --> 0:19:03.960 for years and we've now it's now. I guess it's 0:19:03.960 --> 0:19:07.399