Speaker 1: Bloomberg Audio Studios, podcasts, radio news under Savannahs.
Speaker 2: This morning, AI meekes the physical world.
Speaker 3: Memory is one of the main areas of constraint right
Speaker 3: now because there's not enough physical cleanroom space to put
Speaker 3: the tools in place to build all the memory we
Speaker 3: need for AI.
Speaker 1: Months ago, the big concern.
Speaker 3: Was that we wouldn't have enough demand. Now if we're
Speaker 3: getting to a point where we don't have enough supply,
Speaker 3: what that means is there's more duration to the good news.
Speaker 3: We can't be in a bubble if we don't have
Speaker 3: enough capacity to supply all of demand right now.
Speaker 2: So here's the laces. This morning, the CEO Dave mostly
Speaker 2: issuing a warning for the AI buildout, mostly telling a
Speaker 2: JP Morgan conference that building new factories would take too long.
Speaker 2: The comments wank on memory and hardware makers after plunging
Speaker 2: in Monday session, Jeff Curry of Abak's Markets writing capital
Speaker 2: has chased the AI trade while ignoring the physical assets
Speaker 2: it requires to run assets that have quietly become the
Speaker 2: best forming asset class of the decade. Jeff joins us
Speaker 2: now for more. Jeff, welcome to the program. Be excited
Speaker 2: to catch up with you. Seth then we need to
Speaker 2: take a giant step back and think about the mining
Speaker 2: bust post China boom. We need to think about the
Speaker 2: shale bust of a decade ago and why that's set
Speaker 2: the stage for this period of what you call capex starvation.
Speaker 2: Just where around we and why?
Speaker 4: Well, when you look at history, going back to the
Speaker 4: entire posts where our era, there's two sectors that lead
Speaker 4: the equity market. One is energy, the other's tech. If
Speaker 4: you can't turn on the lights, nothing happens. If you
Speaker 4: can't innovate, you never progress, and that's what you see.
Speaker 1: So we go back.
Speaker 4: Tech was a leadership in the nineties all the way
Speaker 4: up to two thousand and two, then we transitioned into
Speaker 4: energy two thousand and two to twenty fourteen.
Speaker 1: Fourteen to now has been technology.
Speaker 4: And the way you think about it is in those
Speaker 4: periods when energy lead and commodities lead, you build over
Speaker 4: capacity that lowers the overall price. Inflation gets low and
Speaker 4: stable interest rates drop and investors chase duration, which is
Speaker 4: growth stories tech.
Speaker 1: And the rest of it.
Speaker 4: But eventually you run out out of energy, run out
Speaker 4: of commodity capacity, and that's where we are today with
Speaker 4: this geopolitical event, it just pulled forward. Now, you know, Jonathan,
Speaker 4: we've been on here talking about the revenge of the
Speaker 4: old economy over and over and over, this rotation out
Speaker 4: of tech into hard assets that was already underway before
Speaker 4: this happened.
Speaker 1: What this did is just accelerated.
Speaker 2: As you know, Jeff, discipline is really hardened some of
Speaker 2: these C suites. What will it actually take to break
Speaker 2: out of this CAPEX starvation phase that we're currently in
Speaker 2: and do you see us breaking out of it anytime soon?
Speaker 4: Higher prices, higher returns. But the ultimately you ask what
Speaker 4: creates that huge upward trend in prices that you saw
Speaker 4: in the seventies and you saw on the two thousands.
Speaker 4: It's once investors take capital out of tech, dump it
Speaker 4: into commodities, they begin to spend and then you get
Speaker 4: cost inflation. The PPI it came out last week at
Speaker 4: five point one percent, is telling you you're already seeing
Speaker 4: signs of it, combined with a huge supply shock that
Speaker 4: you're seeing in the Middle East. So in you know,
Speaker 4: in terms of thinking about you know where we are
Speaker 4: on that we are just in the i'd say the
Speaker 4: bottom of the first inning of the supercycle. Despite the fact,
Speaker 4: commodities are the best before I mean asset class this decade,
Speaker 4: so you're already six years into it in terms of pricing,
Speaker 4: and when we think about the forward you've probably got
Speaker 4: another decade to twelve years left.
Speaker 1: Just looking at.
Speaker 2: History, Jeff is impletant. Let's just compare what's happening with
Speaker 2: tank then. So I imagine you think as capital intensity
Speaker 2: picks up, compacts intensity picks up of the tech plans,
Speaker 2: we get a rerating, and then you get the rotation
Speaker 2: into the more energy sensitive parts of the market, the
Speaker 2: mining sector, the energy sector. We're not seeing that equal
Speaker 2: and opposite. Moved on fact, Jeff, those particular parts of
Speaker 2: the market have lengthd so far. That's interesting to me
Speaker 2: that the energy names haven't done much at the moment.
Speaker 4: What gives I think there right now there is no
Speaker 4: concern about the supply of energy in commodities, even with
Speaker 4: the largest supply shock the world has ever seen, two
Speaker 4: x what we saw in the nineteen seventies. And I
Speaker 4: think there's three reasons why they're not concerned. One, we're
Speaker 4: in the middle of the shoulder months.
Speaker 1: This is the.
Speaker 4: Weakest demand that goes down and then back up. We're
Speaker 4: in that weakest demand part of the entire year right now,
Speaker 4: so there's no stress on the system. The second reason is,
Speaker 4: right now, we're in a deficit, meaning that demands up
Speaker 4: here supplies down here, we're drawing inventories. Once you exhaust inventories, boom,
Speaker 4: you have to push demand down in line with supply.
Speaker 4: That's when the shortage hits. That's when the pain hits,
Speaker 4: and that's when prices go nonlinear. The third point I
Speaker 4: want to talk about is that every policy maker, macro forecaster,
Speaker 4: central banker, tech promoter is telling you right now there
Speaker 4: is no problem. Every commodity ceo, commodity trader, anybody who
Speaker 4: gets there dirty is telling you you have a problem.
Speaker 4: You have seen this movie before, back in twenty twenty,
Speaker 4: twenty twenty one, when remember infletion is transitory, and then
Speaker 4: you know a few months later, boom, you hit the wall.
Speaker 4: And you know, we went to double digit inflation. And
Speaker 4: I think you're seeing the same dynamic here, you know.
Speaker 4: I you know one last point though, Carter in nineteen
Speaker 4: seventy seven made a fatal mistake.
Speaker 1: It was the sweater speech.
Speaker 4: It was, you know, February nineteen seventy seventy is a
Speaker 4: sweater kind of like this went out was Burgher and
Speaker 4: told everybody turn your thermosats down, and then prices of
Speaker 4: commodities explode. And I think every policy maker has learned
Speaker 4: from that. You know, you don't want to create fear.
Speaker 4: My job is you know, if I was advising the
Speaker 4: president telling him to do the exact same thing, keep
Speaker 4: everybody calm.
Speaker 1: But my job is telling you how to make money.
Speaker 4: And you know, at this point, right now, this is
Speaker 4: really serious.
Speaker 1: Yeah.
Speaker 5: Trump definitely doesn't want to come out, especially with the
Speaker 5: ninety five degree weather, saying don't put your air conditioners on.
Speaker 5: But Jeff, you say that at this moment, supply is
Speaker 5: ever more strain. Yet bread can barely hold on to
Speaker 5: one ten.
Speaker 4: You have that seasonal weakness right now. You're not in
Speaker 4: a shortage. But another really important point here is because
Speaker 4: nobody is buying the energy companies in the back end
Speaker 4: of that forward curve is anchored to the cost of
Speaker 4: capital of those companies.
Speaker 1: It is too low.
Speaker 4: And you know, I call this the biggest asymmetric trade
Speaker 4: in modern finance and historical terms.
Speaker 1: Why when you look.
Speaker 4: At the free cash flow yield of the oil companies,
Speaker 4: they're fifteen point five percent.
Speaker 1: The hyperscalers are zero.
Speaker 4: Let me say that again, fifteen point five percent, you know,
Speaker 4: free cash flow yield for the oil companies, zero percent
Speaker 4: for the hyperscalers. We call those oil companies the munificent seven.
Speaker 4: What does munificent mean? Giving you lavish gifts? And at
Speaker 4: fifteen point five percent free cash flow yield, I'd call
Speaker 4: that a lavish gift.
Speaker 5: And that when it comes to supply and demand. You
Speaker 5: mentioned this, it's going to get rough when inventories are
Speaker 5: drawn down. When will we hit tank bottoms?
Speaker 4: In your analysis, it depends on where you are in
Speaker 4: the world and what products. Some products you're you're already there,
Speaker 4: like motor oil in the US. And by the way,
Speaker 4: motor oil in the US is critical because you couldn't
Speaker 4: even turn on your car without motor oil. Even if
Speaker 4: you had gasoline items like sulfuric acid, you're out.
Speaker 1: What does that cause? That's why copper hit an all time.
Speaker 4: High last week, because you need the sulfuric acid to
Speaker 4: produce copper. But when we think about diesel, jet fuel, gasoline,
Speaker 4: those parts.
Speaker 1: Of the world, jet fuel, you're there.
Speaker 4: We would expect to see here in Europe diesel and
Speaker 4: jet fuel run into very serious problems by the end
Speaker 4: of this month, the United States gasoline by July. And
Speaker 4: at that point is when you start to get to
Speaker 4: that nonlinear part and see prices go higher. But I
Speaker 4: want to emphasize when we look at the spread between
Speaker 4: spot prices.
Speaker 1: In the back end, this spread is never been higher.
Speaker 4: And everybody goes, oh, we had you know, prices were
Speaker 4: at one twenty two in the Russian invasion. By the way,
Speaker 4: the back end of the curve was ten dollars lower.
Speaker 4: And then everybody goes, you know, we saw one forty
Speaker 4: seven in two thousand and eight. By the way, the
Speaker 4: back end was like one forty one forty seven. For
Speaker 4: what is miss priced here right now is the back
Speaker 4: end of the oil sitting somewhere around seventy seventy five.
Speaker 4: This is a long term problem. The cost structure is
Speaker 4: going to go up. There is no spare capacity left.
Speaker 4: It's going to take a long time to re establish it.
Speaker 4: We need to reprice that market. That's going to reprice
Speaker 4: the munificent seven. That's why I tend to think the
Speaker 4: trade here, you know, just looking at pure economics has
Speaker 4: the most upside to actually own these oil companies.
Speaker 2: Jeff Carry. Find up Jeff when you're next in ten
Speaker 2: you need to co host the program with us. Yes,
Speaker 2: looking forward to that. Jeff Carry that of Abex Commodity
Speaker 2: Exchange over in London,