Speaker 1: Hello, and welcome to another episode of the Odd Lots Podcast.
Speaker 1: I'm Joe Wisnal and I'm Tracy all Away. Tracy, So,
Speaker 1: obviously markets have been really fun and wild and crazy lately.
Speaker 1: You know. I think that, um, when we started talking
Speaker 1: about some of the stuff with game Stop and everything
Speaker 1: and a liquid small small stocks being pushed on message boards,
Speaker 1: we didn't expect it to move to a major commodity market, no,
Speaker 1: And I have to say, I'm reminded of the post
Speaker 1: you wrote a week or two ago about how it
Speaker 1: can always get crazier, and I think what we're seeing
Speaker 1: right now is proof that it can indeed always get crazier.
Speaker 1: But what started with a relatively small single stock game
Speaker 1: Stock migrated to a bunch of other stocks like AMC
Speaker 1: and Nokia, and then it seemed to go to the
Speaker 1: silver market. And I think silver future has jumped quite
Speaker 1: a bit, although as we're recording this, uh, let's see,
Speaker 1: it is February second, and they are starting to come
Speaker 1: back down a bit. But the notion that retail money
Speaker 1: would go after a market as large as silver is
Speaker 1: pretty intense. Like that is a big market, certainly multiples
Speaker 1: of game Stop. Now it should be noted that there
Speaker 1: is some ambiguity about where this silver trade emanated from.
Speaker 1: There are people on the subrettit Wall Street bets to say, hey,
Speaker 1: this isn't us. We never said anything about silver. That's
Speaker 1: not clear. What is clear is that something happened and
Speaker 1: in a span of just a few days, starting at
Speaker 1: the end of the last week, maybe Thursday, Friday through
Speaker 1: the weekend, basically every retail silver coin site was just
Speaker 1: instantly out of inventory, some of them saying, um that
Speaker 1: they got as many sales in two days as they
Speaker 1: would expect to get for an entire month. So something happened.
Speaker 1: They just sent silver demand both through physical demand and
Speaker 1: also plays on the e t F and then into
Speaker 1: the future of market. Absolutely wild. Yeah, this is why
Speaker 1: I find some of the reddit or Wall Street bets
Speaker 1: pushed back on this really weird. Like they're all saying
Speaker 1: that it's hedge funds buying silver and its bots trying
Speaker 1: to push the price of silver up on the subreddit.
Speaker 1: But the fact that all the coin stores are sold
Speaker 1: out of American eagles kind of makes me think that
Speaker 1: there is a retail component here. And I'm sure you know,
Speaker 1: Ken Griffin isn't going down to his local coin store
Speaker 1: to load up on Philharmonic coins or something like that. Now, Tracy,
Speaker 1: we're gonna get to our guests in a second, But
Speaker 1: have you um posted a video yet of you stacking silver?
Speaker 1: You promise you were going to do that. I did,
Speaker 1: but then I got really a side tracked and um
Speaker 1: tired by the podcast recording schedule. I will do it.
Speaker 1: I will try it this week. I promise again. Maybe
Speaker 1: maybe you could, maybe you could time the release of
Speaker 1: the video for this episode. So, unfortunately, we're not interviewing
Speaker 1: your dad because we've been talking about that forever. We
Speaker 1: know your dad is a big silver bug, but we're
Speaker 1: not getting him. But I'm extremely excited about our guests.
Speaker 1: In fact, we booked him before all the silver mania
Speaker 1: happened because there is actually so much more to talk
Speaker 1: about in the broader world of commodities, and it was
Speaker 1: originally we're going to talk about all that. So there's
Speaker 1: so much going in commodities, silver, oil, the broader macro picture,
Speaker 1: industrial commodities, copper, etcetera. All wild stuff this year. So
Speaker 1: we have the perfect guest for it. We're going to
Speaker 1: be speaking with Jeff Curry. He has the Global Head
Speaker 1: of Commodities Research at Goldman Sex or role he's occupied
Speaker 1: the two thousand and six longtime veteran at Goldman Sex,
Speaker 1: been there for twenty five years and really just sort
Speaker 1: of knows more about the commodities world than almost anyone
Speaker 1: you'll speak to. So the perfect guest today, So um,
Speaker 1: Jeff Curry, thank you so much for joining us. Great
Speaker 1: thanks for having me. Jeff. I don't want to get
Speaker 1: you in trouble or have you say anything bad about
Speaker 1: people who buy commodities, But honestly, what is the deal
Speaker 1: with people who go who buy silver? Because I will
Speaker 1: say that in my career following markets for the last
Speaker 1: ten or so years, there's something about silver people. They're
Speaker 1: just like wired a little bit different silver people, And
Speaker 1: I'll just leave it at that, silver bug, silver people.
Speaker 1: What is the deal with silver? And why does stuff
Speaker 1: like this happen? Well, you know, you know the piece
Speaker 1: we put out this this morning was silver is remains
Speaker 1: the Populist medal, And you go back in history for
Speaker 1: you know, hundreds of years. Silver has always been associated
Speaker 1: with populist movements, and so the market today is focused
Speaker 1: on the Hunt brothers cornering at the silver market as
Speaker 1: the his oracle analog. We think the appropriate historical analog
Speaker 1: is actually William Jennings Bryan's Cross of Gold speech, where
Speaker 1: essentially he argues that the government in the banks, um,
Speaker 1: we're suppressing inflation and economic potential, which is similar to
Speaker 1: the rhetoric that the you know, the Wall Street veterate
Speaker 1: hedit Um group was advocating. And the key here is that,
Speaker 1: you know, take somebody like Brian. He was advocating silver
Speaker 1: coinage as a way of getting around this, and so
Speaker 1: it has that historical populist element to it, and I
Speaker 1: think that's really what it's at play here, and the
Speaker 1: way we view the Wall Street Vets group is this
Speaker 1: is just a continuation of the rise of populism or
Speaker 1: it's just you know crescendo occurring um, you know, week
Speaker 1: after week. That's representing I think this need for governments
Speaker 1: to address some these issues around income inequality and other
Speaker 1: social needs. So we alluded to this in the intro.
Speaker 1: But trying to force a squeeze in a commodity market
Speaker 1: is very very different to trying to force a squeeze
Speaker 1: in a single stock with high short interest. How how
Speaker 1: effective do you think retail could be. And again we
Speaker 1: should just repeat the Wall Street butts is refuting the
Speaker 1: idea that they're behind all of this. But how effective
Speaker 1: do you think retail could be in moving the price
Speaker 1: of silver? At this point, again going back to the
Speaker 1: Hunt Brothers, there was significant regulatory changes in these markets,
Speaker 1: in particular position limits that makes it almost nearly impossible
Speaker 1: to be able to squeeze these markets on the same
Speaker 1: scale that we saw forty one years ago. Um, you know,
Speaker 1: and also in terms of thinking about the magnitude the
Speaker 1: size of these macro markets versus let's say game stock.
Speaker 1: You know, the size of the silver market in terms
Speaker 1: of what's being produced and all out there is you know,
Speaker 1: somewhere around three hundred billion US dollars. You know, it's
Speaker 1: three hundred times the size of the original market cap
Speaker 1: of games. And so when we and by the way,
Speaker 1: that's a in our world, silver is one of the
Speaker 1: smallest markets we deal with. You put something like gold,
Speaker 1: you know, in term you include everything in the central banks,
Speaker 1: it's just like a seven trillion dollar market. But I
Speaker 1: think you know, the key point here is that if
Speaker 1: you take the what five million Wall Street Bets subscribers,
Speaker 1: they would imply that each one of them would have
Speaker 1: to own somewhere around forty two hundred ounces of silver
Speaker 1: to be able to replicate what the Hunt brothers did.
Speaker 1: Then the ability for them to do it, given position limits,
Speaker 1: means that you would have to split the position fifty
Speaker 1: three ways, with each position representing two hundred and seventeen
Speaker 1: million dollars um, and they would all need to be coordinated. So,
Speaker 1: in other words, it's nearly impossible to do in the
Speaker 1: current environment, and that's one of the smaller commodities. I
Speaker 1: think Wall Street Cuts is now seven or eight million subscribers,
Speaker 1: so the number keeps going up. But point taken about
Speaker 1: the amount of firepower that would be needed, yeah, it
Speaker 1: still seems very unlikely that they're going to do what
Speaker 1: would be needed to really corner this market. Jeff, you know,
Speaker 1: there's this persistent myth or this thing that people say,
Speaker 1: and I don't really understand it, but I guess it
Speaker 1: gets back, you know, to some of the William Jennings
Speaker 1: Bryan populism. There's this persistent myth out there that the
Speaker 1: Wall Street banks and in particular JP Morgan for some reason,
Speaker 1: and I never understood why, what the what the story
Speaker 1: is they're like, oh, they're sitting on this huge naked
Speaker 1: short position, and if we just jack up the price
Speaker 1: of silver enough, they're gonna have to cover and then
Speaker 1: that's the way we're going to take down the bankers
Speaker 1: and get them back and all that stuff. Do you know,
Speaker 1: like what do what? Can you walk us through the
Speaker 1: origin of this notion that for some reason banks Like
Speaker 1: where did they get this idea that banks are sitting
Speaker 1: on these huge unhedged short silver positions. If you look
Speaker 1: at the c TC positioning reports, what you see is
Speaker 1: that the U, the swap dealers, the banks are have
Speaker 1: very large short positions in um precious metals. Now, the
Speaker 1: thing that's forgotten is that these are typically hedges to
Speaker 1: the physical positions and like the E T s And
Speaker 1: that's the one thing that makes commodity markets very different
Speaker 1: from financial markets or the long only markets is that
Speaker 1: there's zero sum, meaning that for every long is a short,
Speaker 1: and I think people forget that. And also, you know,
Speaker 1: it goes to a broader point about the ability for
Speaker 1: um speculators to impact these markets. Uh, when you have
Speaker 1: a speculator coming and buy the share of a company,
Speaker 1: the only way you create more supply of those shares
Speaker 1: is through the SEC approval and then you issue new shares,
Speaker 1: so if the speculator buys those shares, they can drive
Speaker 1: up the price. Now, when you think about a commodity
Speaker 1: market like let's say, you know oil or something like that,
Speaker 1: where you have the the you know every long there
Speaker 1: is a short, you're adding more loans means you're adding
Speaker 1: the short. Now, what separates silver and gold from all
Speaker 1: the other commodity markets is that E t F is
Speaker 1: physically backed. And so to answer your question, what they're
Speaker 1: observed is the fact that the lights of the entities
Speaker 1: that are supporting those e t F s are using
Speaker 1: the comac silver market as a hedge mechanism. And hint,
Speaker 1: that's why you see the shorts in that market. But
Speaker 1: I actually always want to quickly go to a point
Speaker 1: about the physical aspect of those e t F gold
Speaker 1: and silver is if you take the the the current
Speaker 1: size of the of the gold et F, you know
Speaker 1: it's somewhere around a hundred and fifty billion dollars of gold.
Speaker 1: You could put the hundred and fifty billion dollars into
Speaker 1: your office. It may break the floor, it's so heavy
Speaker 1: it falls through. But the key point is that you
Speaker 1: don't need a lot of space to store it. Now,
Speaker 1: in contrast, if you take the oil et F, which
Speaker 1: is all paper, not physical, and you look at the
Speaker 1: total amount in there, it's something like a hundred and
Speaker 1: eighty million barrels. By the way, don't quote me on
Speaker 1: these numbers I made. They changing quickly. But the point
Speaker 1: I want to illustrate here is that if you take
Speaker 1: a hundred and eighty million barrels, one BLCC carries two
Speaker 1: million barrels. So think about this, A hundred and eighty
Speaker 1: million barrels is ninety blccs. Now, why don't you even
Speaker 1: envision in your head parking ninety b LCCs in the
Speaker 1: East River, New York or the Thames here in London.
Speaker 1: It becomes incredibly difficult. Now, in contrast, you take that
Speaker 1: hundred eighty million barrels at fifty dollars a barrel, that's
Speaker 1: nine billion dollars parked out on the Thames River. And
Speaker 1: if you can think about the gold et F, I've
Speaker 1: just stored a hundred and fifty billion dollar dollars in
Speaker 1: my office. I'm gonna get you need to concrete floor
Speaker 1: to be able to store. But the key message here
Speaker 1: is you can do it, you can't do it in oil.
Speaker 1: Hence why you have physical e t s in both
Speaker 1: gold and silver. Yeah, don't take physical delivery of oil,
Speaker 1: something I learned from first hand experience. So so what's
Speaker 1: your what's your take on why the price of silver
Speaker 1: actually moved this week? If if we're saying that retail
Speaker 1: probably doesn't have enough firepower to do it by themselves,
Speaker 1: what's going on here? Well, I mean in terms of
Speaker 1: looking at you know, near term volatility. Absolutely, they can
Speaker 1: create volatility by moving uh, you know, in and out
Speaker 1: of the market and creating velocity and changes in open interest,
Speaker 1: which they are doing because you know, we're down again
Speaker 1: today similar to this we were up. But in terms
Speaker 1: of thinking about a long term structural shift, you need
Speaker 1: to have physical demand for those coins and real physical silver.
Speaker 1: It's increased. What but is they going to create a
Speaker 1: squeeze or anything of that, Megan to The answer is no.
Speaker 1: And I so I don't want to dismiss the inability
Speaker 1: to move markets, because clearly they did. Yesterday's silver was
Speaker 1: up eight percent. But the question is are they going
Speaker 1: to stay in this market and maintain those positions. That
Speaker 1: becomes a much more difficult task because the one thing
Speaker 1: about commodities that separates them from again from financial markets
Speaker 1: is not only are they long short, but also there's
Speaker 1: an expiration that they mean the financial market expires into
Speaker 1: the physical, which means at some point they have to
Speaker 1: roll these positions back out onto the financial market to
Speaker 1: avoid taking delivery like our example with oil, and because
Speaker 1: of that need to roll, they prefer, you know, these
Speaker 1: financial instruments like the E t F, which is where
Speaker 1: most of the retailer activity remains. So regardless of where
Speaker 1: the uh the idea to go crazy to buy silver originated,
Speaker 1: it did happen. Obviously we saw the buying and the
Speaker 1: s l V E t F. I mentioned that the
Speaker 1: the coin dealers all had to put out put up
Speaker 1: signs saying we can't sell coins right now because we're
Speaker 1: out of inventory. As an analyst, now now that you've
Speaker 1: seen this happen in the silver market, how do you
Speaker 1: think about it going forward? Because maybe okay, this is
Speaker 1: gonna die down and maybe silver in a week or
Speaker 1: two weeks we'll be back to where it was. But
Speaker 1: now that this can happen and we're aware that they
Speaker 1: sort of like flash mob buying can happen in a
Speaker 1: physical commodity. How does that make you think about sort
Speaker 1: of like volatility in the space going forward, the risk
Speaker 1: of it happening um again and sort of changing the
Speaker 1: ability for the market to get at least short term
Speaker 1: disrupted so quickly, so fast us all these markets, the
Speaker 1: volatility has started to rise substantially, and this represents a
Speaker 1: significant departure from you know, let's say two to three
Speaker 1: years ago. UM. And I think it, you know, has
Speaker 1: to do with the fact that you have these markets
Speaker 1: running at much lower inventory levels, which goes into this
Speaker 1: more structural story, you know, because you know, I think,
Speaker 1: as you you're aware, we're advocating we're entering a new supercycle.
Speaker 1: And the evidence that we're you know, in you know,
Speaker 1: this transition between a tactical bowl market and structural bowl
Speaker 1: market is that every single one of these markets, with
Speaker 1: the exception of zinc and coco, is in a deficit
Speaker 1: right now. That's a very rare dinam, which means that, um,
Speaker 1: when you have volatility of positions going in and out
Speaker 1: of a market that has tight physical fundamentals is going
Speaker 1: to manifest itself in greater volatility. You know, we like
Speaker 1: to say that the biggest shortage facing silver today is
Speaker 1: the ability to give the physical to the exchanges, whether
Speaker 1: if it's the Leemy or the COMAX. And that's the
Speaker 1: type of volatility that's being generated. Because if you have
Speaker 1: more than adequate inventory everywhere, getting into an exchange is
Speaker 1: pretty easy. When you're short, it becomes much more difficult
Speaker 1: and creates, you know, much more volatility. On that note,
Speaker 1: walk us through your structural both thesis, because I think
Speaker 1: for a lot of people, many people are going to
Speaker 1: still be thinking about and we have this big hit
Speaker 1: to economic growth. We saw oil prices collapse, and a
Speaker 1: lot of people are thinking also that we're getting the
Speaker 1: screen energy revolution, which might be bad for oil. So
Speaker 1: the notion that we're entering a long term up cycle
Speaker 1: in commodities might be counterintuitive to some what's your line
Speaker 1: of thinking here, Well, we think about oil itself, it
Speaker 1: actually benefits from the green stimulus in the very near term,
Speaker 1: long before the energy transition begins to hurt its demand.
Speaker 1: And let's say, and so when we put oil into
Speaker 1: the mix we're talking about over the next let's say,
Speaker 1: you know, three to five years, we would see that
Speaker 1: that tipping point is somewhere around four. But let's talk
Speaker 1: about what we think is creating that the structural bull market.
Speaker 1: And we like to emphasize that while the vaccine represents
Speaker 1: tactical upside, the pandemic itself creates the structural catalyst for
Speaker 1: a supercycle type of bull market. And we would use
Speaker 1: analogy more like the seventies in the two thousand's, but
Speaker 1: it is back to see a bull market along those
Speaker 1: lines of either like the nineteen seventies or two thousand's.
Speaker 1: And there's three themes that we're focused on. One is
Speaker 1: structural under investment in supply, and historically we've termed that
Speaker 1: the revenge of the old economy, meaning that the new
Speaker 1: economy has capital away from the old economy because they
Speaker 1: have much better returns starved the old economy of the
Speaker 1: building the ability to grow out the production capacity. That
Speaker 1: then creates a problem once we see a recovery and
Speaker 1: demand as we're witnessing today and why nearly every single
Speaker 1: one of these markets is in a deficit, and then
Speaker 1: we overlay E s G concerns on top of that,
Speaker 1: you know, you see a very tight supply picture going forward,
Speaker 1: particularly in oil second big theme that we're focused on
Speaker 1: is policy driven demand and we like to call that
Speaker 1: revving commodity demand r E D. And what is the
Speaker 1: r E V and for redistributional policies environmental policies as
Speaker 1: well as versatility and supply chains. And you can think
Speaker 1: about comparing this to seventies. Redigital redistributional policies are like
Speaker 1: the War on poverty in the night late sixties. In seventies,
Speaker 1: the environmental policies again like the seventies, are like the
Speaker 1: war are on acid rain where he took all the
Speaker 1: sulfur out of out of the fuels. And then the
Speaker 1: versatility and supply chains would be like the Cold War
Speaker 1: with the Soviets. This time we have a Cold War
Speaker 1: with the Chinese. And by the way, that Cold War
Speaker 1: type dynamic immediate play today. The Chinese are buying grains
Speaker 1: at a very torrid pace right now. One of the
Speaker 1: key reasons they want to create security and supply, just
Speaker 1: like the Americans and Europeans did back in the late
Speaker 1: sixties and seventies against the Cold War with the Soviets,
Speaker 1: build up these strategic stockpiles at these critical commodities. So
Speaker 1: again that's why we kind of like in the current
Speaker 1: environment more being more like the seventies is fascinating. I mean,
Speaker 1: talks us a little bit more about the under investment
Speaker 1: we've seen in commodities. I mean in the post grade
Speaker 1: financial crisis era. I think like in the immediate way
Speaker 1: twenty nine we saw this pretty big oil spike and
Speaker 1: jump in other commodities, but basically it was just all
Speaker 1: down downhill in a lot of industrial commodities, in particular
Speaker 1: for the last decade. Talk to us about what that did,
Speaker 1: that long decade long bear market in commodities did to
Speaker 1: um investment, how much under investment created and really what
Speaker 1: we're talking about when we talk about various industrial commodities
Speaker 1: being indeficit. Yeah, I think the bottom line is that
Speaker 1: the companies in these industries had very poor returns, and
Speaker 1: those poor returns um you know, basically we're you know,
Speaker 1: reached a peak or you know, they capitulated when we
Speaker 1: reached negative oil prices in April of last year. And
Speaker 1: so when we look at the willingness of investors to
Speaker 1: come into this space, you know it's gonna take a
Speaker 1: significant track record before they show any interests. And you
Speaker 1: know the reason why we termed it the revenge of
Speaker 1: the Old economy. Goes back to the dot com boom
Speaker 1: in the late nineties and early two thousand's a period
Speaker 1: in which you know, the tech sector was attracting all
Speaker 1: the capital because of you know, the much better prospects
Speaker 1: and outlook. And essentially what occurred over that time period
Speaker 1: is investors abandoned the space. That's when you created the
Speaker 1: Exxon mobils, the vps, the shells because they had to
Speaker 1: reduce costs to survive in an environment with very poor returns.
Speaker 1: I don't know if they come back this time because
Speaker 1: you have the e S G overlay, Because you got
Speaker 1: to ask yourself, even if we went to a hundred
Speaker 1: dollar barrel hall, are you interested investing in oil when
Speaker 1: you know it's only a to three year, maybe five
Speaker 1: year proposition at best. I want to go back to that,
Speaker 1: the notion that there's a sort of arms race in
Speaker 1: commodities and in securing things like food and oil. One
Speaker 1: thing I've never quite understood is I understand why you
Speaker 1: would want to build a stock pile of something like
Speaker 1: grains in the short term, but I'm trying to think
Speaker 1: how to phrase this. This is kind of a stupid question,
Speaker 1: But how long would that stockpile actually last? Like if
Speaker 1: you're buying a boatload of grains because you're worried about
Speaker 1: food security way out in the future, Like, how useful
Speaker 1: is that to you? What exactly is the strategy here?
Speaker 1: Is it about actually accumulating physical commodities in case you
Speaker 1: run out? Or is it about building relationships and securing
Speaker 1: supply lines with suppliers and countries and partners for the future.
Speaker 1: To answer that question, you just go back to biblical
Speaker 1: times and you ask where does that seven year number
Speaker 1: come from? That you hear over and over. But when
Speaker 1: we think about the strategic reserves in oil and the
Speaker 1: US has you know, six hundred seven hundred million barrels
Speaker 1: of oil that was built up during those nineteen seventies. Um,
Speaker 1: the oil lasts a lot longer, and they they recycle
Speaker 1: it in and out and they make sure that it
Speaker 1: is you know, up to par in terms of being
Speaker 1: able to create products. Um. But I think you know,
Speaker 1: going to to your your broader question here is that
Speaker 1: you know, when you look at China, there's a lot
Speaker 1: of different motivations here, and we talk about versatility and
Speaker 1: supply chains. You know, we're talking about duplicate five G
Speaker 1: networks responding to the trade war with you know, manufacturing
Speaker 1: UM supply lines. You've heard Biden talk about made in America.
Speaker 1: That's part of this dynamic that we're talking about. It means,
Speaker 1: you know, if if Biden wants to go out and
Speaker 1: promote evs that are made in America and using unionized labor,
Speaker 1: it means you need to build different supply chains in
Speaker 1: America and that's going to take time and require more commodities.
Speaker 1: So that's what we mean by this versatility and supply chains,
Speaker 1: is this need to create your own secure domestic supply
Speaker 1: chains to deal with you know, host of different issues,
Speaker 1: whether if it were concerns around COVID, you know, people
Speaker 1: realize supply chains were vulnerable, concerns around climate change, you know,
Speaker 1: do you have enough firefighting capabilities in places like California?
Speaker 1: UM And so I think you get the point here
Speaker 1: is it's a more of a broader type of comment
Speaker 1: here than it is specific like it was like it
Speaker 1: was in the nineteen seventies. But it's kind of that
Speaker 1: same dynamic. And when you look at capex, you look
Speaker 1: at global capex cycles since the nineteen fifties. We've seen
Speaker 1: two big capex cycles, one that started in the late
Speaker 1: sixties and ended somewhere around sight and then another one
Speaker 1: that started around two thousand and one and ended around
Speaker 1: two thousand eleven. And both of those corresponded to big
Speaker 1: bullmarkets and commodities, because commodities ultimary reflection of a capex cycle.
Speaker 1: So I love this idea that you know, the Biden
Speaker 1: administration could be great for oil because obviously it's kind
Speaker 1: of intuitive, but the way you describe it is fairly Uh,
Speaker 1: it does make a lot of sense, and it's interesting.
Speaker 1: I mean, you have to sort of figure the Trump
Speaker 1: administration was pretty oil friendly with its policies, but that
Speaker 1: was a brutal for years for oil stocks, Uh, the companies,
Speaker 1: the whole industry. How much of an effect um does
Speaker 1: this have? Like you know, say, okay, like the Biden
Speaker 1: administration is going to have a less generous approach to
Speaker 1: new permitting, drilling and so forth. What does that mean
Speaker 1: for sort of domestic the domestic industry and then therefore
Speaker 1: the upward pressure that that puts on prices. Well, you know,
Speaker 1: first of all, the one thing about the policy here
Speaker 1: is that it wants to use a carrot more than
Speaker 1: a stick. Um. You know, you look at Europe and
Speaker 1: now the blueprint and China, it looks more to using
Speaker 1: a stick get rid of the dirty technologies and replace
Speaker 1: them with the um the following defined technologies. At least
Speaker 1: a ministration here is using more of a carrot and
Speaker 1: incentive approach. Now, when we think about, you know, raising
Speaker 1: the cost of oil, um, the way I like to
Speaker 1: think about it is on the Federal lands, which represents
Speaker 1: you know, nearly three million barrels per day a production,
Speaker 1: they can actually create an implied well head carbon tax
Speaker 1: there that raised the marginal cost of producing the barrel
Speaker 1: of oil. And because that shale barrel and these barrels
Speaker 1: in the US are the marginal barrel that sets the
Speaker 1: price to the rest of the world, it effectively creates
Speaker 1: a carbon tax that is imposed on the rest of
Speaker 1: the world. UM. So you can, if you think about
Speaker 1: it in that context, and that he has a unilateral
Speaker 1: capability to do it, takeaway drilling credits, tax credits, raise
Speaker 1: royalty rates and so forth of that nature. So it
Speaker 1: is a way to get at this which then in
Speaker 1: turn and sentivises investment in other types of clean energy.
Speaker 1: Let's say, like you know, he's proposing you know, doubling
Speaker 1: capacity offshore. He can do that through you know, unilateral
Speaker 1: credits on the tax side, as well as you know,
Speaker 1: improving learning standards for for that type of investment. So
Speaker 1: so I do think that the one thing that's different
Speaker 1: about this approach is it's focusing on the carrot as
Speaker 1: opposed to the stick. Because one of the problems historically
Speaker 1: with the US is if you use the stick, you're
Speaker 1: going don't make these investments in these technologies. It gets
Speaker 1: tied up in the courts. And if it's tied up
Speaker 1: in the courts, um, you know, you can see Obama's
Speaker 1: clean air policy is still tied up in the courts today.
Speaker 1: I would feel very remiss if we talked about oil
Speaker 1: and didn't mention OPEX. So when we talk about oil
Speaker 1: getting structurally more incentive through um, what's the word I'm
Speaker 1: thinking of a inadvertent carbon tax? I guess, um, Sorry,
Speaker 1: it's late and my vocabulary isn't as good as it
Speaker 1: really is. But how how would we expect OPEC to
Speaker 1: respond to that? Why wouldn't they like it? Because ultimately
Speaker 1: you're raising the price of oil? Um, And they're the
Speaker 1: you know, so you're basically they're the two bookends. In fact,
Speaker 1: when you look at the ability to grow supply, is
Speaker 1: that the only short cycle production that can be brought
Speaker 1: on in the world if we see a big spike
Speaker 1: and price sometime in the next of months, it's the
Speaker 1: Middle East in the United States, and there are the
Speaker 1: two bookends on. Middle East is the lowest cost, in
Speaker 1: the US is the highest cost. Everything else in between
Speaker 1: is unlikely to be invested in. In fact, actually, when
Speaker 1: you look at part of the reason why Saudi is
Speaker 1: willing to do a unilateral cut is that Nigeria Angola
Speaker 1: can't even produce at their quota right now because production
Speaker 1: is dropping due to a lack of investment. In decline
Speaker 1: rate sitting in Mexico another example of declining production. So
Speaker 1: when we look at non opact production there, even some
Speaker 1: of the non golf OPAC producers, they're struggling to be
Speaker 1: able to maintain production where it is in the face
Speaker 1: of a lack of investment. Goes back to that theme
Speaker 1: of under investment. You know. Another thing that you said
Speaker 1: in terms of like identifying the big pillars of the
Speaker 1: structural bull market in commodities, redistributionist policies, and it seems
Speaker 1: like the new administration is definitely going to you know,
Speaker 1: something in the air. More people are into it, the
Speaker 1: idea of actually, uh redistributing wealth downward, giving more households
Speaker 1: buying power, and you liken that to the seventies. Talk
Speaker 1: to us a little bit more about how that plays
Speaker 1: into your broader thesis. Absolutely critical and it's it's and
Speaker 1: it's hard to distinguish between the redistributional policies and the
Speaker 1: environmental policies because you know, to use a term from
Speaker 1: the UK green leveling, using green capex to level income
Speaker 1: is you know, a policy initiative. So the two begin
Speaker 1: to blend in with with one another. Now in terms
Speaker 1: of thinking about how this differs from the previous ten
Speaker 1: to fifteen years is following the financial crisis. Policy was
Speaker 1: focused on financial stability and as a result, it went
Speaker 1: into banks that systematically created a decline in interest rates,
Speaker 1: which mechanically raised equity valuations and created a wealth effect.
Speaker 1: So stimulus work through the wealth channel. Who owns financial assets?
Speaker 1: The higher income households, now they have a very low
Speaker 1: marginal propency to consume, you give them a dollar, they're
Speaker 1: going to save it. They only spend three cents on
Speaker 1: each dollar. In contrast, today we look at most of
Speaker 1: the stimulus goes directly into the hands of the lower
Speaker 1: income households who have a marginal propensity to consume of
Speaker 1: meaning you give them a dollar, they'll consume one pennies
Speaker 1: of it versus the higher income household that will consume three.
Speaker 1: That is significant because what that tells you is that
Speaker 1: going forward, and you already see it in the postcode
Speaker 1: level data in the US, is that you're seeing a
Speaker 1: mechanical words shifting consumption. So that's point one. Point two
Speaker 1: is that the consumption is more commodity intensive. High income guy,
Speaker 1: he can he drives a tesla, his house is well insulated,
Speaker 1: and he eats fish. The lower income guy drives a
Speaker 1: a SUV with poor gas mileage, a poorly insulated house,
Speaker 1: and he most likely eats beef. The beef consumes four
Speaker 1: times or excuse me, eight times more grains in the fish.
Speaker 1: And then there's more consumption going into the SUVs and
Speaker 1: into the houses. And you put this together and then
Speaker 1: you know, you look at the at the margin, the
Speaker 1: lower income households, you give them a dollar, fifty cents
Speaker 1: of it goes to commodities. In contrast, the lower income households,
Speaker 1: you give them a dollar, thirty five cents of it
Speaker 1: goes to commodities. So not only do you get the
Speaker 1: upwards shift in commodity or in overall consumption, it's more
Speaker 1: commodity intensitive. And then one last point, you look at
Speaker 1: the colation between UM these transfer payments in commodity prices
Speaker 1: going back to the sixties, they're very highly correlated. You know.
Speaker 1: I go back to the point about Milton Freeman made
Speaker 1: the point that, you know, inflation is a monetary phenomena.
Speaker 1: I think he needed a close to it. Now we've
Speaker 1: learned after oh eight oh nine, provided that the money
Speaker 1: gets into the hands of the people who will spend it.
Speaker 1: I love the idea of measuring direct payments in terms
Speaker 1: of impact on commodities. UM. So you mentioned inflation at
Speaker 1: the very end of that, and I wanted to get
Speaker 1: into this because the dollar also factors into your structural
Speaker 1: boal case. Can you walk us through how you're seeing
Speaker 1: the dollar and what it means for commodities and also
Speaker 1: how that would feed into inflation. Let's start with the
Speaker 1: reflation feedback loop. How does it work? It is the
Speaker 1: call it petro dollar recycling story, or whatever you want
Speaker 1: to call it is. Let's take you know, US spends
Speaker 1: money that weekends the dollar um similar to what we
Speaker 1: saw on the second half of last year. A week
Speaker 1: er dollar mechanically raises the cost of produce oil and commodities.
Speaker 1: Take copper and chili. The cost of producing copper is
Speaker 1: denominated in local currency like wages for the truck drivers UM.
Speaker 1: So a decline in the dollar and increase in the
Speaker 1: Chilean pay so it just pushes up the dollar price
Speaker 1: of copper. So then we get to higher commodity prices.
Speaker 1: Higher commodity prices then in term increase the terms of
Speaker 1: trade for those different countries and they now start building
Speaker 1: global liquidity. Hence they're even Saudi Arabian. The month of
Speaker 1: November December saw a rise in their liquidity because prices
Speaker 1: we got into that fifty five dollar range, and so
Speaker 1: the global liquidity then in turns gets lent out creates
Speaker 1: more dollars, which does two things. Weekends the dollar of
Speaker 1: further increases the demand for commodities, and then you cycle
Speaker 1: back over again. So that's how you get that reflation
Speaker 1: feedback loop. But I want to go into tying this
Speaker 1: into kind of the bigger theme here and got back
Speaker 1: to the redistributional policies. If we look at you know,
Speaker 1: the current issues, you know, the populism and so forth,
Speaker 1: I would argue they're mostly tied to this whole idea
Speaker 1: of income inequality. And I challenge you to take a
Speaker 1: picture and look at income inequality over the last hundred years,
Speaker 1: and when we look at when it's at its lowest
Speaker 1: point or when the world was the most equal in
Speaker 1: terms of wealth and income, it was in nineteen seventy
Speaker 1: nine nineteen eighty, a period in which we had the
Speaker 1: highest real commodity prices and you know, substantial inflation. And
Speaker 1: the reason why I bring this in with the discussion
Speaker 1: of the dollar is that you take you know, July four,
Speaker 1: two thousand and eight, we reached peak oil prices of
Speaker 1: a hundred and forty seven dollars. It was also the
Speaker 1: weakest dollar ever observed, one point six one against the euro,
Speaker 1: the exact same hour that that oil spiked to those
Speaker 1: higher or higher prices. So when you see that dynamic
Speaker 1: between commodity prices in the dollar, it really does feed
Speaker 1: on itself. But we now I go back to that
Speaker 1: whole point about redistribution. If the policy aim here is
Speaker 1: to try to solve income inequality over a longer period
Speaker 1: of time, um, you're probably going to end up with
Speaker 1: higher commodity prices as being a call it a collateral
Speaker 1: damage of it because ultimately get more consumption. You know,
Speaker 1: I really didn't expect this conversation to go there, but
Speaker 1: it's interesting because it's such a recurring theme on this
Speaker 1: podcast of the conversations that Tracy and I have, which is,
Speaker 1: are we essentially at the end of the vulgar era?
Speaker 1: And so if you think about the early eighties and
Speaker 1: when the war on inflation really started to take off,
Speaker 1: of this monetary policy dominance and the sort of forty
Speaker 1: year cycle, and we always sort of come back to
Speaker 1: this in different ways of is this the turn or
Speaker 1: are we coming to the end of this idea? It's
Speaker 1: sort of really interesting to hear you put that in
Speaker 1: the commodity context, but when you say that, uh, you know,
Speaker 1: makes it makes a ton of sense. Yeah, I just
Speaker 1: like to emphasize that when you think about these dynamics there,
Speaker 1: they're really these longer terms that you're talking about, they're
Speaker 1: really political choices. And the political choice back in the
Speaker 1: the late nineteen sixties is very similar to the one
Speaker 1: we have today now. Social unrest was high, racial tensions
Speaker 1: were running high, and you had the War on poverty.
Speaker 1: You had, you know, at that point, you had you know,
Speaker 1: the environmental situation was terrible. You had smog, and so
Speaker 1: you had to have that War on acid rain. By
Speaker 1: the way, on that War on acid rain, taking the
Speaker 1: sulfur out of the out of the fuels, and out
Speaker 1: of the sky to get rid of the smog actually
Speaker 1: accelerated the carbon problem. And he did the atmosphere because
Speaker 1: sulfur is a coolant. Suit is heats the atmosphere. Um.
Speaker 1: But I think the key point is we had all
Speaker 1: those similar type of social dynamics at play in the
Speaker 1: sixties and we had to solve them. And as we
Speaker 1: chose to solve them, one of the implications of that
Speaker 1: were higher commodity prices. Joe, I'm waiting for you to
Speaker 1: bring up M M T and ask what it means. No.
Speaker 1: Tracy always always told me with that, but I didn't.
Speaker 1: I wasn't gonna I wasn't gonna go there. I have
Speaker 1: to sort of lightning round question type, and then I'll
Speaker 1: let you go first. I'm just curious, what were you
Speaker 1: doing when the price of oil hit negative forty list
Speaker 1: I'll tell you you guys don't want to know. I
Speaker 1: was on CNBC UM talking about oil price. Okay, yeah,
Speaker 1: we know that's fine, all right, No, actually I do
Speaker 1: have a lot. But this is and this relates to
Speaker 1: the silver question, the precious metals angle, and this is
Speaker 1: something I'm curious about. We don't need to go too
Speaker 1: into it, but there is this meme out there that
Speaker 1: somehow the rise of crypto is um eating into some
Speaker 1: demand from the very rich who might otherwise have been
Speaker 1: putting their money into gold and silver as a store
Speaker 1: of wealth. Is that something that you observe at all
Speaker 1: from your perch? Very small at the margin. And the
Speaker 1: reason why I say that is right now, you look
Speaker 1: at let's say the cryptome or bitcoin. You know, the
Speaker 1: overall crypto market is roughly a trillion dollar market, bitcoin
Speaker 1: around six hundred billion. The institutional involvement in there is
Speaker 1: somewhere around seven to ten billion dollars. It's still relatively
Speaker 1: small magnitude of about one percent. So what's left over
Speaker 1: are the specult retail investors, and they behave um in
Speaker 1: a very risk on fashion. They're not treating bitcoin and
Speaker 1: cryptocurrency as a defensive asset like gold. Instead knit like
Speaker 1: a turbo charged risk on asset that trades very much
Speaker 1: like copper or iron ore, which trades off of positive
Speaker 1: growth news. And so if the current environment means do
Speaker 1: I want to own crypto as a defensive asset, the
Speaker 1: answer is not really no. And then there's also the
Speaker 1: inherent transparency issues. Do big institutional players in you know,
Speaker 1: high net worth individuals want to own crypto? Given those issues,
Speaker 1: the answer is probably unlikely. They're still gonna have to
Speaker 1: use a custodial bank to purchase this stuff. And then
Speaker 1: the custodio bank actually owns the crypto. So why do
Speaker 1: we have crypto? And I like to go to the point,
Speaker 1: what are the physical properties of bitcoin that make it
Speaker 1: a commodity? It's the very first time in the history
Speaker 1: of digital money. You can take it off the grid.
Speaker 1: You can put fort Knox onto the key fob, put
Speaker 1: it in your pocket and walk away. Why do you
Speaker 1: want to take it off the grid? Maybe they should
Speaker 1: find James stop Stock is a store of value instead
Speaker 1: it's true. Oh, thank you. Thank you for clarifying that
Speaker 1: as a joke. Jeff. This was so great. Jeff, this
Speaker 1: was so great, Uh to chat with you. Um, I
Speaker 1: really appreciate you coming on. Super fascinating, love the big
Speaker 1: big picture thoughts as well as the specific mechanics. Thanks
Speaker 1: for coming on the show. Great. Thanks for having me
Speaker 1: about that was really great, Jeff. Thank you, Tracy. I
Speaker 1: really did not expect this conversation, as I mentioned, to
Speaker 1: sort of like fit in so well with some of
Speaker 1: our like other broader macro conversations. But just the way
Speaker 1: like Jeff rounded that out that was so good. I
Speaker 1: could He's another one. I could listen to him for
Speaker 1: very long time. Yeah, for sure. And I gotta say
Speaker 1: his point about the redistributive effects of direct payments being
Speaker 1: different to quantitative easing like we saw after the two
Speaker 1: thousand eight financial crisis. I thought that was really interesting
Speaker 1: and something that I hadn't considered before. The idea of
Speaker 1: you're putting money directly into people's pockets, they're probably going
Speaker 1: to go out and spend it on things that use
Speaker 1: a lot of commodities to come into being. That was interesting. Yeah,
Speaker 1: and just this whole idea of like the sort of
Speaker 1: backloaded or front loaded effects on commodities from green spending.
Speaker 1: So at some point the internal combustion engine may come
Speaker 1: to an end and we really might have structurally lower
Speaker 1: oil prices forever. But in the meantime that is a
Speaker 1: lot of capex spending right now and all kinds of
Speaker 1: things and more money in people's hands that then increases
Speaker 1: the demand. And then if you at on top of that,
Speaker 1: it's like, okay, well, like who is going to invest
Speaker 1: in expanding oil supply when in the long term oil
Speaker 1: demand really will collapse due to everyone having an electric vehicle.
Speaker 1: You could see how you could have the real makings
Speaker 1: of a sustained spike. It may not last forever, but
Speaker 1: you could see how you could have several years of
Speaker 1: extremely elevated prices. It makes a lot of sense. I
Speaker 1: think the thing that comes through really clear here is
Speaker 1: the idea that we're in a transition phase from some
Speaker 1: sort of old economy to some sort of new economy.
Speaker 1: So you know, call it whatever you want, Like the
Speaker 1: baby boomer economy that was focused on returns and financial
Speaker 1: assets and didn't really care about things like the environment
Speaker 1: or fairness, or equitable distribution of wealth, and then maybe
Speaker 1: the new economy starts to look a little bit different,
Speaker 1: tech heavy, very E s G focused, looking at fuzzy
Speaker 1: concepts like fairness and things like that. And the transition
Speaker 1: period is going to be volatile to Jeff's point, but
Speaker 1: you can see how it might throw up weird oddities
Speaker 1: like commodities prices, the oil price getting higher in the interim,
Speaker 1: even though the place we're eventually going to is a
Speaker 1: place where oil is used much much less. No, it's weird,
Speaker 1: but it makes sense. And again, you know, I go
Speaker 1: back to the last four years. It's like literally the
Speaker 1: opposite of the Trump administration, which was super oil friendly
Speaker 1: but in the end terrible for oil given look if
Speaker 1: you just look at oil prices, in the price of
Speaker 1: oil company stocks, and so you can see how this
Speaker 1: sort of like a very big irony, the ultimate irony
Speaker 1: of how like E. S G and redistribution of wealth
Speaker 1: and all this stuff could lead to. Also, that was
Speaker 1: super interesting. I did not realize and he described it again,
Speaker 1: so well, what Biden can do unilaterally by placing that
Speaker 1: essentially the de facto carbon tax. Super interesting, clients, So
Speaker 1: thank you. That was the word I was looking for. Um, yeah, no,
Speaker 1: that was really interesting. The idea that Biden could sort
Speaker 1: of lead a global defacto virtue of the US being
Speaker 1: the sort of pricing benchmark for oil. That's a big change,
Speaker 1: so much that I learned a ton in just in
Speaker 1: that period of conversation with Jeff. That was great. Yeah,
Speaker 1: Jeff's good. All right, Um, should we leave it there?
Speaker 1: Let's see it there. This has been another episode of
Speaker 1: the All Thoughts podcast. I'm Tracy Alloway. You can follow
Speaker 1: me on Twitter at Tracy Alloway and I'm Joe Wisntal.
Speaker 1: You can follow me on Twitter at the Stalwart. Follow
Speaker 1: our producer Laura Carlson. She's at Laura M. Carlson. Follow
Speaker 1: the Bloomberg head of podcast, Francesco Levi at Francesca Today,
Speaker 1: and check out all of our podcast at Bloomberg under
Speaker 1: the handle add Podcasts. Thanks for listening to