Doomsday Clock Ticks: Are We Close to a Monetary Shift? ft. Adam Rozencwajg

[00:00:00] Adam

The equivalent of the doomsday clock of how many minutes we are from a monetary regime change, I would say would be at 11:59. It seems like we’re awfully close. So, is it today? Tomorrow? No. Is it in the next six months? Again, I think that for the first time, I see a potential catalyst in the near future, more than I’ve seen in the past. So again, watch this space.

[00:00:31] Intro

Imagine spending an hour with the world’s greatest traders. Imagine learning from their experiences, their successes and their failures. Imagine no more. Welcome to Top Traders Unplugged, the place where you can learn from the best hedge fund managers in the world. So you can take your manager, due diligence or investment career to the next level.

Before we begin today’s conversation, remember to keep two things in mind. All the discussion we’ll have about investment performance is about the past. And past performance does not guarantee or even infer anything about future performance. Also, understand that there’s a significant risk of financial loss with all investment strategies. And you need to request and understand the specific risks from the investment manager about their products before you make investment decisions. Here’s your host, veteran hedge fund manager Niels Kaastrup-Larsen.

[00:01:26] Niels

Welcome and welcome back to another edition of our global macro series where today, as usual, I’m joined by my co-host, Cem Kassan, as well as a returning guest to the show, namely Adam Rozencwajg, whom we last spoke to about six months ago. Adam, it’s always a pleasure to have you back. And Cem, thanks for joining us today as well. I’m sure this will be another fascinating conversation.

It’s not like anything is happening in the world right now. But before we get to all of that, how have you been, Adam? Are you doing well?

[00:01:55] Adam

Yes, very good, thank you. Happy to be back. We welcomed our third daughter since I last spoke to you. So, some long nights where I’ve had lots of time to read in the wee hours of the morning and maybe a new perspective on the world at large. So happy to be here and happy to talk to you again.

[00:02:14] Niels

Yeah. And is the vortex also hitting you, Cem, at the moment? I know it’s cold in the US.

[00:02:19] Cem

Yeah, it’s currently 3 degrees Fahrenheit outside. So yeah, you could call that a vortex. I mean, Chicago is always cold at this time of year, so it’s all 10 degrees one way or another. It doesn’t change things too much, but it is cold.

[00:02:32] Niels

Well, we’ve got a few hot topics to talk about today in the world of natural resources. And I’m sure some global politics will sneak in as well.

So, what I’d love to do, actually, Adam, with you, is to maybe ask you to kind of, before we dive into all the subtopics, maybe give us your view on kind of your big picture framework at the moment, but also perhaps point out some of the things that may have changed from about six months ago when we last spoke.

[00:03:07] Adam

So, I think a lot of things have changed in the last six months since we last spoke. And frankly, pretty much all of them, as far as we can see, have been very bullish for natural resources and real assets in general.

I’ll start very briefly on some of the supply demand trends and then I’ll kind of zoom out and discuss a little bit more on the macro, in terms of some of the changes we’ve seen and some of the catalysts going forward. We’re value investors. And for a long, long time we’ve argued that, with the commodity markets where they are, which is to say very cheap relative to financial assets, and with commodity stocks where they are, energy at 3% of the index versus 15% long term, we’ve argued that timing really doesn’t matter. It doesn’t cost you anything to be early on these trades when you get such extreme valuations.

And on the other hand, it costs you quite a bit if you miss that move. You know, it can move quite quickly when it comes off the bottom. And I think now that’s evolved a little bit where, I think, the timing is actually coming a little bit more crystal clear in the next six to nine months. And I think you really want to be involved now. So, we’ll talk about all of that here today.

From the fundamental perspective, the big thing that has changed since we last talked is that, after years of underinvestment and after years of restricted exploration and development, we’re starting to see supply responses in a lot of different commodities across the board. That’s certainly true in global oil markets.

You’ll recall that the US has been the number one driver, in fact, really the only driver of global oil supply growth in the last 15 years. We estimate that about 9/10 of every barrel of new demand has been met by a shale barrel in the last 15 years or so, and that’s now over.

You know, shale growth has now turned negative. It looks as though on a year-on-year basis, December to December was likely negative in terms of U.S. crude oil production.

And the shales, all except the Permian, are in pretty sustained declines. And we can use those as a roadmap to say when will the Permian decline? And it’s already basically bouncing along at zero growth. And I suspect that that’ll be in outright decline within the next month or so. So, what we’ve been saying for a long time, look forward to a change in global oil supply dynamics, that’s now here, and it’s also here in natural gas.

So, the US gas production, which has grown relentlessly since the middle 2000s with the advent of shale gas fields, has now actually turned negative by about 2% to 3% year-on-year. It’s a big number. It was as high as, you know, down five Bs at one point. Now it’s sort of moderated down three Bs. But we continue to see month on month sustained declines.

That change really has to do with a weak month, a year ago, as opposed to major growth happening today. And that’s in the view of or in the face of a massive new demand picture.

So, the fundamentals are looking really, really good in both oil and natural gas. This is what our AI models have been telling us for a few years now. Our AI models, by the way, I don’t mean our modeling of AI demand, I mean using AI to actually predict supply, which we’ve been doing since 2018, always predicted steadfast 2014 would be the year everything rolls over. That has now happened.

The same is true in uranium. You know, uranium is starting to see some disappointments coming out of Kazakhstan in terms of production. And Canada had announced about a year ago some problems there. So, we’re seeing it across the board, really across a lot of different commodity spaces. And the reason is it’s been 15 years of a bear market and it’s been 15 years of massive, massive underinvestment. And underinvestment always leads to depletion, it always leads to a supply response.

Taking a little bit of a step back, looking at more of a macro picture, we’ve said, for a long time now, that if you look at the ratio of commodity prices to stock prices, that tells a really interesting long term story. We took that ratio back all the way to 1900. And what it shows is that commodities and real assets move in these huge cycles. When they get really cheap, you should buy them. When they get really expensive, you should sell them.

And the preconditions to both moments of extreme undervaluation, and then the catalyst to make things move into a bull market again, have been remarkably similar over the last 150 years in terms of different commodity cycles and what we’re starting to see now… We’ve been saying that for a long time but in the six months since we last spoke (and I think we discussed this a little bit, maybe, in the last podcast I was on with you guys), but we read a fascinating book by some colleagues of yours, and that would be the Rise of Carry by the two Lees and Coldiron. And what we concluded was these periods of radical real asset undervaluation or commodity undervaluation are actually just symptoms of a bigger cycle. And that would be a carry regime cycle that we’re certainly in now.

And that has actually meant that several different factors have all taken place very much along the same timeline as these big commodity cycles with major bottoms happening in ‘29, ‘69, ‘99 and then today. And so, what that does, we could talk about what those are in a second, but what that does is it suggests to us that this is not just a coincidence. It’s not a spurious correlation. We don’t just happen to have real assets really cheap. It’s actually part of a much bigger causal system.

There’s lots of factors in play here that are driving commodity prices lower and that, if you believe that the same systems are in play today as were in play over the last 150 years (which we do), that we’re on the verge now of a major, major reset in commodity prices and a huge bull market that will probably last 10 or 15 years. So, I think kind of that (you hate to go down this path) grand unifying view of the universe a little bit. The fact that all these things are slotting in at exactly the same timeline I think is a fascinating development and I’m happy to talk all about it.

[00:09:32] Niels

Yeah, I have a little bit of a follow up because this was on my list to bring up with you. And of course, Coldiron, as you refer to, is also known as Kevin Coldiron who is the host of the Ideas Lab here on the podcast. And it is a great book that everyone should read.

So, I have a couple of questions to that because I do want maybe for you to just briefly mention, in a second, what these triggers were so people can have an idea, and putting it in relation to what’s happening now. But the other thing I was thinking about this was in a sense, are commodity prices cheap or is it just financials that have gone crazy and where there’s no relationship between price and value anymore, which is kind of what we see in so many cases at the moment.

But then the other thing, I heard you on another podcast recently, I think with Grant, where you talked about that you had seen, for example, was it Robert Friedland who developed some kind of way of extracting stones essentially and making them into smaller stones in a much more efficient way. And I imagine, without being an expert, also a lot of the drilling that takes place is happening much more efficiently and so on, and so forth. So maybe there are other reasons why commodities are cheaper. There’s kind of a deflationary trend current in there as well. So those were just some thoughts I had when I heard you mention this just now. So, love to hear what you’re…

[00:11:07] Adam

Sure. So, look, I’ll touch on the second point first because it’s a little bit easier to address.

So, on the Grant Williams podcast and in lots of other places, we’ve talked about some really revolutionary new technologies being put out by a number of people. But I think the most exciting are a suite of technologies being put out by a gentleman named Robert Friedland. And he’s the chairman, founder, of Ivanhoe Mines. Before that he was Turquoise Hill, which used to be known as Ivanhoe Mines. And before that, a company up in Canada that discovered the Voisey’s Bay nickel deposit. And together Those are probably three of the most important mining discoveries in the 20th century.

As a collection, I would say that’s probably the best run of any geologist in the last 150 years. I should say that he’s not a geologist, he’s a mining executive. But regardless, that is an unheard of streak. Most mining executives go their whole career without a major discovery. A lucky few get one. You know, the hall of fame is two, three, and now potentially four is almost unheard of. So, I don’t think you can dismiss what he’s been up to.

And he has been working for many years (sort of a 25 year overnight success) on a suite of technologies that uses pulsed power to both explore for minerals much more effectively and then ultimately drill and extract rock, crush and grind rock. And eventually that that will help massively in terms of how we liberate copper, let’s say, or gold even from host rock.

So, you asked is this what’s driving commodity prices lower, this broad deflationary trend from technology in the resource space? And the answer is no, because none of these things have actually been put to work yet. You know, this is all in the lab. The results that they’re seeing are incredible. What it actually does do is it gives us a little bit of concern for copper and copper supply over the medium to long term. So, I’m talking 20, 30 and beyond.

Now, none of that’s in the market today. Nobody even knows about Ipulse. You know, if you asked a hundred mining executives, thirty might say yes, but probably only five actually know what the hell they’re doing over in Toulouse and France. So, I would say the answer, unequivocally, in that particular case is no. We don’t see technology that is leading to massive, you know, deflationary forces across the hard rock mining space.

Is it true in the oil and gas space? That’s a little bit more of an interesting question. I think the answer was yes, and now again is no. And what I mean by that is we did have a disruptive technology there. We brought in horizontal drilling and hydro fracking, and that opened up these massive shale oil and gas deposits that we knew were always there.

You know, that’s what I think people don’t get about the shales. We had drilled for basically a hundred years to find sandstone and carbonate oil and gas reservoirs – standard conventional deposits. And every time we would drill, you would hit one and it was a good day. Probably, you know, you broke open a bottle of champagne when you hit a nice oil pool.

But then you always would keep drilling to determine where the bottom extent of that was. And inevitably you would drill into the shales, which is the rock beneath those conventional reservoirs. In fact, that’s the rock where the oil and gas itself was created, and then over time migrated into these sandstones and carbonates, which were much, much easier to pump from.

So, you’d hit the shale and you’d say, oh, there’s all the oil and gas waiting down there, but it’ll take hundreds of millions of years for it to migrate out into the sandstone above where we can then suck it up with a conventional oil well. The big, big, big shift was being able to go into that shale and rubblize it and then be able to produce from it.

So, now you had this unbelievable inventory of oil and gas deposits, shale oil and gas deposits, up to that point unrecoverable, that now were able to be recovered. So, it unleashed this massive, massive flurry of activity.

And that’s part of the reason (I don’t think people quite understand this), that’s part of the reason the shale revolution happened so fast was that we knew where they were. We knew where the best ones were. We just didn’t know how to get at it. So, once you unlock that part of it, it was very, very quick to lease up the land and go and develop it.

Immense is not the same as infinite, as we’ve talked about in the past. You brought on 10 plus million barrels a day of crude oil production from the shales. You brought on 95 billion cubic feet per day of natural gas production from the shales. Massive numbers, each larger than Saudi Arabia. Together, you know, like three, you know, two and a half Saudi Arabias. The biggest development in the oil and gas industry, frankly, in history.

And you would be forgiven, for a period of time, for thinking that was a new shift deflationary trend, and forevermore would lower the price. And I guess it kind of did for, basically, a decade or 15 years. But now those fields, as big as they are, are starting to show signs of depletion and we don’t have the next shale field waiting in the wings.

Everyone always asks me, oh, will we just go explore and find another massive one? No, we knew where they were. We went after the big ones. Everything here is incremental and it’s not going to be enough to offset declines.

So yes, I do think that there was a technological shift. I do think that’s partially responsible for why commodities are so cheap today. That and a massive spending boom in the last cycle.

We uncover this technology and then we raised a ton of capital to get after it. Both of those things were deflationary. That’s in the rearview mirror. Copper is a concern for 2030, but for the time being, no, I don’t think deflation explains why commodity prices are so cheap.

[00:17:03] Cem

So many big things to discuss. Adam, wonderful seeing you again. Always one of my favorite conversations of the year.

[00:17:10] Adam

Thank you.

[00:17:11] Cem

We talk a lot on this podcast, and for many years now, about these big macro cycles that you referred to. As Neil’s mentioned, Rise of Carry is at the core of kind of how we think about markets as well, never mind The Fourth Turning, and some of the insights gained from there.

The understanding that I have, and that we think about when we think about these big cycles, is not just that they’re some magical thing that happens, but they’re a function of really this push and pull that happens with the natural system of things pushing the world towards more and more inequality, a natural system, everything runs, all the gains go to the top. And, eventually, inequality getting to a point where a whole generation (that’s why it’s 40 years or two generations) all of a sudden, having experienced that inequality, rebelling against it all of a sudden.

And then you enter these periods of populism, and protectionism, and everything goes the other way for 20, 30, 40 years. So, this is this generational kind of experience, which The Fourth Turning talks so much, is so important to these cycles. That said, these are big, long cycles. And you can have years within these cycles, sometimes five years, where things within that cycle go the opposite direction.

And obviously we talk every six months, right? So, people are like, what’s happening in the next three months, six months, year? So, I think the timing part is so hard. And we are dealing with a weighing machine, as we talk about in the words of Benjamin Graham versus a voting machine. And I think nowhere is that more prevalent than in commodities because supply and demand in those markets can get imbalanced and things can, as we’ve seen, be priced incredibly cheaply or incredibly expensive for some periods of time and be so very inefficient.

So, my question is really, at this important point – new administration, new approach. Is this the moment where, in terms of timing, supply and demand (and when I say supply and demand it’s not in the commodities themselves, because I think of that as really the, the weighing machine, yes, that does play into the supply and demand in markets as well), but really, market positioning, market timing, why would this now be the moment, in your thoughts (meaning for the next year or two) to really be getting along fundamentally? Right. We agree there’s a big cycle coming, but again, for five years that could not work. I would love to hear your thoughts a little bit about that, you know, why now?

[00:19:59] Adam

Sure. So, I’m going to hedge at the outset and say that when commodities do get this cheap, the timing, as we’ve shown, actually doesn’t matter. And I find, you know, these numbers are staggering. But commodities first became cheap relative to financial assets, stocks, in 2015. It crossed a threshold that was only ever breached three times before – ’29, as I mentioned ‘68, ‘69 and ‘99. And then it first broke that level in 2015.

And since then, it’s kind of been trading slightly down to sideways, commodities relative to the Dow. (We use the Dow, but if you use the S&P, it’s the same thing). And what we notice is, in the past, again, if you bought it when it first got cheap, even if you’re timing, you know, even if you were the super value investor, right, you didn’t want to market time, anything, you just said, look empirically, it’s as cheap as it’s been. I Like it here. Now’s the time to buy.

We noticed that first that that occurred also in like ‘53, ‘54, and persisted all the way to ‘68, about 13 years. And if you owned a basket of commodity equities over that period of time, you actually performed in line slightly better than the S&P 500. And, believe it or not, since 2015, you’ve basically been right in line with the S&P again. Which has been a good run for the S&P. So, it’s not like it has been dead money. It’s not like it has been… It’s been frustrating from an observational perspective, but if you actually kind of look at your numbers since then, it’s been okay. And that’s where we get this idea of, there’s no cost to being early.

Now, of course, we’re already 10 years into that period of being radically cheap. So, I suspect it doesn’t last another 10 years. We’re closer and closer to the ‘68 takeoff point. You know, the 1971 massive rallies in commodities and natural resources. And yet the cost for being patient thus far has been market returns. And so, I think that the risk return is certainly in your favor.

Now, having said all that, I do think that the timing is now. Our new letter is going to be due out in a week or so, and we’ll be discussing this in great depth and detail. But it has to do with the fact that every major commodity, real asset, relative market bottom, was ended and a new bull market started based on a change in the monetary regime system. And we’ve been talking about that since 2020. That’s when we first made that observation.

So, it’s been five years already, and we weren’t calling for a major change just yet, but we were saying, keep your antennas up and look for a change in the monetary regime. Now, what do I mean by that?

Well, if you go back to the 20s, you know, most European countries suspended their gold standard during World War I. Britain, notably, tried desperately to get back on in the interwar years. And through the ‘20s, Benjamin Strong, New York Fed, decided to undertake quantitative easing. We’re going to print US Dollars with a strong US economy. It resulted in the massive stock market boom we saw in the ‘20s. You know, Strong called it. He was going to give the market a ‘coup’ of whiskey. And he sure did. And the point was to try to devalue the US Dollar, get the pound revalued so it could go back on gold at its prewar rate.

Strong dies suddenly in ’28 and his controversial policies were completely undone. And what you saw was ultimately the stock market crash in ‘29 and the depression and that was the end of the gold standard.

I would call that entire experience the last nail in the coffin of the gold standard. Certainly, a monetary regime change. A hard gold standard had been what we had in place since the Napoleonic Wars. So definitely a monetary regime change. You know, ‘68, ‘69, ‘70, when commodities bottomed again and then took off, of course that corresponds to the end of Bretton Woods.

And I think I probably mentioned this last time. This is like my fun little bit of trivia. Nixon gets blamed for taking the dollar off gold. He definitely closed gold convertibility. He closed the “gold window”. But really it was Johnson who signed a law in ‘68 that said that the dollar didn’t need to be backed by gold anymore. It’d be equivalent to banks throwing out any capital requirements.

The day that you strike those off the rule book, you don’t necessarily go broke, but certainly within a couple years you’ll have a run on the bank. And that’s what happened. And so finally they had to close convertibility in ‘71. That was the end of Bretton Woods, ‘68, ‘71, it’s hard to tell on a chart. I would argue ’68, which corresponds exactly to the bottom. Others might say ‘71, which corresponds to the bull market and resources really starting to take off. And in ‘99, it was the fallout of LTCM. All these Asian currencies had pegged themselves to the dollar at a fair value.

The idea and the understanding was that the IMF and the World Bank would provide liquidity swap lines in the event of a currency hot money flight from the Southeast Asian countries. That happened following LTCM. The World Bank and IMF did not step in.

And in the aftermath, which saw these currencies, you know, devalue 70% in some cases, massive economic turmoil throughout Asia, the countries all said to themselves, well, to hell with this, we’re going to peg below market and we’re going to spur exports. We’re going to make our economy and our export market super competitive.

And it resulted in, you know, five, nine, pick the number, pick your timeline, but trillions and trillions of dollars in US Treasuries ultimately flowing east. It created the dollar recycling standard that is in place today, it brought on the GFC, all these types of things. Again, a massive currency monetary regime change.

So, when we came away with this conclusion, we said look to these markets, look to these systems, and changes, and fractures therein to give you a sense for when we might get a catalyst to start the new bull market in resources and commodities. And I think we have that now. Now, if you’d asked me two years ago, you know, in full disclosure.

[00:26:19] Niels

I think we did, Adam.

[00:26:20] Adam

Yeah, we felt that the BRICS countries were likely going to be the agents of change here in the sense that Brazil, India, China, several others were coming together and looking to start a potential rival to the US Dollar for international trade settlement. You know, it wasn’t clear how it was going to work yet, not all the details.

Every BRICS conference, they were going to announce this new major currency. Indeed, we did see, I think about upwards of 9% of global commodity trade move away from the dollar, a big number, places like France selling LNG to China settled in renminbi. The big question was, would Saudi Arabia sell its oil into China in renminbi? But lots, and lots, and lots of talks and whispers about a potential challenger to the US Dollar as a global reserve currency. It wasn’t clear, again, how you would do that with the renminbi in a closed capital account. But the idea was probably that gold was going to play a role to help balance out any trade settlement and balances. And you saw all these countries buying huge gold reserves.

So, if you’d asked me even a year ago, I would have said, you know, watch this space and monitor what’s happening very, very closely. However, I think today, February 20, 2025, the likely change in the global monetary plumbing or system could actually come from the United States itself.

And what I mean by that is, you know, Treasury Secretary Bessent has spoken about several, what I would call, revolutionary or certainly new and different changes to US monetary and international policies.

Probably the most notable one that people are talking about right now is the idea of ‘monetizing’ the Fed’s balance sheet, or the assets of the Fed’s balance sheet, by which I think even Bessent has said this and lots of people have been speculating, could that mean revaluing the Treasury’s gold holdings, which today are held on the books at $42 an ounce, a far cry from the market price, obviously? You know, even just the tariff systems that are being proposed today are quite different than anything that we’ve seen.

So before, if you had a sort of US dollar recycling system that had been in place since LTCM, whereby the US was the reserve currency, people had trade imbalances, the trade imbalances resulted in excess Treasury issuance, which then found their way to foreign central banks. That model, I think we can all fairly say, is probably over. And I don’t really know what the new model looks like exactly or even broadly.

However, to the extent that it’s going to be the catalyst to re-rate real assets, I don’t know that it matters what it looks like. Lots of people have asked me, oh, is this the end of the US dollar?

I said, listen, if you stood in 1971, and Nixon had just closed the gold window and gold convertibility, and unilaterally taken effectively the world off of Bretton Woods, and you canvassed economists (I have to find this poll. I don’t know if one exists, but it’d be fascinating to see), and you said, what is this spell for the US dollar going forward? Everyone would say, well, you know, that’s it, say goodbye, not sustainable anymore. And yet the dollar gained relevance in terms of a global reserve currency similar following LTCM. You know, the idea was, oh, we’ll trade with you at a par dollar so that you’ll bail us out if need be. And whoops, you don’t have the central bank put the way you thought you did. What did that do to US dominance on a reserve currency? It became massively more important.

So, I don’t have nearly enough hubris to predict exactly what this looks like and where the US shakes out. But what I’m hearing either from the BRICs (I mean, those guys haven’t gone away), or even internally in the US from Treasury, I would say that, you know, my the equivalent of the doomsday clock of how many minutes we are from a monetary regime change, I would say would be at 11:59. It seems like we’re awfully close. And then you start to ask yourself, well, from a timing perspective, what could that look like?

And you know, presumably the administration, if they have all these really bold, differentiated visions on how we should operate, you probably want that to be in place decently early, particularly with, you know, midterm elections in 2026. So, is it today? Tomorrow? No. Is it in the next six months? Again, I think that, for the first time, I see a potential catalyst in the near future, more than I’ve seen in the past. So again, watch this space.

[00:31:04] Cem

Yeah, I couldn’t agree more. We’ve talked here about the parallels between Trump and Nixon. Well before Trump got reelected here, you know, only Nixon could go open up China. Only Trump can have a detente if you will. Only Nixon could take us off the gold standard, right? Only a disruptive figure like Trump can do something similar.

It’s not a coincidence in the arc of history that these things rhyme. People are in the phase of ‘burn it down’, and that brings a disruptive figure that can make change. Now that change may not be the change people want or maybe, much like Nixon in a ‘burn it down’ regime, eventually the hordes come for you as well, as they did for Nixon. So not a political comment, just that people want to burn it down no matter who. Being an incumbent during these periods is not a good thing.

That said, you know, at the end of the day it is a time of disruption and the overwhelming arc of history shows that is a time that people will, some way or another, at some point force change. And I agree that is the most likely thing when it comes and it will likely happen. I agree with you, before too long, given that the agent of change is now in office, I think that is a major, major issue.

The one thing I think about when I think about the weighing and voting machine, as we mentioned, is there’s this idea that the voting machine supply and demand is like the fuel on an airplane. You can keep going in the wrong direction. Gravity is the valuation, but things coming back in line really happen when that fuel turns off. How far are you off the ground is all that matters at the end of the day when that liquidity gets cut off.

And that could happen, as you very astutely mentioned, through an emerging market crisis, through disruption and liquidity getting removed by kind of the dislocation that’s happening, which I think is a very high probability in this regime. As you mentioned.

[00:33:21] Adam

You talk about disruption and you know, change and things like that. And obviously you have a lot of echoes of Neil Howe and the Fourth Turning. And, and we, we are big, big fans of Mr. Howe’s work.

He spoke at our conference last year, we know him quite well. And the Fourth Turning has made a huge, huge impression on both Lee and I and his new follow up work, The Fourth Turning is here, which, if people haven’t read it, I don’t know if this is bad for his book sales, but you probably can read the follow up. It does a good job at summarizing the first volume and then updating it.

But getting back to change and the idea of change shocks and things of that nature and The Rise Carry. What I think is really interesting in The Rise Carry, they basically talk about the carry regime that’s in place. Basically, pick your timeline, but I would say call it from 1980 to today, but really the last 15, 20 years. And it’s been characterized by a number of things. It’s been characterized effectively by a levered short volatility trade.

So, the idea that the classic carry trade of borrowing in yen and investing in Australian bonds represents arbitrage, a leverage on the trade to make it work or to produce an acceptable level of return. And you’re effectively short volatility. So long as the structure is the same tomorrow as it is today, the trade will work. You’re picking up the pennies in front of the steamroller, which is nothing if not being short volatility.

And they talk about a number of characteristics that all kind of line up with that, like the outperformance of growth over value and of momentum because, you know, growth… First of all, as you reduce volatility, you reduce interest rates, you suppress risk, you have a convergence in a lot of different costs of capital. What it ends up doing is you end up pricing and more highly valuing farther out cash flows.

You know, it doesn’t seem quite so scary in a short vol world where you are suppressing volatility by the very trade to all of a sudden look to these big conceptual stocks, and look to things that have, you know, 50 times, 60 times multiples. Because, just like bond duration math, when interest rates are low, you know, all of a sudden that works out quite well.

But you know, we’ve seen those trends actually take place a couple other times. And these guys don’t really talk about it so much in the book. They allude to some other carry regimes, but they don’t study them in depth. And, and you know, their book would probably run to 800 pages if they did. But it turns out the 20s were exactly the same.

If you look at the performance of value or underperformance of value relative to growth, if you look at the concentration, if you look at market cap of the equity markets relative to GDP, you know, the statistically different periods are all 1920 to 1929, 1963 to 1968, and 1992 to 1999, and then today. You start to see all these things repeat themselves and repeat themselves. And so, I would argue that what we’re in right now is a huge carry trade, that the real assets lose their luster relative to these big, conceptual, abstract, multiple growth stocks.

You know, a company that has a factory that’ll generate widgets for 15 years, and you can run that DCF, that maybe will trade at one times nav. Whereas, the company that promises disruption can trade at 60, 70, 80 times earnings and 10 times book value with no problem. And then the catalyst to undo it, in every case, has to be what the authors would call a carry unwind or something that introduces volatility back into the system. A volatility shock that all of a sudden makes people price these two disparate asset classes differently.

And that’s where you get, I think, these monetary regime changes have to be or that, usually, historically are that agent of change. Certainly, when you took the US dollar off gold in ‘71, that was a volatility shock. That was not the same market going forward as it was before. And if you have this multi, multi trillion dollar lever trade on, that’s all betting on suppressed volatility, and tomorrow looking exactly the same as today, you get the unwind of that when you change the underlying system.

That’s really the only thing, in a lot of cases, I think, that can change it because the trade is so reinforcing. It self-reinforces because more money pours into it, growth does better, and so more money goes into it, and then it does even better, and then they can make acquisitions, and it’s the Nifty 50 all over again.

So, I think that the big kind of takeaway, which is a little bit alarming, frankly, for a lot of investors, is that yes, natural resources are super cheap, commodities are super cheap, catalysts are probably here. By the way, the fundamentals, for those who care, the counting of barrels, looking at rig counts, are incredibly bullish and positive. The lack of exploration is super bullish and positive. But not only will that work, the problem is that almost every other investment in the world today is caught up in the carry trade.

So, I worry for people whose portfolios, they look at it and they say look, we’ve diversified, we have a little bit of US, a little bit of Europe, a little emerging markets, and we have some private equity and hedge funds in there as alternatives to really diversify and protect ourselves. You guys. No, I’m sorry, that’s all the carry trade right now.

There’s nothing that’s more carry trade if not private equity, which is effectively just a levered S&P return and a preferential fee to the manager.

So, I worry that, in the event we do get a carry unwind, people are going to realize their portfolios are not nearly as diversified as they think they’re. In fact, they’re what I would call Texas hedged. You think you’re hedged, but you really doubled down.

And that’s the state of the world today. And I think it’s very precarious. And I think investors need to be looking all across the market for anything just on the margin. Not even to tactically reposition yourself, but just to protect yourself, at the very least, against the fact that we might all be in the same trade in almost everything. And resources, I can definitively say, are not in that basket.

[00:39:36] Cem

Yeah, we 100% agree on that. And the key is the timing, as you’ve mentioned. And I agree with you. At the end of the day, at this point, you know, the risk/reward is so dramatically in your favor, it’s okay to be early because the coming move, when it happens, will be quick and decisive. But again, it could be years.

[00:39:56] Adam

I’m going to say six to nine months. When I come back on in six months, we can, we can do that. I think we’re approaching it quite quickly.

[00:40:03] Cem

I think we’re six to 18 months away. And I think there’s several reasons for that. But I agree it could be… It is closer than people realize.

Given that metaphor, I was saying, essentially, that… Liquidity, by the way, is the reason that markets the carry trade across the board. As long as there’s liquidity, the carry trade maintains. Carry trade is really a skew trade, whether it’s in the S&P, it’s downside versus upside. There’s a structural phenomenon where vol and skew (we’re kind of talking my language here), the vol on the liquidity, can be pinned, but the tail happens once that vol compression is released.

And so, what we’re beginning to see is that vol compression, even though at this very moment it’s very well supplied in very short term, but the actual liquidity is reducing dramatically. That fuel in the tank is getting really low.

And even though that’s the case, we can glide like the plane can glide for awhile, but a little bit of a disruption, a storm, something that then all of a sudden, now that the fuel is gone, kind of forces, some disruption, turbulence.

You’re too far off the ground, right? The fuel is sputtering. You’re too far off the ground. I think we’re really heading to a period, in terms of volatility that, we’re looking for a catalyst, but the liquidity is coming off the table. I completely agree with you.

And just a little bit of an insight here in terms of how these things usually end. It’s one of two ways. One, it’s a narrative change, you know, which is not something we’ve talked about here, which I think could be the case here in a Trump administration where people all of a sudden start to say, well, wait a second, all this demand side economics populism we’ve been seeing, even though he’s been talking about rhetoric, he’s reaching across to China and there’s a detente, he’s going to do more supply side economics, all these things, you know, maybe especially after some period here, right.

People begin to lose faith in the energy trade. People lose faith in the commodity trade. If that happens? It’s actually the best thing that can happen in my opinion, given this regime, to actually accelerate a potential move.

I think we’ve had this problem and this is why things last longer than you always think, Markets can stay irrational longer than you can say, solve it. Because people see the thing coming. It’s pretty obvious to those that are kind of looking at it. You need a loss of faith enough so that the supply and demand, in the short term, can become imbalanced and then the bigger move can happen.

And so, that’s one thing I’m really looking for here, some type of a narrative change where people actually begin to lose faith in the reality, of what we’re talking about. That would be great for the trade, candidly.

And then two, you know, the other way could happen is sometimes people don’t lose faith and it’s just such a big shock, as you mentioned. Which I think could be an emerging market crisis in the face of… I was just in Turkey, actually, talking to a lot of big Turkish kind of traders, businessmen, et cetera, people really embedded in the country. And what people don’t realize is how fragile some of these emerging markets already are. And that’s amidst a global, really not a recession, the economies are doing well. The world is full of, generally, liquidity from markets, etc., in the developed world. What happens if we go into a global slowdown?

What if we have some disruptive forces amidst that? That could really cause a big, in a fragile emerging market, a big crisis, especially if that means stronger dollar, especially if there’s some disruptive moves by Bessent and the coming new Federal Reserve chair, whoever that is. So, there’s really two paths here. And I agree with them, one of the two are likely to unlock this trade we’re talking about.

But the time is, is coming.

[00:43:58] Adam

No, listen, I agree with that completely. I think I got most of it. I think I agree with all of it.

But you know, I’m just going to make it a little simpler, you know, because I’m not an options trader, although I have traded some options, you know, in the past, but I’m not nearly as well versed as you are. But you know, in your short vol, pennies in front of the steamroller, skew type of a model, there’s periods of time where the likelihood that tomorrow looks very similar to today’s higher and lower.

In fact, most of the time tomorrow does look exactly the same as today. You know, and then there tends to be the days where it’s very, very different. You know, tomorrow looks very much like today up until the day you die, I guess. And then it’s a very, very different day.

But when you go back, let’s say a couple years, and we had massive, massive US deficit spending (which obviously we still do), and those excess Treasuries were all being effectively monetized through the banking system, but still being monetized by the Fed and everyone, 100 economists and Bloomberg were calling for a recession, and we were never in the recession category.

And you looked at it and you’re like, why would this change? This isn’t going to change so long as the US can run these crazy deficits, and place the bonds, and right now no one’s buying the bonds. The foreign central banks were buying bonds, is really being acquired by the Fed, until they lost control of the 10-year and they had to move to bills and all that. And you say, well, tomorrow’s going to look a lot like today.

Today I think is very different. When I look forward and I say, what’s the likelihood that a year from now policies across the board here resemble what they resemble today? And these are not little policies, not small tweaks. These are potential big ones. Everyone seems aligned that they want to change things.

And so, I think it might be just as simple as that. You kind of look at it and you’re like, the likelihood that this administration, in a year from now, has everything aligned the same as it did a year ago is pretty low. In fact, I’d say almost zero. And that’s, I think, what puts some of the carry trade stuff at risk.

Because again, you start to get the unwind when the volatility picks up, when the regime changes, when things are different. You know, that’s when you start to have a forced unwind of a lot of this stuff. And then it could be just self perpetuating. As it starts to unwind, it forces further unwinds which increases change, and shocks, and volatility more. And that’s where you get your crises that pops up somewhere. Whether it’s emerging markets, whether it’s leveraged regional banks in the US, it’s hard to say exactly where it’s going to be.

But with so much leverage in the system and things set to be so different, I think, or the potential for them to be quite different and everyone with a short levered, short vol trade on, that would be the first time in market history that having everyone in a levered trade, in one direction, that the masses are right. I just don’t think it’s going to happen.

[00:47:04] Niels

We’ve talked a lot about the changes that the Trump administration is coming. We talked about that we need some kind of catalyst, and we talked about that this would have an impact on commodities. So, I want to try and tie it all together in a sense that from where I sit on the other side of the pond to you guys, it looks to me like the new administration is somehow, you know, it’s weaponizing commodities in a sense. It’s going after Canada, it’s going after Greenland, now it’s talking about Ukraine and rare earth has to be part of any peace, et cetera.

So, from your perspective, Adam, when you see these things happening suddenly commodities are, I don’t know how to phrase it, but it’s taking on another role, suddenly. It’s not just something we produce in one place of the world and it’s friendly, and sent over to another place of the world, and it’s used over there.

But how does that change your… And you say that the oil supply is leveling out in the US, and maybe that is why he wants Canada and Greenland for who knows. But how do you think about something like this? Because I don’t think this has ever happened before that commodities play like a geopolitical role, or maybe it has, but not that I remember.

[00:48:31] Adam

Well, I mean, certainly In World War II, you know, there are major, major moves that were done to secure energy supplies, particularly by the Japanese and their incursions throughout the South China seas and the broader kind of Asian continent to try to secure supplies. And frankly there were big moves by the British, as well, to have coaling and refueling stations for their blue water navy. So, I think we have seen this. I’m not entirely sure that we’re seeing a weaponization of commodities today.

When I think of a weaponization of commodities, I really think, you know, probably the prime example of that would have been China with rare earth metals back in 2010 or so, where they mined and then processed basically all of the world’s rare earth metals that went into all kinds of things like magnets and electronics. And they restricted output to Japan, notably for geopolitical leverage and things of that nature.

Basically, what they wanted was they wanted all the battery technology and magnet making, manufacturing technology to be brought into China so they could steal the intellectual property. And when Japan didn’t want to do that and they said, no, no, just you give us the rare earths and we’ll make the stuff here, they said no.

And, you know, that forced a pretty big realignment in a lot of those trade routes. That was pretty mercantilist and pretty, you know, aggressive. Are we seeing that today? I think that it’s a little early to say that.

I think certainly what we’re seeing today is a renewed appreciation for some of the fragility of the supply lines in the raw material space. Lee and I were talking about this just last night, that through the Cold war and into the early 1990s, the US maintained strategic stockpiles of lots of different things. Those were all thought to be redundant and superfluous and were liquidated.

And when you look at anything from, antimony is a big one where, you know, the US Is now providing loans to US antimony potential mines that we can have domestic supply; uranium, where we used to be both the world’s largest producer of mined uranium, and then importantly had a huge enrichment facility here as well. Now we basically don’t register on either of those things.

Those are trying to be moved back into security of supply, lots of different things like that. So, I don’t know that we’re quite at the weaponizing phase. Certainly not in the US. I don’t think that’s a fair assessment yet. But I think there’s a renewed appreciation for security of supply and the idea that it could be a strategic vulnerability, you know, in a little bit more of a hostile world going forward.

[00:51:15] Cem

We talked kind of bigger picture for the last bit here. I would really love to kind of get more specific to different commodities.

I mean, you mentioned yourself that copper and uranium are going in different, likely, going different directions. So, we have a universal view of things with fundamental hard value and their importance. But I would love to drill down a little bit and talk about, you know, we have very disparate things like gold and precious metals, and uranium and copper. Where do you see the greatest opportunities currently?

And specifically, I would love to focus on uranium and also gold and hear your about precious metals as well. And then also maybe energy writ large. We’ve talked about, a little bit of, the supply and demand amounts there. But let me get a little bit more specific and particularly as we sit here.

[00:52:06] Adam

And look, you’re absolutely right. You know, if you look at commodities in general, they tend to move in these big cycles. However, within that there’s certainly ability, and not even trading, you know, investing over multiyear timeline, there are definitely returns, excess returns to be generated by picking the right places at the right time. And we spend a lot of time doing that.

So, if I’m talking to somebody about an asset allocation in their portfolio, I might talk about the asset class and commodities and resources in general. If I’m talking to someone who buys the story and wants to know where we’re thinking, there are times where copper becomes radically undervalued relative to energy, relative to itself, whatever the case may be. I think right now the biggest dislocations are likely in US natural gas where US gas today remains 80% below the world price.

And there’s a good reason for that. It’s been that cheap for a long time. And the reason is we’ve had just so much supply from the shales.

You know, we’ve shut down most of our coal fired power. We’ve gone from being a big LNG importer to big exporter. We built all these petrochemical facilities, we’ve done a lot to soak up that gas and there has still been too much. So, that’s why it’s dislocated from the rest of the world.

Our contention though, is that in a period like we have now, and upcoming, where electricity demand is set to go through a huge shift higher because of AI data centers and things of that nature. And US LNG exports are coming online, 78 BCF a day in the next two years or so – big, big, big numbers. At the same time as production is now declining for the first time in 15 years, that disparity with world prices could be closed quite quickly.

We’ve been early on this trade, you know, for anyone that’s followed us. We’ve been basically two years early because of two back to back mild winters that we had that eviscerated natural gas heating demand. This winter has been more seasonable. It’s actually been a bit colder in parts. But we’re now starting to see the impact.

We’re starting to see inventories that decline quite sharply. Production continues to be really, really weak. It’s down 3 plus percent year on year. It’s not going to get better anytime soon. And I think now we’re at massive risk of pegging that US gas price to the world price. That could be like a three to four fold move in gas quite quickly depending on weather in the short term.

So that’s probably the biggest dislocation in commodity markets today. Uranium is also in a really bullish situation and it’s a very interesting and kind of opaque market. I’m sure we’ve talked about it in the past here too. The idea is that with uranium things don’t develop on a week-to-week basis the same as they do in the oil markets or the gas markets.

You don’t get weekly inventory numbers, the market moving data coming out every week. You have to take a little bit of a bigger picture view. And where we are today is the market’s in pretty sharp deficit. We have not brought on enough new capacity in the last 15 years. Partially that was due to expectations that we would continue to retire nukes around the world. That didn’t happen.

In fact, now we’re giving them life extensions. We’re bringing back on shuttered plants and of course we do have new build programs in places like China and Korea as well. So, reactor demand today outstrips mine supply. Inventories are basically almost zero.

You know, post Fukushima we had built up all these excess Japanese commercial stockpiles that could be fed into the market when supply was less than demand. That’s not true today. And, for the most part, the term uranium price, which is to say where fuel fabricators contract with miners and stuff like that, that’s been going up and up and up. That’s 90% of the market.

What has been a little bit weak peak has been the spot uranium price which fell last year. Even though the term price went up about 20%, the spot price came down by about a comparable amount. And that’s because a year prior to that a whole bunch of speculative money came in and was playing spot uranium from the long side.

I think that’s all gone now and that’s obscured the narrative a little bit. But the fundamentals remain super positive there. There’s no real major new mine supply coming online until the Rook Arrow deposit, up in Canada, comes online in ’27, ‘28. And the big question mark there is, can that come on in time?

And I suspect the answer is no, we own the stock because I think if they say they can’t come online, probably uranium prices and all the uranium stocks go up a lot. But you know that’s an aggressive timeline. It’s debated in the industry whether they can make it. Who knows, we’ll have to wait and see. But the market looks quite tight physically and demand is very, very strong.

Gold, you wanted to talk about the gold market. You know, gold is a super interesting market. Obviously gold price is making new all-time highs every day. And that still, today, is basically with almost no Western participation in the gold market. We have no big Western buying of gold. In fact, shares in the GLD are flat to down and the GDX, which is the gold shares, is seeing outflows every day.

So, it has basically been central banks. We had a little bit of time of Western buying, along with central banks, that took gold prices up another leg. But right now it’s the central banks buying and it is the western retail investor, I would say, neutral. That leaves a huge amount of buying power left to go and I suspect that that will continue as gold prices move higher.

The Western investor or the Western speculator, whether it’s retail, institutional, what have you, they are pro-cyclical. They chase price. If you put $4,000 on gold in the next two months, there would be more demand for gold investment, not less.

The eastern physical buyer is the opposite. They’re super price sensitive. If prices go up, you see them step out of the market. The western guys, when prices go up, they come in with more force. And the central banks, of course, are completely price agnostic. They don’t say, oh I think gold’s a good buy here, let’s go buy some ounces. What they say is, we’re going to change our policy and hold more gold and then they go and do that.

So, I think you have two potentially, you know, very bullish buyers on the horizon that would be the central banks and the Western investors. And so, I suspect the prices will move quite a bit higher from here.

[00:58:38] Cem

Related to gold, I have a couple questions, actually. So one, we don’t really talk that much about bitcoin, you know, that’s not a commodity, obviously, but I do think that, obviously, gold is not an industrial commodity as much that the value is more like a currency. And so, you know, akin to bitcoin in that way.

There are some that have argued that, this time around, gold will have less demand because you have a bitcoin kind of alternative in that particularly certain part of the generation that’s out there, at this point, driving some of these changes. Millennials on down see that as a store of wealth, maybe more than gold. Do you have any views on how this time it might be different in terms of gold on this cycle?

[00:59:27] Adam

I think that’s going to end badly for millennials. I’m not a believer in bitcoin, and I have some fundamental reasons, and then I’ll tell you, kind of a markets-based reason. So, first off, I do appreciate that Bitcoin is an asset that’s outside of the financial system. It’s an asset that you can own sort of independently. And that’s always been a big benefit of gold. It’s an asset that’s no one’s liability. Obviously, gold has served as a store of value in a much better way for much longer than bitcoin has.

Now one of the interesting reasons as to why that is, and some people make the case that if you look at the long run increase in the supply of gold, for whatever reason… There are short-term dislocations if you come up with the gold rush in San Francisco, and in the Yukon, and stuff like that.

But if you look over thousands and thousands of years, the increase in supply of gold, above ground gold, of which 99% of all the gold that’s ever been mined is still accessible, has basically mirrored the long-term real GDP rate, including preindustrial revolution, it was lower. GDP was lower. And then industrial revolution both helped GDP start to grow and helped gold miners, effectively, bring out more gold. So, really kind of interesting. And they’ve moved in lockstep.

And so, that argument says, look, you know, if you started out with four different economies, societies, one that used seashells, one that used pine cones, one that used gold, you know, the seashells, the rate of seashell growth would be above GDP growth and you’d have inflation and there would be turmoil, and as you talked about before, you know, that would lead to inequalities and ultimately revolution.

Pine cones won’t grow fast enough and pine cones probably would. But you know, pick one that wouldn’t grow – diamonds. Diamonds wouldn’t grow fast enough, you’d have deflation, there’d be equal imbalances and the society that picked gold would kind of self-reinforce over time.

So, you compare and contrast that. It’s hard to test the counterfactual, but you compare and contrast that with Bitcoin, where we know that its supply is not going to grow properly or not going to grow in line with… it’s going to asymptote, it’s not going to grow in line with GDP. And you wonder if that’s going to serve as the right, long-term, real store of value.

The other thing of course, even simpler than all that, is just it’s a huge energy hog. It’s massive and the more you use it, the more energy it’s going to require. So, if you start to look at what these hashes will require as computing power gets thrown at it, and as the value of Bitcoin were to go up, you’d end up consuming huge, huge, huge quantums of energy.

And if you think, as I do, that energy is ultimately the lifeblood of the economy, at a certain point the economy will collapse under the weight of all the energy being used to mine Bitcoin. And I don’t think that’s sustainable long term. So those are my reasons for that.

If you look at a market from a more markets perspective, I think the question you have to ask yourself, getting back to the conversation we had before, is Bitcoin a carry trade asset or not? And that’s a really interesting question because one of the nice things about gold here is that it is an anti-carry trade asset. And I would argue that Bitcoin has traded more like a tech stock, like a high duration bond, or like a high multiple valuation company. Now is that fair? Is it not fair? I don’t know, but I think that’s who’s buying it.

And so, I think there’s a big risk nearer term with Bitcoin, particularly if we have some of the events unfold, and when people say oh, you know, won’t Bitcoin take away all the demand from gold? I mean, certainly not if Bitcoin ends up trading like Microsoft, Meta, Google, then no, I think that’s going to have a huge inflow of bitcoin investors dumping Bitcoin and saying we should probably have some of this back in gold. If that’s not the case then you know, it’s an open question.

But I think just look back at 2022. 2022 is a really seminal year because it showed what the real carry trade unwind look looked like, and it showed that a lot of assets that should have behaved differently, stocks, bonds, what have you, didn’t. Incidentally, we had a good year that year and Bitcoin had a terrible year that year.

And so, I would look to that, and that would be a big kind of canary in the coal mine that if you do have regime change, or you do have a shift, or you know, a dislocation, will bitcoin give you that exposure? And I think the jury is out. And if you had to ask me to put my dollars at work, I think you probably know where they are.

[01:04:09] Cem

I think you make a great point about risk.

Like there’s so much unknown. And on a risk adjusted basis, it does seem like gold is probably a better bet.

Last thing related to gold, what do you think about the rumors of Fort Knox kind of gold not being as much as people think it is? There’s a lot of things swirling around about there’s no audit of that gold. Is it really the gold now, as gold’s importance increases, as the talk about revaluing kind of the gold reserves, as you mentioned, comes up, there’s conversations about that. Do you have any thoughts on the US gold reserves?

[01:04:57] Adam

I do think that there are often conspiracies around gold holdings. I think gold lends itself to conspiracies because that’s part of its appeal and allure is that it’s not, you know, infinitely trackable in the same way that registered stock certificates are; things of that nature. So, I think probably, frankly, having a little bit of conspiracy swirl around gold is probably good for gold in general.

It’s a little bit like, you know, when you watch the Crown, and they say all the pomp and circumstance and all the mythology around it is what gives it its power. I mean, part of it is that gold is anonymous. And so, I think there’s always a lot of conspiracies around gold.

I don’t have any reason to think that all the gold in Fort Knox is there. I think that it is. And I think that, in general, sometimes these conspiracy theories, when they come out, a great one was kind of in the silver market back in 2021, I think it was. And that’s when the Reddit crowd got into silver. And this big rumor, forever, was that JP Morgan had this massive short silver position. None of the silver was where they said it was. It was all uncovered, and naked, and goes unreported to try to keep silver and gold prices down, to keep the dollar looking good and stuff like this. And they said, let’s squeeze JP Morgan the same as we did Gamestop. And it very clearly didn’t work.

You know, it lasted about two days and then it came back down. So, is that signs of even more market manipulation or is it signs that maybe the imbalance is not there? I think it’s the latter. I think everything’s kind of fine.

[01:06:32] Cem

As you mentioned, the short-term narrative can be incredibly powerful and eventually can effectuate a real big change in revaluation, even though that may not be the real cause.

But I will say, you know, I’m not a conspiracy theorist by any means, but we do live a time where conspiracy is more likely to be real than maybe other times.

Going back to nuclear, real quick, a thought I’ve had, which I think is really interesting, is the last time we were likening this, among other periods, to the ‘60s and ‘70s, we drew those parallels between Trump and Nixon. And obviously one of the big things for commodities was the OPEC crisis in the 70s.

I see that as very connected to both the Vietnam War, which was inflationary, and the fiscal spending, and the Great Society program. All these things are connected in a way to populism, and I won’t go through all those details.

But it’s a time of deglobalization, global conflict, and entities who have power over commodities will use that as a bludgeon and you get disruption because of that. That’s what the OPEC crisis in my mind was about.

I don’t think that energy is as likely to experience that because the US has so much now, Canada, etc, allies, OPEC has less control, I would say. I’d be, A, curious to hear your thoughts about that. But I’d be curious to hear if there was a commodity that is very controlled, potentially by certain entities globally, and prone to, in a world of global conflict, supply constraints, artificial supply constraints, which one would you think it would be?

And by extension, you know, do you think there are odds of, in the next five years or so, some type of big supply disruption in that commodity? I see that as increasing probability and again, a way to maybe tease out what commodity might have a parabolic move in the next several years.

[01:08:36] Adam

Well, look, it’s interesting, I wouldn’t write off energy and oil just yet. You know, what’s kind of fascinating is that remember from Colonel Drake to 1970, the US was a behemoth in terms of oil production. And nobody in 1970, 1971 expected the United States to roll over and suffer declines. It was a huge player in the global oil markets.

And King Hubbert, the Shell geologist, predicted in the late ‘50s or mid-‘50s that by 1970, 1971, US oil production would roll over. And it did. And that’s what gave OPEC incremental pricing power market share, and like you said, allows them to use oil as a weapon. Throughout the 1970s, twice, once after the Yom Kippur was where the US supported Israel. One is after the Iranian revolution.

The US today looks just as precarious as it did then. Again, you had years of million barrel plus, year on year, growth in the lead up to 1970 and then that stopped. You’ve had here years of growth, million and 2 million barrels, and now that’s stopped. And so, I don’t think that we’re immune from such a dynamic today at all.

And remember, you know, Nixon back following the Arab oil embargo, the first one, put in place Project Independence, where he said, look, very similar to the Three Arrows. He said, look, enough’s enough. You know, we haven’t tended to our garden enough here. We haven’t made sure that our domestic supply is robust.

And now production’s falling and we’re beholden to potentially hostile countries. So, we’re going to encourage guys to drop drill. We’re going to deregulate. We’re going to raise the oil price. Because back then it wasn’t so much a price issue, it was a security of supply issue. So, let’s help raise the oil price, give these guys the incentive to drill. And they did. They drilled huge.

They increased the rig count fourfold in the next 10 years, and production continued to fall, and OPEC just gained more, and more, and more power and more, and more, and more market share. So, they thought that they were fine.

Just like today, production’s falling. And, I think not, to paint you with the consensus brush because you’re quite differentiated and quite contrarian, I would say. But in this case, I do think the consensus view is that we’ll be fine because we have so much.

Yeah, fine, maybe production is declining a little bit now, but that’s not really symptomatic of anything because we’re so well endowed. And the question is, you know, we were well endowed then too but after you produce about 50% of your reserves, production falls.

Think about it a different way. You still have everything that you’ve already produced to date sitting in front of you. It seems like a pretty good spot. And yet production, daily rates, tend to fall around that time. With shale could be even earlier because they have long tails. So, it means that production peaks when less of the total reserve is produced. It could be as low as 38%, we’ve seen in a lot of the shale basins. We’re there now.

So, it’s not really clear that we’re out of the woods. I think that oil is probably still our biggest vulnerability. Yes, we’re “energy independent” today, but everything matters on the margin. If you go from energy independent to needing to import again, then you’re susceptible again. I mean, I think it all matters on the margin.

Uranium is the other one that jumps to mind because the US is not a major producer of uranium. Canada is. It’s an allied nation. Of course, Kazakhstan is. That is questionable. It’s not a hostile nation by any means. I think people paint it with the Russian brush. I think it’s a little premature. I mean, yes, it had Russian troops and Almaty to help settle dissent about a year ago or two years ago now. So, a little bit of a shot across the bow, but you know, it’s, I would say, gray. Yeah. And, and so that’s vulnerable.

However, longer term, uranium is not the world’s rarest element. And I think, given enough time and enough capital, we ought to be able to bring on enough uranium production in domestic allied countries – domestic or allied countries to make that be okay.

But there’ll be huge dislocations in the middle. So, I think oil is a little bit more structural and uranium will be in a big bear bubble market. Where big bulls on it with big core position in uranium producers. However, longer term, price will take care of that market target.

[01:12:57] Cem

Yeah, I think a strategic, some type of strategic move by Russia in Kazakhstan could be something, that black swan that nobody’s talking about, and we’ll certainly hear if something happens. But I do think it’s something that not many people think about, but is, I would say, something that is, given how concentrated uranium is in Kazakhstan, a huge potential upside, potential tail.

[01:13:22] Niels

I heard another one of our previous guests, Jeff Currie, talk about that, in his mind, natural gas has kind of changed its role a bit. It’s become sort of more the marginal price setter of some sort, that’s how I remember his argumentation. Obviously, we know gas, you said there’s a lot of LNG coming on stream, so, I’m just curious about your… And maybe this is also why, I don’t know, oil prices seem fairly stable compared to what’s going on in the world. I don’t know, I’m just curious about it.

And then my final question would be, do you know anything about Nord Stream? Is that more or less coming back online? I mean, as a Dane, I’m a little bit interested whether, under the radar, they’ve kind of begun to fix the Nord Stream pipe and maybe with a deal with Russia soon, the Germans will be enjoying Russian gas again. I’m just curious.

[01:14:25] Adam

It’s really difficult to say. I don’t know and I don’t think anyone knows. I think progress has been made. Look, I think that Europe is in a very difficult energy spot and I don’t think that’s a big surprise. You know, Germany is in the process of de-industrializing itself as we speak because of mistakes they’ve made in their energy program.

Right now, it’s all being made up with relatively cheap, sustainable, and by sustainable, I mean like stable, geopolitically stable, US gas. Then that could be at risk. You know, if we start to see major… You know, again, just think, okay, the gas market in the US today is in deficit. We are taking gas out of inventory. This is not dissimilar from uranium a couple years ago. Okay, we had the gas in inventory, so it’s not an acute shortage or crisis just yet, but we’re taking gas out of storage at a pretty good clip.

Production is falling year on year, and we are set to increase LNG export, not keep it flat, which would be a problem too, but increase it by as much as seven Bs a day. And then we need another 7 to 10 BCF a day for domestic AI needs, which is obviously becoming, you know, a huge focus of everybody.

So, I don’t think the US will be overly keen to sacrifice its AI industry on the altar of cheap European gas. Nor do I think production is set to increase in anytime soon because of the geological reasons we’ve talked about.

So, I think there’s a big risk that the US is not the supplier of LNG that everyone hopes it is. That becomes kind of the swing factor, particularly with an administration like we have today.

The US consumes almost as much, on a BTU basis, in gas as we do in crude oil. And we have a price that’s 80% below the world’s price. That would be like… It’s not dissimilar from Saudi Arabia, where they have $10 oil price gasoline equivalents and the rest of the world’s at $70 to $80. Why? Because they produce the oil. You know, we produce the gas, so we get cheap natural gas.

The difference, that I tell everybody, is that in Saudi Arabia, everyone’s aware of it. And if something were to happen and they were to lose that, they’d be pissed. And here, nobody even realizes it. You know, no one realizes that we train our models for much cheaper than anywhere else in the world, our computer models, because we have cheap natural gas.

And, you know, we just had our building’s annual general meeting. I promise you, none of the residents in my apartment building realize that we pay next to nothing to heat our hot water and apartments because of very cheap US Natural gas. If we were to lose that, I could see the administration curtailing US exports very, very seriously.

So, Europe’s in a tough spot, and I don’t know what they’re going to do. And I suspect that under the right scenario, you could see a crazy thing like Russian gas flowing back to Europe again. I mean, I don’t think there’s a resolve within Europe to tough it out. And I don’t know where you’re going to get the gas from. So, yeah, I think anything can happen. I think we’re in uncharted territories here.

[01:17:37] Niels

Yeah, I mean, on that cliffhanger, I think it’s a good time to say, once again, thank you so much for a delightful, insightful conversation on so many important topics.

And no doubt when we speak again in a few months, there’ll be some new ones, but there’ll also be some developments in the ones you’ve laid out so beautifully today. I want to encourage everyone to go and sign up for Adam’s reports, and especially now that there’s a new one coming out.

You can find that on the Goehring & Rozencwajg website and we’ll of course also link to that in the show notes. They’re always incredibly fascinating and insightful, so not to be missed.

And as I told you before, Cem and I do these conversations because we really do feel that we are living in a global macro, but also in an energy driven world. And it is possibly more important today to be up to date on these things than ever before. So, stay well informed.

From Cem and me, thanks ever so much for listening. We look forward to being back with you as we continue our global macro series. And in the meantime, take care yourself and take care of each other.

[01:18:55] Ending

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