The State of the Commodity Super Cycle ft. Adam Rozencwajg

[00:00:07] Adam

We firmly think, looking at history, that this time is going to be no different. I think we’re in the right zip code, as they would say in the US, the right neighborhood, for change in the monetary systems, just like we had in those other times. And I suspect that that will be the ultimate catalyst here.

And you just look at all these, like you said, these massive volatility events that we’ve seen, including, you know, what’s happening with the yen, including what’s worried to be happening with the dollar, with the central banks accumulating gold. I mean, it strikes me that there has to be a new reordering of things to help alleviate some of these imbalances that have accrued in valuations today.

[00:00:51] 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.

[00:01:46] 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 Karsan, as well as a returning guest to the show, namely Adam Rozencwajg, whom we last spoke to about 15 months ago.

So welcome back, Adam, and thank you so much for joining Cem and I today for what promises to be another entertaining and highly insightful conversation, as they always are when you join us for these global macro/ commodity conversations.

How have you been? It’s been a while. I imagine that things continue to be interesting as well as challenging in the world of natural resources.

[00:02:21] Adam

Yes, well, thank you for having me back. Happy to be here. I can’t believe it’s been 15 months. It doesn’t seem that way. And look, it’s been a particularly interesting time in the natural resource markets, probably over the last 15 months since we last spoke. And you know, sometimes I wish I didn’t have a Bloomberg terminal because if all I had to work off of was the underlying data, and the supply and demand figures for the different commodity markets, I would be as excited and as enthusiastic as I’ve ever been.

But instead, when you look at the price action, you know, it certainly has been frustrating. And there, of course, lies the value is the disconnect between the two is that the fundamentals have only gotten better. Everything, basically, that we’ve talked about 13, 14 months ago, whatever it was, 15 I guess you said, is now starting to take place.

We’re starting to see major disruptions in supply of both crude oil in the US as well as natural gas, particularly natural gas. So excited to talk about that. And meanwhile, the market caps of energy in the S&P, it’s now down to 3% again, 3.3% as of this morning from probably the last time we spoke, it was as high as almost 5%.

And so, we’ve seen just an unbelievable amount of value get created in this space. And that’s been true in the oil space, in the gas space. A lot of values come back now into uranium, as I think a lot of the hot money that was in that at the end of last year has come out. And gold stocks, at least the way we measure them, have never been cheaper in the entire history of the gold industry. So extremely bullish fundamentals all around and really, really good value. So, for better or worse, we’re as excited as we’ve ever been.

[00:04:08] Niels

Yeah, well, so are we to have you back to talk about all these things. Sounds like we have a full plate on. But before we jump into all of these questions, Cem, I also wanted to ask, how have you been?

How has been your world travels, Olympics, life? I noticed you saw the Danish guy win the badminton gold, live. I’m very envious, of course.

[00:04:29] Cem

We were in the front row for the Dane winning the badminton championship, which, you know, was pretty epic, pretty funny in badminton to see, you know, I think he’s 6’5 or something against like a 5’9, I think, competitor. It was it was pretty awesome. He was dominant. It was it was fun to watch.

The Olympics were amazing. I had a month to really kind of restock, spend time with family. I went back to Turkey as well. Wonderful, wonderful month and happy to be back.

[00:05:00] Niels

Fantastic. Good stuff.

All right. Well, let’s get going. Now, you’ve already mentioned a number of topics that we will dive in sort of one by one. But I think, like we did last time, I think that and maybe some of it you feel you already talked about, then you can just make it a very short one. But it’s also maybe a good start to start with your kind of big picture framework. And maybe in particular, what you feel has changed since we last spoke from that point of view. And then we dive into some of the more specifics.

[00:05:33] Adam

Absolutely. I think our big picture framework over, you know, in my partner Lee’s case, 33 years of doing this, in my case, 17 years of doing this is that, you know, commodities, as we all know, deep down, move in these big, long cycles.

Some people call them super cycles. And that term, I don’t think is appropriate, because to me, a super cycle implies that it’s something other than a cycle. You can have a big cycle or a small cycle or a long cycle or a short cycle, but it’s a cycle. And this one will be no different.

And we are in the very, very early innings of a what I think will be a prolonged and quite large bull cycle. And the cause of those bull cycles is really another cycle. And that’s the capital spending cycle in both the energy and the extractive metals business.

So basically, there’s periods of time where commodities are in slight deficit and prices can rise quite dramatically. Companies at the time earn super normal profits. It’s not uncommon to see them have, you know, yearly cash flow returns of 30 percent or more in the good years.

Money obviously, at some point, flows in to chase those returns. Stock performance is very high. And there’s a virtuous cycle there, pushing stock prices higher, attracting more capital. And then it becomes a classic reinforcing cycle.

What eventually happens, though, is too much money comes in and supply comes online. Now, in most commodity industries, certainly the mining industry and the energy industry as well, there’s a delay from when that spending comes in.

You know, first you have to find new discoveries, then you have to prove them out as reserves, and then ultimately you have to bring them into production. And so, it doesn’t happen overnight. And that period of super normal profits lasts longer than it should.

And because of that, more capital comes in than it should. And eventually too much supply comes online and the market slips from deficit into surplus. Prices collapse and investor returns, you know, plummet.

Projects that get underwritten at $100 oil don’t make sense at $60 oil. And if you’ve used any bank financing to get you to that point, then you risk permanently impairing all that equity capital.

Prices fall. Equity stocks collapse. You know, 80 percent is not uncommon in the troughs of the bear cycles. Money pours out.

And just as investors stand around at cocktail parties and talk about how all you need to own are oil companies or iron ore companies or gold companies at the top, they tell you that the mining industry is nothing but, you know, liars standing on tops of holes in the ground (That was a famous quote always), and that oil and gas people are snake oil salesmen. And of course, the truth is like somewhere in the middle. There are times to own it and times not to own it.

And we use several metrics. We like to look at capital spending cycles. We like to look at energy weightings and the various indices, metals weightings and the various indices. And we like to look at capital at the just broad ratio of commodity prices to stock prices. And we have that data going back 130 years.

The others we have back anywhere between 50 years and 80 years. And they all paint the same picture. We’ve had a terrible bear market.

Capital spending has collapsed. Commodity prices collapsed between 2010 and 2020. And we’re just now in the early stages of reversing that. Supply, as you would expect when you have an area that has been starved of capital for so long like most of the resource industry, you start to see just supply disruptions because depletion takes hold.

It doesn’t happen the first year you cut capex or the second year. But finally, after a certain number of years and the art isn’t figuring out how many years that will be, supply disruptions start to take hold. And that, I think, has really been the theme of the last 12 months is major supply disruptions that we’re seeing in everything from crude oil to natural gas to uranium. Now big disappointments in uranium announced a couple of weeks ago in Kazakhstan for 2025 growth. So, we’re starting to see that all play out.

And the other thing I should point out that we’re seeing is that from the lows we’re seeing, still, leadership from a lot of the extractive industries, even relative to tech energy off the lows in 2020, are outperforming. And so that’s exactly what you should expect to see.

Now this bull market is taking a little bit longer to really get going than it has in the past, although it’s not without parallel. It’s very similar to what happened, frankly, in the early 1960s, where commodity markets bottomed, resource equities bottomed and started to rally. But it took until the 1970s, ‘71 before they really, really took off.

And I think that’s exactly where we are now. You know, four years into a bull market, it’s been, you know, a quiet bull market that most people don’t even realize was there. Really the only standout kind of investment optimism so far this cycle has been uranium.

And it’s funny because if you had asked me at the beginning in 2020, okay, all these stocks are cheap. All the areas have been starved of capital. Which one’s going to move first? I never would have said uranium, although we were heavily invested in uranium. We were wildly bullish right at the very, very bottom. But I didn’t think it would be the first to go because it’s such a kind of niche industry. But there you go. It has been.

And now I think in the next year or two, we’re going to see very, very strong performance in all of the areas that we think are particularly starved of capital and are particularly bullish from a supply demand perspective. So that would be oil, natural gas, uranium, gold. And copper is an interesting one. We can spend lots of time talking about that.

[00:11:18] Niels

Yeah, no, absolutely. We’ll certainly do that. Maybe just for a little bit of context, I looked at a chart in terms of commodity cycles. I think you’re spot on in terms of more calling it cycles rather than these super cycles. And for listeners who may not follow it as closely, and you can obviously correct me, Adam, if you disagree, but we certainly had a big cycle up from around year 2000 to somewhere just before the GFC broke out. And this was often kind of related to China’s massive growth during that decade.

Then we had a big correction. And after the GFC, we saw a lot of stimulus, both in China and the US. That led to another big move up. I think that ended around 2012 or something like that from memory.

And then it’s kind of been heading south for a while and into sort of 2019, late or 2020 or so. And then we had a big rally leading into the Ukrainian situation and a correction from there, but probably not a reversal of that move. It may just be a correction.

So that’s kind of how it looks. A lot of the topics you mentioned that we’re going to be talking about are obviously impacting this, not just supply and demand. We have fragmentation in terms of reshoring and friend-shoring. We have the green transformation that you also mentioned. We have structural long-term inflation, geopolitics, climate change, et cetera, et cetera. So quite a few things to talk about as well.

I wanted to, and Cem, if you have something general you want to share, before we start in, but otherwise I thought we could start with metals, because gold obviously has been somewhat in focus, making new all-time highs, but not all metals are doing as well as people thought it would be. But maybe just kick off with talking about the “bull market” we have right now in gold and silver, for that matter, and what your thoughts are on the metal sector in general and how it’s been evolving.

[00:13:35] Adam

Sure. I’d be happy to. So, we’ll start with the gold market, because I think it’s fundamentally different than the base metals market for a few reasons, both the supply trends, the demand trends, and then just the idea that obviously gold serves a very different role in our economy and in our society than copper does. So, I’ll talk first about the precious metals markets. So, we’re gold bulls right now.

We have about just shy of 20% of the portfolio in gold stocks. That is up from probably a low of 5% a couple years ago. And so, I’d like to be very clear, we’re gold bulls, but we’re not gold bugs. We don’t have a consistent gold long position on, or gold mining long position on.

I don’t think that gold is the panacea of society’s ills. I think it’s an asset like anything else, and it goes through periods of being in favor and out of favor, and it goes through periods of being cheap and being expensive. And I think that you can kind of try to estimate where we are on that cycle.

And again, these are long cycles that we’re looking at, so you’re not calling anything to the day or to the month. But I do think that it’s instructive, and it tells you ultimately where things are likely to go. When gold is really cheap relative to financial assets, it tends to outperform.

In fact, it’s always outperformed. When it gets very expensive, it tends to underperform. And gold, by any measure, based on how much money we’ve printed, based on how much market capitalization of stocks, based on the everything bubble, et cetera, et cetera, gold is as cheap today as it has ever been.

And that’s been true for the last couple of years. So, we’re long-term bulls in gold. However, we largely got out of the gold market in response to very, very low energy prices back in 2020 and even 2019 a little bit.

And we like to look at the relationship between gold and oil. And obviously, when oil went negative, but let’s just take a more reasonable number. When oil was $20, on a monthly basis, during COVID, and gold actually held in, the gold to oil ratio told you that you needed to get heavily weighted to energy and really stay out of the gold market. So, we did that.

By 2022, when Russia invaded Ukraine, the reverse had happened. You know, you’ve got a price spike in energy. And gold over that time had been somewhat lackluster. And the gold to oil ratio told you that you wanted to get back involved in the precious metals.

However, there was a major, major problem. And that problem was that by 2022, we had embarked on a rate hike cycle. And typically, when real rates rise, gold does very poorly. Western investors and traders and speculators are all conditioned to sell gold when real rates are rising.

And that’s exactly what they did. As real rates rose through ‘22 and ‘23, we saw really widespread liquidation (800 tons, I believe, off the top of my head) of gold coming out of the various ETFs. That’s now become, you know, the Western investor speculators vehicle of choice for getting their gold exposure. We saw a big liquidation in the futures contracts and in the Comex as well.

So, the Western investor was shedding gold at a rapid clip. And gold stocks did poorly, obviously, in that environment. Gold prices, you know, did poorly as well. And then the central banks started to step in.

And so, we had this dynamic that we haven’t really seen in the gold market for frankly ever, probably, where the Western speculator was shedding their gold exposure quite dramatically. However, the central banks were now stepping in and buying, in fact, more than what the Western speculator was selling.

And so, because of that, gold prices started to move higher from a low in late ‘22 of just over $1,600 an ounce. We started to see this sharp uptrend in the gold price that has now taken gold to an all-time high of $2,500 an ounce.

And as we’re recording this now, it’s September the 6th, and we’ve just had the jobs report out in the US showing weaker jobs growth than expected and downward revisions. And so, the view is that interest rates might now begin to start moving in the other direction. But over the last couple of years, when you had this real rate hike cycle, you had all of the Western gold being put into the market, being absorbed by the central banks, in fact, more. And that’s why prices rose.

Now, gold stocks have not kept pace with the gold price over the last two years. And the reason, as far as I’m concerned, and as far as all of our data points to, has not been poor operations by the gold companies. It has not been rising costs or something like that, like some people have talked about that’s more than offset the gold price. What it’s really been is that the Western guy is out there, selling both gold bars and gold shares, and the central bank is out there buying gold bars, but they don’t buy gold equities. So, the gold equities over the last couple of years have sort of gone non, no bid, and they’ve dramatically lagged the gold price.

And that’s what’s creating this huge opportunity. Because still today, at $2,500 an ounce gold, gold is radically undervalued compared to financial assets. A fair valuation is probably closer to $10,000 an ounce, given how much money we’ve printed in the last 15 years.

If you look over hundreds of years, the ratio of how many US dollars are printed to the value of the Treasury’s gold holdings has moved in a band. Actually, the band, you can’t even see when the US went off gold, because before, when the US was pegged to gold, the gold price didn’t move, but the amount of gold the Treasury held would go up and down. So, you could compute the ratio, and it moved in a band. And then after that, the amount of gold the US held after 1971 stayed fixed, but the price started to move.

And amazingly, that trend line, that band, has been completely preserved. You couldn’t point out on the chart where the US went off gold. And today, if you were to go from radically undervalued based on that chart to radically overvalued, you would be at $10,000 to $20,000 an ounce.

So, let’s say $10,000 at the low point. So, gold today has a lot of room to run. And the gold stocks are as cheap as they have ever been relative to the spot gold price, the way that we measure them in history.

We look at it on a price to NAV basis using the current spot gold price. We also look at it as (a kind of an interesting way to look at it) a series of options. Because if you think about it, a gold company is like a series of call options on the gold price where your strike price is the cash costs to get the gold out of the ground. And the number of call options you own is how many ounces of gold you produce. And the cadence of how long they expire is your production profile. And if you do it that way or on a price to NAV basis, they show that gold stocks today are as cheap as they’ve ever been, comparable to 1999 lows and comparable to the 2015 lows, which were both, mind you, excellent times to be a gold investor.

So that’s where we are right now. The Western speculator has actually just started to come back into the gold market. You can see the shares outstanding of the GLD, the big gold holding ETF, are now starting to tick higher.

You can see that the shares outstanding of the GDX, which is the gold equity, still has not ticked up. And so again, that divergence has created a huge amount of value in the gold stocks. And if we get it back into… People ask, OK, that’s all well and good but what happens, or what’s going to be the trigger to bring the Western investor back in? And the truth is, I suspect it’s a rollover in rates. But we’ll have to wait and see.

But what I can tell you is that the value that’s been created, now, is too big to ignore. And that something will emerge to crystallize that value, exactly what it is. My gut feel is that it’s the rollover in rates, but we’ll have to wait and see.

[00:22:06] Cem

When it comes to gold, I actually have a couple of thoughts. I’d love to hear your thoughts about some nuance here. But if you look at the other commodities relative to gold, obviously there’s a big disconnect.

And the obvious reason is gold is often seen as a currency. It’s seen as a store of wealth. And when people lose confidence in, let’s say, the dollar or there’s a lot of turbulence in those markets, gold tends to outperform historically, especially relative to other commodities.

If you look at the 60s and 70s as an example, obviously we have the unpegging. But outside of that, even, gold really outperformed. And it was very convex.

And I think being somebody who’s from the volatility space, I worry, I think a lot about not just direction, but kind of convexity. As opposed to other commodities, industrial commodities or energy, which during that period were much more consistent and much lower volatility.

If you look at, historically, oil volatility during that period, it actually underperformed. So, the trade was not in oil to go by calls. Yes, you had some periods where it spiked, like the OPEC crisis, et cetera. But broadly during that period, the trade was actually to be short puts consistently in oil. And price was underpinned by the suppliers, to a great extent, throughout that period. And whereas gold, again, the trade was really to be long calls and really to play the convexity because it was a very volatile asset that still dramatically outperformed to the upside. That makes sense in this period too for me.

I mean, you have a lot of geopolitical protectionism going up, which is causing a lot of geopolitical strife. And much like we’re seeing moves in Bitcoin and other currencies, if you will. We can debate whether Bitcoin is or not, but you’re also seeing dramatic volatility across FX and interest rates.

So that having been said, I’ve seen miners, much like oil producers historically (and I’d love to hear your thoughts) as really being closer to an investment where you’re net selling puts. These producers do very well with the commodities above a certain level. They are often hedged to lock in at least some portion of those earnings and they re-hedge and lock in those margins over time.

But broadly there’s less convexity to the miners or the energy producers relative to the underlying commodity. So given that, I tend to like the trade of being long the underlying commodity and more importantly calls or convexity in the underlying commodity relative to the miners. I agree the miners are dramatically undervalued still, still agree, but on a relative basis I’d love to hear your thoughts about that. And also, the broad framework of volatility and convexity as it relates to different commodities.

[00:25:20] Adam

My goodness, I never should have called gold companies a series of call options. I didn’t know what I was getting myself into. I thought it was hard enough just getting the commodity price right.

Look, I’m not an options trader. So, obviously, I understand everything that you’re saying, whether or not being long vol or short vol in the commodity space, either by being, you know, long calls or short puts to get the direction and the same, but being on other sides of the vol trade, I’ll leave that. I don’t know the best way to express a move higher in commodity prices based on those two options.

I’ll take your word for that. What I can tell you though, is that directionally, I do think that most of these areas that have been wildly starved for capital are moving considerably higher. And I think that absent, you know, some very sophisticated options traders, who is probably who you’re talking to right now, or your audience that you’re speaking to.

I think the big question that a lot of people ask themselves is whether they should be in the underlying commodity themselves or in the producers. And in there, I think the answer is unequivocal, that you should be in the producers. And the issue is, of course, largely the contango in the different commodity markets.

And so, if you try to put on a long future strategy to try to get a cycle move, what you end up with is paying a huge rule yield. So, people, what they try to do is play a relative value future strategy, being long something and short something. And when you do that, what you end up with is obviously uncorrelated returns, but not the same exposure to the underlying cycle move that we try to get.

And if you can get the producers right, particularly those that are not value destructive and those that have very, very good capital recycle ratios and good projects to deploy their capital into, what you can get at the best of times is a move in the commodity price and the earnings leverage underlying the equity, and potentially be able to buy them cheap to begin with. So, you get a re-rating on valuation. And that has always tended to be, in my estimation, the preferred way to get exposure to a large cycle move like the ones that we anticipate.

Like I said whether or not being long volatility through owning call options or short volatility through selling puts is the preferred option strategy, I’ll leave that to you. But I do anticipate that the moves higher will be volatile, they’ll be unfortunately probably chaotic. You’ll have periods of time where they will undoubtedly have pullbacks, the likes of which we’re in now.

And in many of these cycles, whether it’s looking from ‘70 to ‘80 or whether it’s ‘99 to 2010, 35% pullback in the cycle is certainly not unheard of. I won’t say it’s common, but it’s not unheard of, and I suspect you’ll get that again here. So, I think the trade really is to kind of be long and strong hands. And how you then choose to express that, my preferred way, is obviously through the producer equities on an unhedged basis.

[00:28:33] Cem

That’s very insightful. Thanks for that background. Particularly on the contango and talking about those dynamics, which I agree are incredibly important, how does the timing historically tend to work?

When you look at, obviously, this is the show Top Trades Unplugged, so I fully agree and understand the long view, these are bigger cycles. Timing is, to your recent post, there’s not a lot of cost, in theory, to waiting. That said, you can sit in something that’s underperforming for years, whereas you could be in other things.

So, it’s important to get some level of insight, at least, and try and do the best you can on timing it to some extent. So, in that context, particularly as it relates to the miners relative to the underlying asset, when do you tend to see miners catch up? Not just when do the assets start, the commodities start performing, but when do you start to see miners or underlying producers of commodities start to catch up?

What tends to provoke that? What tends to turn things? Again, I know you don’t have a crystal ball, per se, but what are the factors and incentive structures that tend to drive that move when it happens?

[00:29:53] Adam

Yeah, it’s a really great question. And I’ll tell you what I think we’re really good at and what I think is not… I don’t think we’re bad at it, but I don’t think it’s necessarily our strong suit.

And what we’re really good at is the research, and what we’re really good at is the underlying fundamentals. And what we’re not as focused on, I suppose, is the timing. Now, obviously, you always try to get the timing right, but if I had to grade us on a scorecard, I would give us above average, exceptional marks on our research, if I could be so hubris-filled, and I would give us sort of average marks on the timing.

And if anything, we do tend to be early, and we’re more comfortable being early, much to our frustration sometimes, because we are value investors. I think lots of people call themselves value investors. I would like to hope that we’re true value investors.

And one of the drawbacks of being a true value investor is that if something starts to run on you, you run the risk of it being very difficult for you to get in. It’s against your nature to want to get into something after it has first moved substantially higher. Now, that might be foolish, right?

And oftentimes it is, because things that go up continue to go up, and things that go from extremely radically undervalued to extremely undervalued (I’m not sure which is lower, but that still are undervalued) can still represent really good investments. But if you have that kind of nature in you, what you really don’t want to do is miss the bottom and miss the move. And so, I think what ends up tending to happen is you tend to be a little bit early to some of these trades. And that tends to be the way that we are as well.

We do all the fundamental work, so we’re looking at the data. We then project that data out going forward, because oftentimes if you wait for the good data and supply demand to come forward today, that often gets priced into the stocks already, right? So, you want to be kind of a year out in front of that, and say, okay, at the beginning of this year, natural gas inventories were really high because we had a mild winter. Things looked gloomy. Prices were low, but our model said by the end of the year, inventories would have largely repaired themselves, so now’s the time to get involved.

And so, as we progress through the year, that I think is bearing out on the fundamentals, and it’s now starting to bear out a little bit more in some of the investor sentiment. But we do tend to be early because I think we’re looking into the future on those fundamentals.

One thing that I will tell you, though, that I’ve noticed in the market and that Lee’s noticed in the market over the last, in my case, I guess, 17 years, is that the market used to be, the stock market for commodity stocks, used to be more of a discounting mechanism than it is today.

It used to be more of a future-looking forecasting instrument than it is today. And so, if you waited for the data to turn positive, you had missed that trade, and so you really needed to be out ahead of these things.

Today, we’re seeing quite the opposite. You know, we’re seeing that the data really needs to get good right in front of you before anyone seems to really care. Now whether that is short-term thinking, whether that is attractive areas in tech and in AI and things like that, sucking capital out and creating a huge opportunity cost, is difficult to say. But it’s very, very clear, looking at how these stocks are now moving, that nothing forward-looking is being priced into them. And if anything, sometimes even the current positive fundamentals are not being priced into them.

So, I think whatever is going to be the catalyst going forward might be a little different than it’s been in the past, because it’s going to have to be real data right in front of you. So, for instance, in 2022, we had a major increase in energy prices and energy stocks driven by a real-time event, which was Russia’s invasion of Ukraine threatening gas supplies into Europe.

If you had looked in 2021, you would have easily seen all of the preconditions for a bull market in energy, namely the fact that we hadn’t spent enough money on global energy upstream, the fact that wind in particular, wind and solar, were underperforming in Germany. So even though they had spent all this money to try to move away from natural gas, they were in fact more dependent on natural gas than at any time before. And because of that, and because of the fact that no one had invested in the domestic European gas industry, all that gas was being piped from Russia.

And so, the reliance on foreign gas was growing and growing and growing. So obviously, the catalyst in ‘22 was Russia’s incursion into the Ukraine. However, that market was tightening and tightening and tightening, and it kind of had to hit everyone over the head to get people to respond, whereas in the past, I think you would have looked at that in 2021 and said, I think we have a problem brewing here and perhaps would have gotten a bull market going. So, I think that it’ll be real-time data, unfortunately, this time around.

I think in the uranium market, what’s going to drive things higher (it’s different market by market), but I think in the uranium market, what’s going to drive things higher is a realization that the physical market is extremely tight, that utility buyers don’t have any source of secondary supply to help bridge the deficit. In the past, they could go to Japan, who always had these huge stockpiles, because after Fukushima, they didn’t need the uranium, but they kept buying it.

Between 1980 and 2010, they could always go to the governments because the governments were decommissioning warheads and releasing their strategic inventories of weapons, inventories of uranium into the commercial market.

There’s always a secondary source of supply. That’s gone now, and everyone’s hopes are pinned on big new mines coming online in Kazakhstan and Canada the next couple of years, which are now being delayed and pushed out.

And so again, I think the writing’s on the wall there, but what’s going to drive things higher in this next leg is probably going to be an actual uranium buyer who has a difficult time sourcing pounds, whereas before, I think you would have looked through that a little bit.

The other thing that I would like to kind of touch on, on a broader sense, is that if you look at these big cycles where commodities become radically undervalued relative to financial assets, the trigger to normalize that, the trigger to enter into a new commodity bull market, and the trigger to have a robust period of outperformance in resource stocks, has always been underlying shifts in global monetary systems or regimes.

What on earth do I mean by that? Well, the 1929 period, commodities became radically undervalued. The stock market exploded to the upside. And then during that whole late 1920s, Benjamin Strong, who was governor of the New York Fed, was experimenting with the first case of quantitative easing. And what he was doing at the time was trying to print US dollars, despite the fact that we were in a strong economy in the US, in order to devalue the dollar and prop up the pound so that the pound could go back on gold, which it had abandoned or temporarily paused during World War I. He dies in late ‘28, and that’s it.

You know, his policies were very controversial. They reigned in liquidity and credit dramatically in ‘29, and it caused ultimately the great contraction, if you believe Milton Friedman and Anna Schwartz, as I do. So that was the end of the classical gold standard.

It was put on pause in World War I, but the final nail in that coffin occurred in 1929 when you reversed Benjamin Strong’s policies. The dollar rallied against the pound, and the pound had no hope of going back on gold. That was the catalyst for a huge collapse in the stock market, but also for strong both relative and absolute outperformance of natural resource equities over the next decade.

Between 1929 and 1940, a basket of commodity stocks that doubled. You know, Dr. Copper and copper stocks, despite the fact that they’re supposed to have their PhD in economics, obviously were not told of the Great Depression because they were up over that period of time, as were oil stocks and, of course, gold stocks because Roosevelt raised the gold price. So that was the catalyst, you know, was that shift in monetary systems at the end of 1929.

Flash forward to 1968. That’s when the commodities to equity ratio bottomed and came, you know, roaring off the bottom. Commodities first got cheap, because I know we’re going to talk about cycles later, but commodities first got cheap in 1956.

They first approached that 1929 level of cheapness in 1956. But it wasn’t until 1968 that they really bottomed. And then in 1970 came roaring off the bottom to enter, you know, the period of the 1970s that we all know is so important for commodities and commodity stocks.

But what happened in 1968 that made the bottom? It coincided nearly to the day with President Johnson taking the dollar off gold. And, you know, most people think that Nixon took the dollar off gold, and he did. He shut the gold window. He no longer allowed the dollar to be convertible into gold. But actually, in 1968, Johnson said the dollar does not have to be backed by gold anymore.

There had been a legal requirement and needed to be backed by at least 25 cents on the dollar gold. After that, it didn’t have to anymore. And so, for the next three years, gold flooded out of the US. And finally, Nixon said, we can’t redeem anymore. We’re going to not have enough gold to meet our obligations.

So, you can really make the case that the Bretton Woods exchange standard, which is thought to have died in 1971, really died in 1968 because the big reserve currency, the US dollar was no longer legislatively mandated to be backed by gold. That corresponded nearly to the day with the low in commodities relative to stocks and commodity stocks just exploded.

They actually did well in the earlier period, too. But from ‘68, that was just the beginning of an incredible bull run. And in 1999, you had a complete reordering of all of the Southeast Asian and Chinese central bank policies, which before the Asian currency crisis were all pegged to the dollar.

And after that, they pegged at a below market rate to spur their exports. And so, what you had was, you know, over the next 10 years, $9 trillion worth of treasuries make their way east. So, we don’t teach that one in the textbooks quite as much as the others.

But from a monetary systems perspective, I think that was just as impactful as the US going off Bretton Woods or the end of the classical gold standard. All of those corresponded nearly to the day with when commodities and commodity stocks started radically outperforming. So, we think, and, you know, it’s a little bit out of our wheelhouse, I suppose, but we firmly think, looking at history, that this time is going to be no different.

Just like the other cycles, you’ve had a period of very easy money. You’ve had a period of a mania in other parts of the market, in this case, almost every other part of the market. You’ve had a decrease in commodity prices, from 2010 to 2020, an erosion of profits and investments.

We think that the underlying catalyst will… you know, if history is a guide, and look, three times does not ensure that this will be the catalyst, but three times is pretty interesting. You’ve had three cycles. It’s been the whole period of modern finance since the beginning of the 20th century. And every single time, all three, have been triggered by a shift in the monetary system.

So, when we see China talk about settling its commodity trades outside of the dollar; when we see all these central banks rushing to buy gold; when we see people talk about how the US has overplayed its hand, having weaponized the dollar (which I’m not sure if that’s, I don’t know if I agree with that or not), I think we’re in the right zip code (as they would say in the US), the right neighborhood for change in the monetary systems, just like we had in those other times. And I suspect that that will be the ultimate catalyst here.

You just look at all these, like you said, these massive volatility events that we’ve seen, including, you know, what’s happening with the yen, including what’s worried to be happening with the dollar, with the central banks accumulating gold. I mean, it strikes me like there has to be a new reordering of things to help alleviate some of these imbalances that have accrued in valuations today.

[00:42:50] Cem

I think you make an important point that is also one that could be carried across other asset classes. You know, obviously, you know, Benjamin Graham, one of his famous quotes is “the long-term things are a weighing machine”. Markets are a weighing machine in the short term it’s a voting machine, right? These things can become undervalued and stay undervalued for some time. Obviously, as you’ve noted in your note, the cost of holding that becomes quite low, but it can take quite some time to come back in line.

The catalyst that often pushes these things back into line is volatility. It is dislocations. The reason that is, is because, generally speaking, the supply that the voting machine, people are aware that this cycle is going on, you know, in some level, people are buying much like yourself, some more than others, right?

That there’s a higher probability there is a convex trade potentially in the makings and no trade is ever easy, by definition. The more long players you have, the more positioning there is long, even if it’s structurally a supply and demand, the weighing machine says, Hey, this needs to go a lot higher, and people can’t make money that easily. It has to be difficult.

And that’s what the voting machine is. And it takes somebody, you know, something hitting investors over the head, right? It has to be so incontrovertible, something like taking the dollar off gold to really force the move. And then once it starts, it’s incredibly convex for a long period of time. So, I think you make a very good point.

[00:44:39] Adam

I completely agree. What’s interesting, and this isn’t so much talking about markets as maybe just talking, you know, in general or whatever, what we’re interested in is generating long-term returns and our long-term returns, you know, go back to the early ‘90s and they’re very, very good.

So, does it mean that they have to stay good forever and past performance is not indicative of future returns? However, I’m quite confident in the approach and the framework that we have to be able to uncover long-term value and take advantage of it. And to me, that’s my barometer of success.

But everyone feels the pressures and feels the requirements of short-term performance. I think to me, the most important thing is kind of being able to operate as the former in the environment of the latter; being able to keep a long-term mentality and being able to look.

I think there’s a massive time arbitrage by being able to be long-term (at least in my corner of the market), being able to look at long-term trends, which if you’re willing to take the volatility in the near term, if you’re willing to be wrong or early a little bit in the near term, and if you’re willing to have the trust of your clients and your partners by explaining to them exactly what you’re seeing and how you’re expressing that, then you can definitely, like you said, arbitrage people’s short-term focuses, relative to the long-term trend.

Long-term trends, to me, are much easier to read than people’s short-term flows. And what we’ve created is a structure and a product that we think is ideally suited to being long-term focus. So, what do I mean by that?

You know, we don’t use leverage. We’re long only. We’re daily liquidity. So, people don’t feel trapped, and we’re quite easy to own and we’re low fees. So, the carrying costs, nobody, no client likes to see negative returns and high fees. That’s always quite problematic.

So, we try to do all that to match our investment focus with what will be the ideal vehicle to provide that. And I think that’s what we’ve been able to do. And it’s very, very difficult to do because, like you said, over the long-term, if you really want to get something right, you have to be able to withstand the idea that everyone’s against you all the time.

Lee and I often joke that, you know, everyone is a trend follower and a herd investor because, probably, from an evolutionary perspective, it always made much more sense to be in the herd and in the pack and not off on your own saying, oh, actually we should look this way. You know, the lion would come and take you out pretty quick.

So, Lee and I sometimes joke that we’re very, very happy that we live when we do and not back in the caveman days, because we would have been picked off a long time ago because we’re really not very comfortable in that herd. We’re much more comfortable, I think, being contrarian and looking at things where other people aren’t, because that’s where value is. But you know, it didn’t pay to be a value investor in the caveman era. But today I think it pays to be a value investor.

[00:47:46] Cem

Yeah. I mean, obviously, if things are fundamentally cheap, eventually the weighing machine wins out. So, I’m not going to sit here and go tell Warren Buffett he’s wrong. I put you in the same light. I’m not going to go out there and tell you you’re wrong. Actually, I agree with the fundamentals, and I agree with the… But there are two separate things, the voting machine and the weighing machine. And that voting machine often is right before the trade is the best. Is when people are long, and it is often the hardest to be long during that time. The best, as you’ve said, you’re a contrarian is when people don’t love it and the fundamentals are great. That’s when the trade is the best.

So, to follow on that question, is this a contrarian trade at this point? What is positioning like? Where is it the most contrarian? I’d love to hear your thoughts a little bit about positioning in the markets and where you see that. That’d be, that’d be helpful.

[00:48:43] Adam

Yeah, yeah, of course. Absolutely. So, first of all, I think that when you look at how investors are positioned today, there’s almost no exposure from these people in the market.

So, an easy way to look at it, maybe not the most precise but fairly easy, is that you look at what’s the energy weighting of the S&P 500? The long-term average is 10%, 12%. The bull markets top out at 25%, 30% and they bottom historically, you know, at 5% or 6%.

We got as low as 1.8% in 2020. So that was obviously an all-time low. Today, as of this morning, it’s 3.4% of the S&P 500. That’s off of a near-term high of 5% in 2022. So, in the last four years, the high in the energy weighting in the S&P is more typical of past cycle lows. So, suffice it to say we’re awfully low on this chart and people’s weightings in energy stocks are quite low.

The other thing is that if you look at shares outstanding of the different energy stock ETFs, that’s a good proxy for money being put into or redeemed from these different funds. And we’ve seen consistent monetary outflows, over the last four or five years. So there has been, you know, almost no increase.

In fact, over the last 18 months, we’ve seen fairly sharp outflows in all of the energy stock ETFs. So, it tells me that people are selling and we’re getting down to the point where you have seen rebound rallies and bottoms in the last couple of years. So, I think you have shaken out anybody now that has made any money in the 2021, 2022 period.

You’re approaching, again, as far as investor positioning and investor enthusiasm, kind of the lows; maybe not the depths of 2020 when everyone really thought that oil would be negative forever, but like the third and fourth quarter of 2020, you’re back to those levels and approaching them very, very quickly. So, people have taken a lot of exposure off. When you look at the commitment of traders reports, you see the same thing on the physical side.

Uranium is an interesting one because uranium obviously went through a massive bull market in ‘22 and ‘23, and that attracted quite a bit of money coming into it. That money is now in the process of coming back out. The hedge funds that bought uranium in late ‘23, and that were touting themselves as uranium experts (having been in the trade for about six months and studying all 20 pages of the world nuclear association website) are now, I think, in the process of having largely liquidated. When, exactly, that trend is finished remains anyone’s guess, but I suspect you’re getting pretty close to it as of now, just looking at some of the metrics that we look at.

What was interesting, you mentioned it a second ago, and I’m not sure if you have read the book or not. It was recommended to me by Neil Howe, who wrote the Fourth Turning and who’s an adamant cycles scholar. He, for those that might not know him, coined the term ‘millennial’ in the early 1990s. And that’s just the least of his accolades, but that’s how most people probably know him on a daily basis. The book that he recommended was by Jamie Lee and Kevin Coldiron called The Rise of Carry. Have you guys read that book or heard of it?

[00:52:18] Niels

Well, Kevin actually is one of our co-hosts. And so, we know him pretty well.

[00:52:22] Adam

Oh, is that right? I had no idea.

[00:52:25] Niels

No, no, that’s fine. And actually, I’m bringing back Kevin next week, recording with him where he’s the guest, to revisit the next evolution of The Rise Of Carry, so to speak. So, it’s very interesting that you mentioned that.

[00:52:40] Adam

Oh, I would love to listen to that. I found the book absolutely riveting and frankly felt that it helped change quite a bit of my perspective on certain of these elements that we’re talking about. Very clearly, there are self-reinforcing trends that he brings up in that book, both the idea of being short volatility and the idea of how the entire S&P has now become one giant carry trade, and really the whole world has become one giant carry trade.

For some odd reason the commodity markets (and he might argue this because I know he talks about carry trades and crude trading and stuff like that), I’m talking about the whole real asset trade, stepping back, seems to be on the other side. It seems to almost be the funding mechanism, the short, that’s helping to propel the long of the giant carry trade bubble that he talks about. And, and we see this all the time, you know, when carry trade indicators move in one direction, commodities tend to move in the other direction. And then you get this big reversal that, that helps to normalize things.

So, I would suspect, looking at some of these things, that an unwind in carry, that might be the beginning of both a rethinking of global monetary systems (which in and of themselves have helped precipitate the carry trade), as well as a rethinking and a catalyst to make a bottom in real assets relative to financial assets.

So, that book made a very big impression on me. I should have done more research on you guys. I did not realize that Kevin was a co-host of yours.

[00:54:19] Niels

No, it’s fine. And actually, you have a chance, Adam, to email me over the weekend, if you have specific questions, I’d be happy to bring them up in the conversation.

Now, because time is kind of quickly approaching the hour mark maybe you will stay for a few minutes longer. First of all, just a quick comment, Adam, I know you said that everyone is a trend follower. After 35 years of doing trend following, unfortunately, I can assure you, not enough people are trend followers in my opinion, but that’s just a personal observation.

We’ve gone quite broad. I mean, I’ve prepared a lot of specifics, but I like the idea of where we’ve gone in more broad terms, I would like just a couple of maybe quick thoughts and maybe Cem has some as well.

A couple of things, you mentioned in the introduction, you mentioned copper. When I look at the copper price, it’s actually lower than it was in 2021, despite all of this green transition we’ve talked about. Now, I don’t know what exactly this means. Maybe you can enlighten me here, but I noticed that the exchange monitored warehouse of copper is up dramatically in terms of number.

I don’t know what exactly that means, but why are some of these things that people have been so convinced about that, oh, this is going to be the next bull market, because we can see that there has been a lot of demand, certainly a lot of political push for a green transition. Yet, if I look at the price of copper, I don’t really see that. Any thoughts on, on these things?

[00:55:56] Adam

Yeah. So, we have a bit of a different view than a lot of people in the copper market. With most people in the copper market the conventional wisdom is that, on a long-term basis, they’re wildly bullish and on a short-term basis, they’re kind of cautious.

The reason they’re bullish on a long-term basis is they feel as though not enough mine supply is due to come online. And there’s some truth to that, you know, particularly copper mining has a fairly long lead time. You make a discovery, you prove the reserves, you build the mine, you produce.

And so, it’s sort of like the pig going through the snake. You can kind of see where you are, and it goes like that. In the case of copper, starting 10 years ago discoveries went to almost zero. Starting five years ago, most new reserves went to almost zero. About three years ago new mines coming online went to almost zero. At the same time, you have quite bad base declines in the existing mines, which were all brought on 10 to 20 years ago.

And that’s all very true. And we see that number too. And that’s certainly why we’re bullish as well. Demand meanwhile, both from places like India, China is an interesting story. I want to talk about that in a second. Places like India and Indonesia, which have historically under-consumed copper relative to economies of their size, there are these huge catch-ups now that are going to really be a big tailwind for demand. Both of those countries are up like 30% year on year, crazy numbers, you know, in terms of demand growth. And so, people say in the long-term, they’re quite bullish. On the short term, however, they remain bearish or cautious because of Chinese property bubble and slow down concerns.

That was kind of the big narrative through last year that hit its maximum peak, you know, copper hit $3.50 in the fourth quarter of last year. I think that was coincided with sort of maximum peak bearishness there. And then over the next kind of six months, everyone said, well, maybe those concerns are overblown. The numbers coming out of China, on the copper side, are actually quite good and they’re quite healthy. We’re bullish still in the long-term on all this type of stuff.

And now our short-term concerns are alleviated. So, whether it’s short covering or long positioning, a combination of both, and copper rallied from $3.50 up to a high May of this year of $5.20 per pound.

I’m sorry, I don’t work in dollars per ton. I know a lot of your listeners probably do. And I’m not even American, I’m Canadian. But even I’ve grown accustomed to dollars per pound.

We take a totally different view. For us in the short term, we’re bullish. In the short term, mine supply is tight. When I say short term, the next three to four years, let’s say. We see demand being driven by places like India and Indonesia continuing to grow. The green revolution is anyone’s guess. But the market’s tight without that.

To the extent that we continue to push for, which I think is misplaced, but if we continue to push for a big green rollout, which is terrible energy efficiencies, et cetera, et cetera (topic for another day), that will be a big driver of additional copper demand.

However, longer term, we’re starting to see some really, really, really important technologies being developed that could have a huge supply response. So, just as everybody expects that we’re kind of really in a tough spot for supply for the indefinite future. I don’t think it’s quite so indefinite.

I think that by the end of this decade, we’re going to see a big supply response. And it’s going to be led by technologies, mostly being developed by Robert Friedland, who is the CEO of Ivanhoe Mines and Ivanhoe Electric. And he has a group, out of France, that he’s helped founded 25 years ago. And they’ve been developing, along with some incredibly brilliant scientists, some fascinating new technologies in the mining industry.

One is for exploration. And they’re using that already. They’ve used that to make three big world-class discoveries in the United States. The other is for rock and materials processing and handling, crushing and grinding. And it might be too in the weeds for some of your listeners, maybe not.

But it has the potential to dramatically reduce the capital intensity of copper mining. For those in the mining industry, it’s very, very exciting.

Who thought that crushing rocks is exciting? But believe it or not, I think 5% of all the energy used in Australia is used to turn big rocks into little rocks. And that could be reduced by up to 90% if some of his technologies pan out. And I’ve been there, and I’ve visited them all. And they all work. They’re all incredibly exciting. It’s just a question of time to commercialization.

There is an historical precedent, by the way, for new technologies dislocating the copper market. In the 1990s, we came up with a new way of liberating copper from oxide ore. It was called SX-EW.

We didn’t know how to do that before. We figured it out. And oxide copper production came to represent 20% of the copper market within a couple of years. So basically, a 20% copper supply growth, right, that no one had in their models. It dislocated price for almost a decade. And I think there’s the potential for that later this decade, too.

So, we’re a little bit more tempered and cautious longer term, but we’re quite bullish short term. So, what’s happened? And why are prices back down now to $4 a pound from a high of $5.20? Why are inventories rising? It’s a pretty interesting question. The big thing that’s driven that, in the near term, has been something (and I think it’s a little bit delicious, again, by trying to be contrarian) that literally every copper bull said was impossible. Mine supply grew this year. It wasn’t supposed to grow, but we had pretty sharp growth in the first six months of the year.

Now, I think that’s all behind us. I don’t think the next couple of years have any… There’s no way that you can keep up that growth. We had some restarts of places that had been disrupted a year earlier in places like Chile. We had Kamoa-Kakula in the DRC, phase three ramping up. That was obviously in everyone’s numbers.

But there was a bunch of things that happened on a year-on-year basis that led copper mine supply to grow. And just again, I think it’s kind of ironic that, literally, everyone said that you cannot grow copper mine supply. And in the 180 days after they wrote that, you had a very robust period. Now, again, I don’t think that continues, but that explains why inventories have crept higher.

The other thing that’s been a big change for us, and I want to be kind of clear on this, for many, many years, we have proprietary models that look at Chinese copper demand. And the whole world, for years and years and years, said that China was overconsuming copper. And their rationale went like this. They are 50% of the world’s copper demand. They’re not 50% of world GDP. They must be overconsuming copper.

There’s a really nice, simple elegance to that argument. But it’s not true.
It misses the underlying demand drivers that actually drive demand. The idea that it’s not so much what you consume in a given year, it’s how much you have installed in your economy in total. Copper doesn’t get consumed as such. It’s not burned like oil, and you’re left with nothing at the end of the year. It’s installed. It’s a capital asset. It stays in an economy for years. And it’s much more instructive to look at the total installed copper base than it is to look at the annual copper demand. And when you do that, China has been on trend line, year in and year out, for the last 15, 20 years. So, all of those fears have been misguided.

However, as of now, we believe that China is actually overconsuming copper. It has gone up above that trend line, and a little bit dramatically so. So, for an economy of its size, it has more copper installed than it ought to. That could mean a couple of things. It could mean that there’s other sources of copper demand.

I think the most likely is because of their big green energy push, which obviously wouldn’t be captured in all the historical data. If you’re benchmarking with other countries that went through a similar period of GDP, 20, 30, 40 years ago. You didn’t have the green demand. So it could be that. Being a little bit more nefarious. It could be big military build ups and things of that nature. Or it could be that they are now, for the first time, overconsuming copper and that that’s going to lead to lower copper demand going forward.

And that’s the really key critical question on the China side of things. That’s what we’re trying to answer in the research that we’re doing now. That’s being backfilled a little bit by India and Indonesia, which are way, way, way behind in their copper intensity. And they’re now starting to grow to catch up to that. So how it all shakes out will remain to be seen. I do think we have a period of strong demand, though, over the next five or six years.

Mine supply is probably going to be challenged for the next couple [of years]. So, I do think there’s a bull market here, but it’s going to be undone by new supply probably at the end of this decade, probably by Mr. Friedland.

[01:05:13] Niels

Just before you jump in, maybe with your last question, Cem, my final topic, really, just to hear your quick thoughts on this, Adam, that is, and it kind of tied a little bit to China, but maybe also to other things. And maybe it’s not just about copper. This question is more about commodities in general, at least those that are somewhat affected more by this, and that’s demographics.

I mean, demographics is something that is fairly easy to forecast. We can kind of see, quite far out. There’s a lot of talk, by the way, in Europe and not least in the country that I was born in, in Denmark, about the falling birth rates and all of that stuff.

And we know from one of our previous guests, Peter Zayan, that he’s very big on demographics and talks about how China will be a lot smaller and some of the other big countries will be as well. Does demographics feed into your long-term views as well? And maybe just give us kind of a shortish answer, and then I’ll let Cem round it off.

[01:06:23] Adam

Yeah, look, I think the demographics are absolutely fascinating. And obviously, like you said, there’s certain kind of slow-motion train wrecks in the making. The one thing that I would caution always on demographics is, of course, the sort of Club of Rome arguments that were made in the 1970s, how overpopulation was going to lead to mass starvation and poverty. In fact, now we’re here debating and worrying about how underpopulation is going to lead to deflationary implosions.

So, demographics are this bizarre kind of beast where it seems as though the future is set in stone and yet has abilities, just like a day trader in the oil market, to confound everybody. So, I don’t know that we have any long-term investment decisions made on demographics, but very clearly China, over the next generation and two, has a pretty clear issue stemming from their one child policy that was enacted for so many years.

I mean, that one seems hard to deny. And so, I do think that you have to obviously include that in all of your models when you’re projecting out demand and things like that. It’s always best to look at per capita demand multiplied by population.

So, yeah, it’s in the models, but, you know, I can’t point to a single trade that is the China population bomb trade that we have on. But I agree. I find it absolutely fascinating.

I don’t know if I came back in another life if I’d be a demographer, but maybe if I was forced into academia, I might choose demography because it’s just such a fascinating concept for study.

[01:08:07] Niels

Maybe just one last comment before Cem jumps in. Actually, I wasn’t thinking necessarily, just for clarity, that what’s changing in China may lead to deflation, actually. I think it could lead to inflation because China won’t be the manufacturer for the world, so to speak, that it has been.

So, we’re going to have to produce our goods elsewhere. That probably will come at a higher cost and so on and so forth. So, yeah, just interesting.

Cem, do you have like a final topic question that we can do in the next five minutes before we round off?

[01:08:41] Cem

Yeah, I have two quick ones. One, just I didn’t want to let the stockpiling of copper in China or the above trend, I guess I should say, slide without a quick question. Is that something you’re seeing across assets?

Are you seeing over demand relative to history in China, relative to what you would expect?

[01:09:01] Adam

No, so we’re not. And what’s interesting is that that’s like a fairly new development, right? We’re talking in the last six, eight months.

So, like even people that were looking at the data last year that said, oh… The reason I want to be so clear on that is that the sort of boogeyman of China, over consuming copper, has been such a common refrain for so long and one that we’ve disagreed with. And so, to me, I mean, not to say that my opinion matters all that much or anyone cares, but this is a change in our view. We have not been with the crowd, but now that number has crept up above trend line.

And no, the short answer is, you know, when I look at its oil demand, that’s spot on where it ought to be for an economy of its size. When I look at steel demand, actually, steel demand has run for several years above where we might have expected it to for an economy of its size.

That’s why we’ve, frankly, been largely out of the iron ore business. And that’s been right and wrong at different periods of time. So, we can’t claim victory there all the time. We’ve been largely out of that because Chinese steel production has been the biggest driver, steel demand has been the biggest driver of iron ore demand growth. That, actually, has over consumed for a period of time, but not copper, not grains. And the big one that’s really fascinating is LNG.

When you look at natural gas, as an economy grows, its total energy demand per capita grows. And that trend is fairly predictable and fairly constant over time, actually. When an economy grows (this is what is less well understood), its desire to move towards gas and away from coal grows. And that trend is fairly predictable as well.

And so, when you put all that together and then you look at what their gas consumption is in China, China has been really, really behind trend line in terms of its gas consumption. And by extension, then, if you back out domestic production and pipeline imports, LNG imports, I think the answer to that one is that LNG has not been available.

It’s been a tight LNG market. And so, they haven’t been able to consume as much as they would like. And that’s why, for the last 10 years or so, our house view has been that there will be kind of a constant bid for LNG over and above what people expect. And that’s largely played out.

If you go back 10, 15 years, Wood Mackenzie was calling for… It was when Qatar was bringing on their first LNG trains, Wood Mack said, well, that’s going to be it. You’re going to overwhelm the market and all that excess gas is going to wash up on US shores because they’re the only country with storage. And so, they’ll buy gas for zero. In fact, you know, they might get paid to take the gas because Qatar won’t know what to do with it. And they can sell it back into the winter market where prices are higher. So, what’s happened since then?

Well, Qatar brought all that online. Everybody else, Australia came online, that wasn’t in people’s models. The US went from being the largest importer to the largest exporter. I mean, that’s like forgetting to flip the sign in your model from negative to positive. Normally that has an impact. And yet, you know, LNG prices today are 13 bucks in Asia, 10 bucks, 12 bucks in Europe, in line with their oil parity.

So, I would say it’s a tight LNG market despite all those massive new sources of supply. And I think the reason is because you have this bid in the market for demand. And yet China’s under consuming gas vis-a-vis its wealth.

And so, I think that’s why we maintain kind of a bullish outlook on LNG. And I think that new US exports will be absorbed in that market relatively quickly. So no, it’s not everywhere that we see China over consuming. In fact, I think that copper is a little bit of an outlier.

[01:12:52] Cem

Very interesting. Yeah. Thanks for that insight.

And lastly, we’re talking about energy. I’d be remiss if we didn’t at least give some lip service to the recent decline in oil. Your thoughts?

I know you’re not short-term, you’re much more long-term, but I’d love to hear what you’re seeing as this is unfolding and your thoughts about how it might change in the medium term.

[01:13:13] Adam

Yeah, look, this is position unwinding, particularly, I would say, in the last month from 80 down to, in WTI 68, as we talked this morning. This is position unwinding because inventory levels now in the US are drawing relative to normal and in the rest of the world as well. So, in fact, I would say the data has been getting stronger and stronger as we progress throughout the year.

And so, I think the recent downdraft in the price is just positioning, is traders positioning. There’s nothing fundamental that we see in the oil market that gives us pause right now.

And in fact, you know, the most important thing in the oil market, and it’s funny because it’s true in oil and it’s true in US natural gas. And we were so macro today, we didn’t talk about either of these. But if I have a last word in the matter, the biggest development in my space this year is that when I last spoke to you, I talked, probably for an hour, about trends in shale productivity and trends in drilling productivity and things of that nature and how going forward, we might not be able to grow the way we had in the past. And we might even see declines. US gas production is plummeting. It is down 5 BCF per day so far this year, 5% down in the first seven months of the year.

That’s massive. That’s unprecedented. That’s leading to inventories in the US relative to normal. We started with this huge overhang after a mild winter. It’s now 75% repaired. You know, we were massively bullish compared to anyone else out there in terms of our supply demand fundamentals. And we didn’t see that market balancing until mid-25 in terms of the inventory overhang. I think it’s going to balance by December now of this year. That’s a lot of ground to make up in four months.

I’m saying from when we first made the prediction earlier this year to kind of now, to pull forward your prediction by six months in four months is quick. That’s how bullish things are.

On the oil side of things, all the shales, including the Permian, has rolled over as far as December. They made a peak in December. They’re not off as much. They’re off 1% or so, about 150,000 barrels a day on a 10-million-barrel base, give or take those numbers.

So, it’s not the same 5% drawdown that we’re seeing in gas. However, it is now the case that the only source of non-OPEC oil supply growth, over the last 15 years, is now in decline. And historically, that’s always been a precursor to a big move higher in oil. And I think this time will be absolutely no different.

So, those are the biggest developments. I buried the lead, I guess, bringing them up in the final minutes.

[01:15:44] Niels

No, it’s always good to keep the best for last. One final question, and speaking of oil, something that I seem to be getting a lot of commentary about a while ago. I haven’t seen much since.

What exactly is the level now of the US strategic reserves? How many barrels do they have? Because they were selling it to keep oil prices down.

But where is it today? Do you have any estimate on that?

[0(1:16:14] Adam

On a trend basis, the US strategic petroleum reserve sold about, was it half of its total volumes in a series of sales. One was at the end of COVID, one was during the Russian crisis and then a little bit after that. Let’s see.

So basically, as far as a trend goes, that has now stabilized. They’re no longer selling oil out of the SDR. They have been refilling it a small bit, but not nearly as much as they had sort of claimed to be. And so here I have the numbers for you right now. 2020, you had 650 million barrels, give or take, of oil in the strategic petroleum reserve. You took that all the way down to 340 by 2023. And today we’re at a whopping 375. So, you’re basically just a tiny bit off the bottom. But you have stopped selling.

We have said that in the event that you see an oil price spike ahead of the election, you might see more of that selling. I don’t know. It remains to be seen. I wouldn’t put it past anybody.

[01:17:26] Niels

Sure, sure. Adam, this has been another wonderful and delightful conversation. And it’s really been great to get an update on all of these important issues.

I think we need to do this more often than every 15 months as we used to do. So, thank you so much for taking time out of your morning to do this.

By the way, if people are not following and subscribing to Adam’s work, you really should go to their website and sign up. They produce some wonderful reports and papers. And Cem and I were referring to the latest one, I think it came out yesterday. So that’s definitely important.

And also, because, as I think people can tell from our conversation, we really are living in not just a global macro driven world, but also an energy driven world. And it really is important to stay well informed on this topic. From Cem and me, thanks ever so much for listening.

And we look forward to being back with you as we continue our global macro series. And in the meantime, as usual, take care of yourself and take care of each other.

[01:18:34] Ending

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