Transcripts

Erik: Joining me now is Boxwood CEO Morgan Downey, who's probably much better known as the author of Oil 101. For any listeners who are not familiar with that book I guess for most professional investors even, maybe if you're not in the oil market, you haven't heard of it. But if you are in the oil market, there's nobody who's anybody who didn't start their career reading Oil 101 by Morgan Downey, which is a book that really goes from upstream to downstream and tells the whole story of how the energy market works, from the logistics and the tankers all the way to futures trading.

It's an amazing book. There is a new version. We'll talk about that at the end of the interview. But Morgan, I wanna start with the big picture. Boy, Middle East I keep telling my listeners I think it's a really big deal, maybe more than the equity market is discounting. You're the expert.

You're literally the man who wrote the book on the market. Is this just another hiccup, a- another little Middle East skirmish, or is this a significant event in the history of the oil market?

Morgan: This is the significant event. The next 50, 100 years whenever the next history of oil over the next 200 years probably is written.

We are living in an event that people have modeled, traders have modeled it, risk managers have modeled it, the oil market itself has modeled it for the last 60 years, and this is it. This is the most significant event in the oil market. And over the last, s- since, probably World War II, to be honest.

Even it's greater than the 1970s crises. It's a larger, it's a larger event. And what's interesting is that a lot of things that people had presumed were going to happen when a situation like this occurs, this, the shutting of the Strait of Hormuz, have not happened. We haven't seen $500 oil yet, yet, because we're still in the middle of the crisis.

We're at 100, just over $100. And we also haven't seen a panic and a kind of, with equity markets are still relatively strong. So this is a crisis that everyone had worried about that potentially would happen. It's happened and is happening. But now A lot of the assumptions of how the world would react have not come to pass.

As I said, equities seem to be sailing along okay. Oil prices are a little bit higher, but not at crisis levels higher. It seems that the world's kind of taking this in stride, which is very unusual. The world taking this in stride is not what people would've predicted.

Erik: So why is that? Because as you say, this is, Strait of Hormuz closure has literally been the stuff of doomsday blogs. Yeah. It's what the doomers say, "Oh my God, Strait of Hormuz closed for a few weeks, you'd see thousand dollar oil," yes. Yeah it's been way longer than anybody...

And I used to get laughed out of the room for worrying about this because people thought it was a doomsday scenario that's never gonna happen. And even the people who were the biggest skeptics, Morgan, what they said is, "That can't happen because the consequences would be so dire that we couldn't, possibly let it go on for more than a few weeks."

Well- Yeah ... but it did. Nothing really that big of a deal has happened yet.

Morgan: Yeah. And I think a few key things have mitigated, at least in the short term, and we're s- we're over two months into this situation, but a few things have happened. One was the huge strategic petroleum reserves releases around the world.

So you had the US SPR release a whole bunch of other countries within the IEA, the International Energy Organization released SPRs. China has a big SPR, their own domestic SPR. So there was a large short-term dumping of oil, physical oil into the oil market. And oil is a very unusual commodity.

It's not unusual. It's like any commodity in that the oil industry hates to carry inventories. Carrying inventories, storing oil in tanks or in pipelines or ships or whatever, it costs money. What the oil industry loves to get it out of the ground and get it to the customer as quickly as possible.

It's never really that profitable to store oil. So the oil industry tends to try and run inventories, stored oil as lean as possible. That's always been the case for since the oil industry began 150 years ago. And that lot of oil from these strategic petroleum reserves that's a lot of oil for all of it to be released in one month into the market.

It's like someone a snake eating an antelope. It's kinda stalled- the rally in oil markets because the oil market kinda has to digest that big glut of oil from the SPR releases that were released in one glut. So that was the first thing that stalled the rally.

It stopped it immediately. It was like throwing water on a fire. It just quenched it. The challenge is that there's only so much SPR out there. There's not... this is not an indefinite situation where you can keep dumping SPR into the market, but it did stall that initial rally.

And then in addition to that, you had some demand reduction. You're-- when you went from, we were, before the crisis, in the 60s basis WTI or even Brent crude, and now we got up to 100. Some demand did fall off. It wasn't a huge amount, but a little Usually it's jet fuel is the first thing that reacts when oil spikes.

So jet fuel demand fell off a little bit enough that it took the edge off the rally. So you had the SPR release, you had a little bit of demand destruction. Demand destruction in oil, as I said, jet fuel's one of the first to go because it's it's discretionary. People just choose n- to drive to their vacation or take a train rather than fly to the other side of the world.

So jet fuel, there was a little bit of demand destruction, and then you had, so you had the SPRs, you had a little bit of demand destruction And then you had a what I think is the kind of the hidden thing that has occurred in the oil market over the past five years in particular, is that over the past five years, we had a huge increase in efficiency in inventory use across the oil industry, and it's one of the most boring things to talk about.

If you look at BP or Shell or Exxon's financials, deep in there, they'll talk about working capital usage and that they've gotten 20, 30% more efficient in terms of their working capital usage, which is basically a lot of its inventory, storage oil. They've reduced their need to store oil by 20, 30% over the last five years.

A lot of that is due to they've now got sensors, electronic sensors on pipelines and tanks, so they get real-time data on inventory levels. It used to be 10 years ago, 20 years ago, a guy sticking a stick into a big tank. It was literally that basic, even as recent as 10, 20 years ago. That's all gone now.

It's all electronic. You've got much better demand forecasting models so people can... the oil industry is a lot of really lo- small local markets. It's a big global market, but at the end of the day, there's usually this airport, this tank terminal, this gas station. It's a very local market. And so the oil industry has become much better at forecasting local, hyper local level demand.

It's almost like Amazon does delivery. The oil industry has applied that same big data technology to inventories such that the world has rounding the numbers here, 8 billion barrels of oil in storage globally in SPRs and commercial storage. 10 years ago had 8 billion.

Today, it has also 8 billion, but the world has loosened up the need for that 8 billion by about 1 billion barrels. So there's a hidden kind of extra availability of oil in the market in these inventories that has been loosened up by just technology improvements over the past five years. And if the evidence for this is you have to just look, just search for working capital of BP.

They announced their last year they had, as I said, reduced their inventory levels by 25, 30%. And so that I think has been a hidden reason for oil kind of being a little bit looser in terms of this not rallying to $200, $500. And then finally, another reason is there was a lot of oil in floating tankers.

Everyone points to it. There was 150, 180 million barrels of Iranian oil because Iran, remember before this, the crisis, it was sanctioned and via mostly US sanctions. But that meant that Chinese refineries and a lot of refineries around the world, they would buy the occasional cargo, but they were very reluctant to deal with Iranian oil.

So Iran had to store all this They kept producing oil and they just put it in in tankers offshore Malaysia and offshore Singapore, near Singapore, and a lot of that oil now is being drawn down. So there was a, there was a little bit of excess... not a little bit, a lot of excess supply in the market.

And so all of that together combined, the big SPR, that was like a first shot that, that really took the energy out of the rally. And the world has got probably another one or two slugs of SPR releases that could hit the market if governments decide it over the next month or so. But and then you had the inventory efficiencies, you had the floating storage that Iran and a few other countries had.

And so you had all of these kinda combined to take the edge off the rally and the oil price rally, but the underlying crisis is still there. And, one of the, one of the things when people talk about a crisis, everyone thinks about we're gonna run out of oil, like as in tanks will go to tank, empty tanks.

That doesn't happen. The world is a f- big... The oil world is a f- a big floating, people make the analogy of it's a big floating bathtub in that no one's gonna run out of oil. The world is still producing w- we, before the crisis, 105 million barrels a day. Now it's 95 million barrels per day, roughly.

And so the, but the world is still producing 95 million barrels per day. It's still a lot of oil being produced and refined. It- all that's gonna happen is that oil prices now we're in a situation where we kinda have to go up, unless the crisis ends today, and even if it ends today, we, this may happen.

Oil prices have to go up to kill more demand destruction. And demand destruction, the oil industry started in 1859, demand has only fallen four years in all that time. So over a hu- almost 160 years, oil has only fallen, demand year on year, even throughout wars, World War I, World War II, it only fell in 1973, 1978 2009, the housing crisis, and COVID.

Four times over the last 160 years. And Prices are gonna have to rally to cause that fifth year of demand destruction in the oil industry. Oil is very inelastic. People need it to drive to and from work, to and from school. It's one of those things, it's an essential of modern life, and it doesn't matter how, "Green People" say they are you buy anything, literally a pint of milk in a, or gallon of milk in a shop that everything is transported via oil.

So it's in everything that people touch. And so- Price has to go a lot higher to kill demand. As I said, d- jet fuel is the first thing to, to the first cookie to crumble in the oil demand sequence. The next one tends to be gasoline for cars and then diesel for trucking and so on.

But it's basically, it's starting to happen, but it needs to happen much more severely. And, so we're not gonna hit a situation where tanks are empty, but we're gonna have to hit a situation where if this goes on, we are going to go to 200-plus oil if this goes on. We're currently the middle of May or towards the end of May here, 2026, and we're two months on-- more than two months into the crisis.

If this goes, this can't go on for another month when we can have a few slugs of SPR releases, but this is not sustainable without, with $100 oil. We need oil prices... Either two things have to happen: oil prices have to go much higher, 200-plus probably, to kill demand, or the crisis ends today, and then even if the crisis ends today, there's gonna be a wind-up time of people ha- all this production in the Middle East has been shut in.

It has to be restarted. Tankers have to start going in and out through the Strait of Hormuz. So there's gonna be a recovery time and and longer term, five years plus I think the Strait of Hormuz is going to be removed as a choke point for the world oil market in, within five years.

Every Gulf producer, Saudi, UAE, all of them Iraq, they're all going to start building these pipelines, overland pipelines to avoid the Strait of Hormuz regardless of cost, and the Strait of Hormuz is not going to be an issue in five years plus. So this is a five-year issue. Iran played their card. They choked the Strait of Hormuz like everyone worried about for years.

They've played that card. Now, all these pipelines are gonna be built. It's gonna cost $50, $75 billion. And put this in context can this... Is that a lot of money? Saudi Arabia on that NEOM project, that kind of desert city that they were gonna build, was gonna be $1 trillion. So 50 to 75 billion, yes, it's a lot of money.

In the Saudi oil industry, no, it's not a lot of money. It'll add $1 or $2 a barrel onto the cost, and for the Saudis and others to avoid using the Strait of Hormuz within five years, they're gonna build these pipelines. So the Strait of Hormuz has got five years left as a choke point. Beyond that, it's gonna be replaced by pipelines.

It is... There-- These pipelines are already... Drawing boards are, have already been drafted to get these things built. So it's a certainty that that strait is, within five years, will no longer be a choke point.

Erik: Okay, so recapping what we've discussed so far, it is m- fairly easy to understand how we got to where we are today, which is we came into this crisis with a fairly significant supply surplus.

Then as we got into the crisis, there was a whole bunch of SPR releases. There's a whole bunch of floating storage. For a while, Iran was exporting a lot of its own oil. China has a huge inventory o- of SPR and commercial storage. It all makes sense, but the question that's in my mind now is that explains how we got six weeks farther into this than I thought possible at these prices.

How short is that fuse from here? Is this something where, oh we could still go on for three more months and then it's gonna really start to get bad? Or are we down to just a matter of weeks or less before this really turns into a major big deal?

Morgan: We're down to weeks. Yeah, it's really become that simple.

Erik: And is it linear? Is it... Should we expect prices to gradually start creeping higher and higher? Or is this something where one day an event happens where somebody says, "Oh my gosh, we're completely out at location X," and that's a Bloomberg headline, and people panic and, it all happens at once?

Morgan: I think when people say they're gonna be out, I think that the only places that will be out of storage will be those places that set the local price below the international price. So oil will be still available. As I said, there's still 95 million barrels per day produced outside of, that's available to the global market.

There was 105 before this crisis, and so 10 million barrels a day of inventory, or sorry, of daily production has to be killed. That demand has to be... And the only way to kill demand is higher prices. So we're gonna see $100. It still doesn't... it reduces demand a little bit, but it doesn't reduce demand enough.

We're going to have to see a lot higher prices before to c- to reduce demand by 10 million barrels per day. And w- what I think is gonna happen is that you're going to have a situation where there will be some sort of negotia- not negotiation, some sort of either stalemate where we get a a kind of a ceasefire-type situation, and the strait kind of opens, but it opens, I think, slower than people anticipate because you're going to have tankers willing to transit that strait, and that's a lot of tankers every day.

It's 100-plus tankers that go through that the Strait of Hormuz. And so you've got to have a situation where- the process has to be restarted, and that restart process y- your listeners are of course very familiar with the fact that these tankers from the Middle East to China, Middle East to Japan, they take a month to, to make that journey.

So this process is like a flywheel. Once it stops, you... it takes a month or so to get back up and running, probably even longer, maybe two months. And even then, even if the tankers start moving a lot of this production is shut in, and so that production, when it's shut in, literally people have turned valves at the wellhead to stop oil coming out of these wells.

And those valves have to be turned back on. The whole process, oil is a flow type process. Everything is always in movement. These liquids are always in movement. These things have to be restarted as well. And the hope is that not much damage has been done to these, this production, these wells by shutting in production, but there's always some damage and always some unknown when that restarts.

And so that whole process, like a flywheel, is gonna take one or two months to get back up and running. So even if today, m- end of May 2026, the process starts up and running, we're into June, Jul- end of July before we've got a full even close to recovery. So This is gonna take a bit.

It's gonna take a while, and I think that what's gonna happen is that people will realize it within... people are familiar with equity markets and foreign exchange markets where you can literally print paper or print equities, issue stocks, and it's immediate. Just it's an electronic transaction.

Oil is not like that. It takes... there's a a, if it's a physical process, it takes a while to get started and stop. And I think that the markets have become have think that this is like a COVID-type situation where the government will print money to get the whole process started again.

It, that doesn't help. It l- it helps certain markets, but it won't help in oil because this is engineers have to get literally on the ground, start up production. In Qatar, there's a lot of natural gas there, LNG, liquified natural gas that facilities have been damaged and might take three or four years to repair if they can even get the repairs done in that time because parts are, they, these turbines are very are being demanded by a lot of industries, including data centers.

But I think that the market has been, less panicked. No one likes to panic in any situation. The panic is never helpful. But I think this is, we're in a crisis where this market is unusually calm. And as I said, there's, and you mentioned, there's a bunch of reasons why we've haven't rallied fast, the SPR dump, the inventory overhang, all of these things have happened, but I think that they've lulled the market into this feeling of safety that is not r- reality.

We're still in this crisis, and it's a it's like someone had a heart attack, and they've made it to the hospital, the emergency room. They're still in the middle of a heart attack. It's one of those w- where we s- even to get the heart started and the blood flowing again, we still need to get that the, it, that there's still a risk in this whole situation. And I would be shocked if we're not over $150 within a month. It, I think this is gonna take a lot longer, even if it, as I said, even if peace is declared today, it's gonna take a lot longer to restart than people think for confidence to restore in the oil market itself and for all those valves to be turned back on, and for...

and it's n- when I say turn the valves back on, it, they're not, I'm simplifying it grossly by saying that. You've gotta have a whole situation where a lot of these Saudi wells, these reservoirs are water-flooded, where there's water pumped on underneath the oil to help keep the pressures in the reservoirs c- up so the oil comes out of the ground.

And these, it's a, there's a, an engineering, very complex engineering process. It's not just turning a valve behind the scenes to produce all of this oil, and that process has never really been shut in to this extent ever. And there's a lot of gonna be, a lot of unknowns that are gonna be f- discovered over the next two, three months, four months that could really complicate the restart.

So we're still in the middle of the crisis. That's, one thing to, to think about in terms of it... We should we need to c- create demand destruction to deal with the current crisis. But then going forward, the restart process, I have this feeling it could take a lot longer than people anticipate.

And so I... my personal view is I think we stay at $100 plus. People think we're gonna collapse immediately following the strait reopening in two or three months' time. I think we stay at $100 plus for a year unless there's... barring an economic, global economic recession or anything like that.

I think that th- this risk premium for... that's gonna, is gonna stay there because even if there's a p- peace declared today, there's gonna be the risk that Iran falls back and the crisis restarts in another six months' time or four months' time. So I think that the current crisis, we need higher prices immediately to kill oil demand.

 secondly, the r- the restart process, I think it's gonna take a lot longer, six months to one year, maybe even longer. In some cases like the LNG in Qatar, it's gonna take four or five years because engineering facilities were damaged by drones. I think it's gonna take a l- a lot longer than people think.

And so I think that we may see $100 plus oil, barring a recession or anything like that, $100 plus oil for a year or two, and which is... that creates opportunities for other parts of the oil industry. The US oil industry, Permian producers are having a great time right at this moment.

Erik: Let's talk a little bit farther out then about how... beyond just the immediate recovery, how the global energy markets evolve afterwards, because it seems to me we've already seen some pretty strong signals. United Arab Emirates was probably half of global spare capacity before this crisis.

Pulling out of OPEC seems to me like a really clear signal that their intention is gonna be to pedal as fast as they can and just produce as much oil as they possibly can as soon as this is over. First of all, would you agree with that? And if it is, doesn't that kinda leave us in a place where, okay, then Saudi Arabia would be the only remaining spare capacity?

They're not gonna just, sit this one out and let everybody else make the profit. They're probably gonna produce as fast as they can too. So doesn't that mean that although maybe that will help bring the prices down and the supply back online, doesn't it mean that we end up with no spare capacity at the end of the day?

And then, okay we'll just make more. Wait a minute. There's been underinvestment in the energy sector due to ESG for more than a decade now. It seems to me like Maybe for the next, decade or so, we've got an investment deficit-driven energy crunch. Is

Morgan: that realistic?

I think it is realistic. I think you've got... The, going back to the UAE, them leaving OPEC UAE was always-- Everyone in OPEC except for-- OPEC is Saudi Arabia. It always has been Saudi Arabia. They've been the big boy on the block in terms of cutting production to maintain prices high, at a higher level than otherwise would be.

So Saudi has always been the real OPEC. All of these other countries, O- UAE and everyone else, they've been cover to make it seem like there's a global consensus. It's one of these, it sells much better when there's a group involved. Even, it's a cartel.

That's what... They're a price-setting cartel to try and keep prices high. So it's it doesn't sell well to the consumer that they're trying to keep prices high. That's why OPEC exists. So Saudi has been hiding behind all these other countries, including UAE. UAE itself, they've been they've had, their, their politically, they're, they've had issues with Saudi Arabia over the last t- for a long time.

They're a much more Western-focused entity, with Dubai, the success of Dubai in tourism and all of that. So they've been much more they're probably 10, 20 years ahead of Saudi in terms of diversify- trying to diversify their economy away from oil. And so I think that them leaving OPEC, it, it was it was always something I think that the oil market suspected that they would do. But now that they have done it yeah, they're gonna produce us flat out just like anyone else. They're gonna do they have no OPEC constraint. So it's gonna be, Saudi is gonna be the only player left with major spare capacity in OPEC.

So the dynamics of OPEC in terms of oil prices and that, I think that at a grand level, I don't think it's gonna change the long-term outlook for oil in terms of Saudi was always the big br- big brother in OPEC. It's gonna continue to be the big brother.

Yes, UAE left, but I don't think it's as big a deal as the market kinda as it's not gonna be a big deal long term. Going to the the thing you mentioned about longer term and ESG and investment in oil and gas pre- Three months ago, we were at $60, give or take, WTI. The marginal producer in the world was the US Permian producers, all these fracking wells in West Texas.

They were the marginal production that grew over the last 10 years. I- when I wrote Oil 101, that was published in 2009. Since 2009, what's called conventional oil production, as in you drill a hole straight down... i'm simplifying grossly here, but you drill a hole straight down and you, you hit a reservoir and the oil comes up by itself.

That production has stagnated. It's gone sideways over the last 15, 20 years. All of the growth in oil supply over the last 15 years has been from fracking, which is a US phenomenon because it's more kind of a manufacturing type process. You drill, you move the well on a pad the drilling rig 50 meters, you drill again, you frack, you drill sideways.

All of these kind of technologies have only been developed in the last 15, 20 years. So since 2009 oil production has come from this fracking and horizontal drilling as well as heavy oil out of s- out of Canada. Those have been the two major supply areas over the past 15 years. Both of those things are high cost.

They're very capital intensive. They're People make the analogy that they're akin to manufacturing because as I said, you used to drill a well, and it would be the only you would drill on a, in, within 40 acres. Now, you drill a well, you move 100 meters, you drill another well, or 50 meters, you drill another well.

So it's it's become much more capital intensive, but that, what that means is that the the marginal cost of production over time ha- is now 60, $70 per barrel for crude oil. So as long as we stay above $70, give or take WTI crude oil the oil industry can fund itself. Can, at $100, the oil industry is actually a little bit, it's decently profitable.

At 70, some w- marginal producers start shutting in production. In terms of the ESG and the investment against energy growth, w- a lot of that that ESG initiatives, those initiatives were to stall oil production, stall nat gas production. Those ESG kind of initiatives have fallen out of favor and the oil industry has just moved on beyond them.

It's at $100 oil as we are today, give or take, and the oil industry doesn't really... w- the oil industry is still very conscientious about pollution and making sure the environment is taken care of. It's not a, it's not a careless industry. But those kind of ESG where people were trying to reduce energy production, those kind of initiatives I think have stalled.

There's still a remnant of the, philosophical objections out there. You've got now a big push, you may have seen in social media all these people complaining about AI data centers, and everyone's couching it in, "Oh, they're too noisy.

Oh, they consume water." They don't consume water. They actually have closed systems, or they don't they don't... They recycle their usage. People say they're burning nat gas and other fuels. Yes, they do. Yeah, they do. That's a reality. The world's economy does need energy, and AI data cen- data centers are, 4% or 5%, or will be in the next year or two of global oil consumption or global nat gas and power consumption.

But that kind of ESG anti-energy underpinning is still there. It k- morphs into different forms. It's currently morphing into an anti-data center initiative. I think that what happens is that, people forget because people are disconnected from where their energy comes from.

Oil, nat gas and coal are still 80% of the world's energy usage. And for good or bad, for good, here we are talking on the internet on other sides of the world and listeners are listening in from all over the world. The energy from oil, nat gas, and coal enables this situation where we are living in a safe, much safer more knowledge is available type environment.

If you cut energy supply, cut nat gas, cut oil, cut coal you're trying to stall a lot of the global economy. And people can be disconnected from where basic things come from, even their food. A lot of food we've discovered from the closing of the Strait of Hormuz, fertilizer also comes from nat gas.

It is the famous nitrogen creation process, and it relies on cheap natural gas. So a lot of fertilizer a lot of plastics, a lot of the energy to move things around the world, food and tractors and everything like that comes from energy, from oil, nat gas and coal. And if you restrict those energy sources.

And if you try and go for just wind and just solar, they're good. Wind and solar, there's nothing wrong with them, and they have their place, but they don't meet all of the flexibility and the use cases. You can't make fertilizer from solar yet. Maybe one day you... someone will discover something.

But one day, the oil and nat gas and coal they are essential to, hydrocarbons are essential to modern life. And, things like nuclear, they're also very useful and should be, I think, myself personally, I think should, they should be expanded as a part of renewables ecosystem. And but I think that the oil industry at $100 oil, I think is going to be okay.

I think at 70 and 60, which it was a few months ago, it was not struggling, but it wasn't it wasn't thriving. So I think at $100 oil, the world in the next few years will get enough oil out of the ground and nat gas to enable and enable growth to continue. And an interesting kind of side note is that Saudi Arabia, they their famously cost of oil production is five, $10 a barrel, and here we are at $100.

Unfortunately for Saudi, it's their only industry pretty much, and so they're... If you factor in all of their government welfare and costs like that, military their cost of production goes up to $95. So Saudi is, at $100 oil, is break even. So I think here we-- That's, it's interesting that we got to $100 oil.

I think this is a spot where consumers can tolerate, producers can make a decent profit and g- and bring additional barrels onto the market. But in a crisis, $100 oil is not enough. We need to get much higher quicker if this continues, if this crisis continues. I think it looks like it, even if it's resolved, this is a crisis that's gonna take a while to restart.

I think we're gonna see $150 plus oil over the next month or two regardless of what happens, even if there's peace in today. I think that we're gonna, we need to slow down demand, oil demand a little bit by 10 million barrels per day, 10% roughly over the next few months or weeks at least.

Erik: I agree with you, but at the same time I'm very concerned because from a macro perspective the world could easily tolerate a spike to $150 oil that lasts for a couple of days.

But if we're talking about months and months of $150 oil, I think that's a, a global recession to depression kind of outlook.

Morgan: So- it is. Oh my gosh. The a- the analogy of that situ- or the comparison of that is the housing crisis 2008. People forget the, in the run-up to the 2008 housing crisis, one of the things that pushed the market, the macroeconomy over the edge, was we were at $150 WTI.

We were at, from 2005 to 2008, the oil market moved Up $100 a barrel, and just right before the crisis in the summer of 2008, we were at 150 plus per barrel oil, and that was the final straw that pushed the market over the edge. And right up to the middle of 2008, everyone knew the housing crisis was highly leveraged, even though people say, "Oh, I, they didn't know it was coming," and whatever.

It was... Everyone knew that the market was very leveraged. But the market still hummed along right up until oil got to 150, and then that was it. That money has to come from somewhere. People, only have so much spending money or disposable income, and if they have to choose between buying a, going on vacation or buying a new computer or a new phone or driving to work, they're gonna...

if it's $150 oil, which is, $5 plus, $6 plus per gallon gasoline it's, they're gonna choose to drive to work because it's an essential. So unfortunate thing about $150 oil will kill the economy. It it, there's no doubt about that. It's even if it's over for a few months, it's gonna really hurt.

Erik: It seems to me the critical question to ask then is if what you've said so far basically leads me to conclude that the prices only have to stay super high for long enough to cause about 15 million barrels per day of demand destruction. Okay, can the global economy tolerate 15 million barrels a day of demand destruction because, okay, we'll just carpool?

Or is that enough of a hit in... it's about 7% or 8% of global energy consumption. Can you just, cut that back and everybody carpools to work and it's okay? Or is that just a shutdown kind of event for the global economy?

Morgan: I think it's gonna be a shutdown type event. I don't think it's gonna shut down, but it's gonna be an event where marginal Businesses that rely on low oil prices, tourism even delivery...

everything is delivered, you buy anything on the internet these days, it comes by oil. People, they forget it's a diesel truck. Maybe the last mile is electric, but the big long-haul trucks that drive on highways, they're all diesel. Trains are diesel, train aircraft are jet fuel.

And that, getting that 10 10 million barrels per day cut in demand destruction, it's going to be very painful because as I said, it's oil is inelastic, it's an essential of daily life. It's one of the last things people cut, and so the only reason they cut consumption is because prices get too high.

And it's gonna be, I think it's gonna, it'll be a little bit painful. It's a terrible thing to say, but it's, it doesn't happen that often in the oil industry. As I said, it's only happened four times in 160 years where oil demand has fallen year on year, and those four times oil prices had to rally a lot.

In going back to 1973, oil prices went up fourfold, 400%, which, in the space of six months. So we went from back then, these are pre-inflation adjusted dollar prices, but we went up 400% within six months. That was the first kind of recent times oil crisis. And that was a, it caused demand destruction.

And the one thing I would always mention to people is that when they think about the 1970s, 'cause they're the kind of the classic oil demand destruction, 1973 and 1978. It was the OPEC and the Iran situations in ni- in the 1970s. And people also have this image, the grainly, grainy low-res images of lines at gas stations.

And the interesting thing to always note is that the only, one of the few places in the world that had lines at gas stations was the US, and the reason it had those lines is that US government in, as a reaction to the oil crisis in the 1970s, the US set the price, the domestic price of oil in the US below the international price.

And so it created a shortage because if you're a, an oil producer in Saudi Arabia, you wouldn't send your oil to the US because the price was capped. And so the lines were all artificial. They were government-created lines in the 1970s. So there's-- there will be no shortage of oil in this crisis. There will be no lines or shortage of oil if you have no price caps.

The flip side of that is that you might have $200 per barrel oil with no lines. And so for a lot of governments will feel like they need to intervene. The problem is oil is a global market. If you put a local price cap, you're just gonna cause lines in your local country. So if Germany puts a price cap or England, UK puts a price cap, there's gonna be lines in that country alone.

Everyone else will be fine. They'll be paying $200 per barrel, but they'll be-- they'll have supply. There's that interesting dynamic of comparing... Because this, in this situation, every oil analyst, including myself, we look at back at history and say, "What happened in the past?"

This time is different. There's a whole bunch of different dynamics are happening right now. But the, the-- a few lessons to be learned from the 1970s was, one big lesson is, if you are a government, do not cap your local price of oil. You are gonna cause a local shortage in your market. That's the one big lesson that I would encourage if you're a government-influencing person, do not set a price cap on your local market.

It's, it backfires big time

Erik: I w- I would counter that with I can't remember if it was Warren Buffett or Charlie Munger who said the the biggest lesson that history teaches us is that people don't learn from history. And I don't think governments have learned their lesson or are going to learn their lesson.

I predict that they... There will be price controls, and they will cause all of the adverse consequences that you're predicting. But that doesn't mean they're not gonna do it.

Morgan: Yeah. There are price controls out there for certain goods. India has famously price controls, and they're already finding shortages of of oil.

Allowing the free market to operate, it feels sometimes it gives people a sense of there's no... You're losing control because the price is being set out there in the market. Sometimes it's al- it's the... not sometimes, it's almost always the best thing to do, is just let the market do its thing.

It... Prices will, yes, they will have to go higher to kill some demand, to sh- create some demand destruction. But y- at least your, if your local population wants to buy oil, it's gonna be available. It's gonna be a little bit higher price, yes. But there's no... Apart from Saudi Arabia, they really are, with their spare capacity, trying to control the price of oil, the marginal price of oil, and all these governments with their dumping of the SPR into the market in a very short period of time, they're trying to keep the price down.

So there is, quote-unquote, "manipulation of markets" going on, but there's no nefarious secret group or country or company trying to do. I think everything's pretty relatively transparent, so it's just a matter of, look at history, look what happened in the 1970s. Don't put a local price cap.

You're just gonna kill your local economy. It's basic common sense. And yeah, unfortunately, as you said, some g- some governments fail at basic common sense in history.

Erik: Let's come at this from another angle, because if I think about the consequences of everything that you're saying, what you're really saying here, Morgan, is It's not a question of prices might rise, prices might not rise. It's a question of prices must rise enough to cause 10 million barrels or about 10% of global energy demand. We have to see demand destruction on the tune of approximately 10% gross of total global energy production or energy demand.

Yep. When's the last time the world went through a 10% reduction in energy demand and- Okay ... or came anywhere close to it? Yeah. And what happened economically then?

Morgan: So here's where, in, on trading floors and hedge funds and and basically s- research firms, they always try and back test when something like this happened before, what happened in the market then.

The challenge with that is that sometimes the situation is very different. So this is a supply side shock. There's a production has stopped oil coming to the market. The consumer still is out there doing okay. The most recent comparison was COVID, unfortunately, was 2020 when demand, because of the shutdowns and lock-ins demand collapsed by a lot, where it was, 20% at one stage over the, month to month in early 2020.

And so that was the last time oil had a a, it's... That was a consumption side shock. W- One of the very few consumption side shocks that happened to the oil market ever. And in that situation, we had the oil market became, discombobulated. I hate to use that word because it's a strange word, but we had WTI priced at negative prices because storage tanks became full.

It was like the opposite of the current situation in that we had demand collapsed because everyone stopped flying, stopped traveling. Every, the world kind of transport kinda shut down for a month or more than a few months. And oil inventories filled because the oil is like a flow. It's like a human body.

It's as I said, the oil industry doesn't like to store oil. It likes to keep everything flowing through the pipes, get it to the consumer, drill more, get it to the consumer. And so when COVID happened demand stopped. The oil industry is still pumping, and 'cause the oil industry hates to shut in wells because it causes all these down problems.

So that was the last time we had a kind of a 10% or greater than 10% fall off in demand. Demand recovered rel- very quickly in COVID even. But the prior situation was 2009 the financial crisis, 2008, 2009. That was the prior situation where... So 2020 COVID, 10% drop. 2008, 2009, 10% drop in oil demand.

And then before that it was the two 1970s shocks, the 1978 Iran, w- the Iranian revolution when the Shah, which was the he was a US style king installed there in the 1950s, but the overthrow of the Shah and the installation of the Islamic regime. And then 1973 was the the Arab oil embargo, so those four situations, COVID 2020 2008 the f- financial crisis, and then the two '70s shocks. Those, over the last 60 years, those are the four data points y- as an oil analyst or a hedge fund, you gotta try and back test and see, okay, when these things happened in the past 60 years, what happened to the rest of the economy?

In every situation equities took a huge dive immediately. So 2008, obviously the 1970s but also equities struggled in the 1970s. The only situation where equities rallied was COVID, and we all know what happened in COVID. There was the money printing and and the stimulus checks went out.

And so I think one of the big reasons behind equities being so strong into this crisis is that COVID stimulus is still fresh in people's minds. And everyone thinks that if this thing gets bad enough, as in this crisis goes on for another month, oil goes to 150, we may have another stimulus. It could be just turn on the printing presses.

It's inflationary and it comes out in the wash in the end. This money printing doesn't come out of nowhere. Everyone has to pay for it in the long term. But short term, that will have a big boost to equity prices. If you put 10, 20 grand into each family in the US or in Europe or everywhere around the world because of an oil crisis, I think that there's a little bit of thinking that equities, we're going to see a big bailout in terms of a stimulus if this gets worse and if it gets worse fast.

We may see, I think the equity markets are looking forward saying, we're going to have a COVID-style bailout if this thing gets really bad. And it's sad that the world has that kind of view now that, the printing press is going to save us or save equity markets. But it did during COVID.

And, people have got that fresh in their memory. That was only five years ago. I think that people think that if this oil crisis gets bad enough, equity markets will be bailed out by the printing press and a stimulus. That's, I think, a lot of what's in addition to the SPU dumping and all this kind of inventories in terms of a lot of the oil market itself is the sting has been taken out by shoving so much inventory into the supply chain over a period of weeks that the oil industry is struggling to manage these SPR releases.

I think that similarly, I think people are looking at equities and saying, hey, if the situation gets bad, we'll just do a COVID-style print and give everyone 10 grand and 20 grand and they can go off and buy tech stocks or- Fill up their tank once ... or fill up the tanks once buy some cryptocurrency and and make it 2020 rain again.

Erik: Let's go back to the two most recent major data points, which was the 2020 COVID crisis and the 2008 into 2009 great financial crisis. How long, how many months did demand destruction stay above 10% during each of those events? And how many months do you anticipate, e- even if we were to open the Strait of Hormuz next week, how many months do we have to have that 10 million barrels of demand destruction in order to balance this market?

In other words, put those two on a scale. Is this half as big as 2008? Is it just as big as 2008 in terms of how many months of more than 10% demand destruction it's going to involve?

Morgan: That's a very good question, and the interesting answer is it doesn't take very long at all. It takes... Oil gets to 150, and oil will move there fast.

It... People think we're gonna stay at $100 for a long period of time. Give the market a three or four weeks from now, if we're still here in the middle of June that's, we're gonna get to 150. If we're in the same situation, strait is closed, as I said, I think that even if peace is declared today, I think this is gonna be...

the restart time is gonna force oil to get to 150 plus, even with the restart today. And so it doesn't... And then going back to comparing it to 2008 and 2000-- and 2020 oil didn't have to... On a, if you inflation adjust the price level back to today's money, oil prices only have to stay above 150 for a few months, and you get that destruction.

People stop. A lot of discretionary consumption just falls out of the market immediately. Because when you think about it, it, people start canceling vacations. They don't book long trips. They stay local. They will cut back on other things. People will still buy oil, but they will buy less of it, and they'll be more conscious of, consumption that, that involves oil s- spending.

And so it doesn't take that long. I think in 20-- in 2008, I think we only stayed above $150 for a few months. I think it was, it literally was two or three months. And in 2020 oil demand fell below 10%, and again, it was only a few months. And that-- 2020's a complicated one because there were so many...

It was in a very unusual situation with the stimulus checks and the whole f- obviously the situation. 2008 is the better comparison, and it only took about two months of $150-plus oil for-- in the middle of 2008, for consumption to fall and stall. And then obviously we had a- an equity crisis immediately around, after that.

So it basically this happens fast. And so I would encourage your listeners to, to be prepared for, if you're one of those things, even oil, oil companies fa- are famous for the fact of, they do stress testing of their portfolios. Banks do that now since the financial crisis also.

And but they basically I would-- if you have-- y- you should be stress testing your portfolio, not just in a negative way, in a positive way, because some things will actually become very cheap when you have $150-plus oil. I would be stress testing your portfolio for 150 to $200 oil happening over the next month.

What will you do when that happens? Because that is a more than 50% chance of probability of happening over the next two months, 150 to $200 oil. The economy's gonna take a moment, as in it's gonna react negatively, the macroeconomy, and it's gonna look bad. It's gonna look-- People will be starting to say really bad things about the economy.

We're in a doom-type situation. Equities might do okay in this because as I said the people are gonna think we're gonna money print our way out of it. It doesn't help the oil industry, unfortunately, the money printing, but it might he- help equity valuations and multiples might expand because of that.

But I would s- if-- as of today, the end of May 2006, I would be stress testing my portfolio for 150 to $200 oil within the next 30 days. And what will you do when that happens? Some things, airlines, a lot of the US airlines are not hedged. Some of the European airlines are hedged. A lot of them actually are Ryanair and Lufthansa and a lot of these guys.

But so you're gonna see a lot of these instru- interesting dynamics are gonna start to appear. Oil and gas producers in the US are gonna be-- are gonna have a really good summer. No one-- They're, they're normal people like you and I. They're not gloating over higher oil prices.

They would like prices to be $100 or $4 per MBtu for nat gas. People would like those prices to be their producers. Those producers are gonna look could be looking cheap today versus if we get to 150 to $200 oil 150, $200 oil is not sustainable f- over a longer period of time, at least today.

And but I would be stress testing my portfolio today in anticipation of this happening over the next 30 days.

Erik: On that uplifting note, we're gonna have to call time on this interview. I can't thank you enough, Morgan, for a terrific interview. But before I let you go, there's another piece of news in the oil market, maybe not quite as big as the Hormuz crisis, but close, and that is a new edition of Oil 101, the book that almost all of us read in the beginning back when it came out in 2009.

Why now, almost 20 years later? I don't think this was brought on by this crisis. You were writing the new book before the crisis hit. So why the new edition? What's new in it? And for those listeners who haven't read Oil 101, tell us a little bit about just the structure of the book and what it's about 'cause it's definitely the bible that everyone goes by.

Morgan: Prior to the first edition of Oil 101, I was an oil trader. I traded, I still do futures physical oil swaps, OTC swaps. So but I was-- I had to assemble all of my knowledge and as did everyone in the industry, from dribs and drabs. There was no single source where you could say, "Okay, I want to learn about shipping oil and pipelines as well as refining, as well as a bit of history and context," like a bigger picture, zoom up a little bit.

But still not in a dumbed down way, in a relatively, information intense way. And so I wrote the book I wish someone else had written. I had to-- I kinda had to write the book. I felt obliged to do it. And that was in 2009. And the oil industry in 2009, and so we're now obviously in 2026, 2009, fracking and hydraulic fracking as well as-- so back in the big recovery in US oil production as well as a whole bunch of other kind of developments like electric cars hadn't-- didn't really exist.

It sounds like a long time ago now, 15 years. And I wrote the first edition in 2009. It became-- it was- People bought paper books back then. People don't do that now . But p- it became a really-- it became a global bestseller. It was... Basically, you get a new trader on a desk, or you're starting a job in an oil refinery or an, a nat gas producer in the US, you get handed this book.

And it stood the test of time. It's-- A lot of it was, has been evergreen. But a few things did really need to be addressed in the second edition. One was the huge growth in US oil production. So That in itself was an interesting tale of how did that happen?

And it is actually a very interesting story. The whole backstory of how US oil recovery that had been a long-term oil production, had been long-term decline, how that turned around, and the US is now the largest oil producer in the world. And is a net exporter. That was 15 years ago, that was not the case.

It was not looking good. And a lot of this was turned around by technology. The oil industry is highly innovative. People think of NVIDIA and tech companies like that when they think of technology. The oil industry is a extremely technology-intensive industry, and which is the reason why the US has become one of the largest oil producers, if not the largest oil producer depending on the month at the moment.

And so that was one reason, just to cover the changing supply, including especially the US oil production growth. And the second thing was I wanted to make it fully electronic. So it's now, it's on... If you go to morgandowney.com it's there on the on the internet.

It's much more interactive. The charts... it's no longer just a book because things change so quickly, obviously, these days that it needed to be delivered in a different format. So the second edition which is produced tw- 2026 it has much more interaction.

Everything is interactive about it, as well as it enables me I have a chapter on the Strait of Hormuz crisis, and And I update it every day or two. It's allows me to talk about, how much inventory is in SPU or how much is being drawn down. So it's basically a modern delivery mechanism for the same book.

So you can still buy the physical book off Amazon and things like that. And it's still worth getting because it's, some people like the tactile nature of being able to flip to the index and look for a particular obscure word, like what does API mean or some acronym. And so physical book is still useful, but the...

You can just go to morgandowney.com and... Or just look up Oil 101, just Google it, and you'll find the book. And it's just a modern version. It just needed, to be more interactive, which is great. It enables the book to keep up with current, evolving situations like this the Hormuz crisis.

Erik: Okay, Morgan, and just briefly, tell me what is Boxwood? You're now a software guy.

Morgan: Yeah. So as mentioned, the oil industry is a very technology-focused industry, and Boxwood is a piece of software that oil and gas producers, so the people that get oil and gas out of the ground, primarily in the US they use it to manage their hedging.

So if you're a nat gas producer and you need to lock in $4 per MMBtu gas, you can use this software called Boxwood to help you get that overview and as well as detailed level analysis. So it's air traffic control for financial markets for oil and gas companies. So it allows them to make really fast-moving decisions and very smart decisions using the Boxwood software.

So it's like a tool used by the CFO, the CEO, the treasurer of oil and gas companies primarily in the US, but all around the world, and it's called Boxwood, B-O-X-W-O-O-D.

Erik: And again, listeners, the book is Oil 101. Your research roundup email contains a link where you can find both the Amazon link as well as a link to Morgan's website, which is morgandowney.com.

Patrick Ceresna and I will be back as Macro Voices continues right here at macrovoices.com

Erik: Joining me now is Simplify Asset Management's Chief Strategist and Portfolio Manager, Mike Green. Mike prepared a slide deck which only contains one slide, so I guess it's not a slide deck, it's just a slide. But boy, it is a doozy. You're really gonna wanna see this chart, so I strongly encourage you to download that to accompany this interview.

Mike, it's great to get you back on the show. I've gotta ask you, because you've always been a voice of reason in my investing life I feel like I did at the end of January, beginning of February of 2020. I thought there was just information so obvious that the market had to discount it, and it wasn't.

And I felt wait a minute. Usually, when you're the only guy who sees it, it means you're wrong. But boy, I was so convinced, and I'm convinced now. I don't think that the market gets it, that we've got a really big problem with energy flows, and it seems like, it's just another reason to rally the market.

S&P all-time highs. I don't get it. Help me. 

Mike: The good news is that rising energy prices increases earnings for the energy companies which have been powering the S&P. I'm totally joking when I say this. No, look, you already know what my answer is going to be. Unless the news meaningfully impacts employment, and therefore contributions coming from 401Ks or other equivalent strategies, I don't see any reason why the marginal pricing behavior for the S&P should change.

We have the mindless bid coming from the passive robot where money is flowing into 401Ks on a continuous basis and into retirement accounts. Nobody called Vanguard and said, "Change your allocation schema." Nobody called BlackRock and said, "Your model portfolios need to change." And as a result, they don't.

And so when you get a drawdown, as we had from the February 27th until basically the early April lows, that triggers multiple forms of rebalancing. The most important of those in terms of its initial implementation is gonna be a target date fund which uses a threshold level for rebalancing out of bonds and into equities.

Every time you see that anomalous behavior where equity markets are rising and bonds are simultaneously selling off aggressively, we'll hear all sorts of narratives about, the end of bonds, Etc. But the simple reality is that's just a portfolio that has allocations between bonds and equities that is rebalancing itself at a massive scale.

And unfortunately, that's what I think we saw. And I don't see any reason for it to change until unemployment begins to rise significantly, retirements begin to increase significantly, and that bid coming from the passive robot comes to an end or turns negative unfortunately, that o- that sounds like I'm bearish because I keep saying the markets are irrational.

What I'm reminding people is the Keynesian the Keynesian statement, "The markets can remain irrational," quote unquote, "far longer than you can remain solvent." We saw that play out fiercely in April, where hedge funds decided that they wanted to hold their favored names and instead increase their shorts.

And when markets reversed, we had an unbelievable amount of short covering. We saw fast-moving strategies like CTAs and to a certain extent, vol control strategies rapidly scale up their exposures. Risk parity had some leveraging up, Etc. So basically everything hit all at once. That's the chart that I shared with the listeners, showing that we had a record one-month flow into equity markets, and surprise, we had a record one-month performance in equity markets.

It had nothing to do with any thoughtful application. It had everything to do with positioning and with a mechanical bid. 

Erik: Let's talk then about what would happen next, because I suppose with the COVID pandemic, there was a brief little emotional freak out, but then the market looked completely through it, and we saw, as a result of a lot of money printing, a rally to fresh all-time highs right in the middle of the pandemic.

Are we headed into a situation where we do have a major economic dislocation? Things are shutting down all over the world because of an energy dislocation, which I think at least in some parts of the world, as far as I'm concerned, has to be inevitable at this point. Does that just mean that it's time to celebrate and rally to even higher highs on the S&P?

Because as Louis Gave said last week, it's probably gonna be other countries that feel the massive human suffering as a result of this, and not so much the bigger developed economies. Does that just mean S&P keeps going up from here? 

Mike: The painful reality is that as passive continues to gain share and it owns more and more of the market will behave more and more like a low float stock because Vanguard or BlackRock are not going to change their positioning unless they receive a sell order.

And so the simple, the simple math is this gets crazier and crazier. And y- I have to confess, like when I made that forecast, it was with some pr- trepidation because there's always periods of craziness in markets. It's hard to imagine an environment much more crazy than late twenty twenty-one, when people were receiving significant stimulus payments.

But even more importantly in that time period, they were getting their paycheck and they were staying at home and they weren't incurring all of the costs that I've identified in things like, my poverty line analysis like childcare and transport to work and fancy clothes that you have to wear to work, etc.

We all wandered around in our pajamas and decided to buy stocks with our spare time. The difference is this time we haven't seen the stimulus. What we're seeing is an increase in costs, and consumer balance sheets are significantly weaker, than they were in the '21, '22 time period when we suspended debt payments, etc.

But within the moneyed class, those who effectively have money and have the capacity to spend it we're not seeing much of a disruption, and I don't think we really will until the Fed ultimately begins cutting interest rates and reducing that income transfer to that, to that cohort.

it's a v- it's a very strange place to be, where cutting interest rates could actually be contractionary, because of the, the give or take ten trillion dollars in short-term instruments that are linking their payments to the Federal Reserve's policy that's created an extraordinary pulse of income that is really fiscal policy, but not identified as such.

Erik: Let's take a look at the sole chart in your chart deck, which is really staggering for me to look at given the news flow backdrop upon which it happened. Listeners, again, you'll find the download link in your Research Roundup email. Mike, what you're showing here is basically the biggest inflow ever in history, and you told me off the air, even though this chart only goes back to twenty sixteen, you said there is no prior example of a bigger inflow any time in U.S.

history ever into the S&P five hundred other than the one that's happened in the last month or so on the back of news that we've got a massive global energy dislocation, which hasn't quite hit the tape yet, but we know it's coming because we've used up that six-week lag of delivery times. We're burning into all the buffers of of s- spare oil that was sitting around in storage.

We're about to run out of diesel fuel and jet fuel globally and have a massive crisis on our hands, and that's been I don't wanna say the cause, but that has been coincident with the biggest inflow into the stock market in recorded history. Explain. It does sound crazy, 

Mike: doesn't it? It does. Pa- part of what I would emphasize on this chart is if you look through the discretionary portions here, we're really not capturing anything that is happening other than systematic flows.

And so I just wanna caveat that, y- we do see flows into things like SPY, VOO, and IVV on a discretionary basis, where people ultimately decide everything is great, we should buy back in But ironically, that was among the smallest parts or smallest contributors to this. So this was really a mechanical bid that was caused by CTAs trend following strategies, basically having to rapidly reverse their move into a net sale.

They reversed that within a month at a pace that we have candidly never seen before. Vol control strategies. As volatility retreated and never really hit the realized levels that the implied volatility was pricing, we were emphasizing at Tier 1 Alpha, where I shared the chart from, that, we were behaving like a market that had already crashed.

People bid for protection, the discretionary bid was there, and it didn't materialize, and so they were forced to cover shorts. They were forced to cover their protection. That led to a collapse in the VIX. The VIX itself then becomes a profit center as people short the VIX, creating a synthetic long.

All of this has no real thought behind it, right? That's the frightening part of this, is that I don't think it's that people are looking at your analysis and saying, "It's wrong in principle." I think by and large they're saying the market is telling me it's wrong," right? And that means that it's wrong, at least in the short term, until it actually starts to hit the employment numbers, until it starts to actually hit the flows into the market.

But, the the machines did what the machines do. 

Erik: Okay. Now, before the inflow happened I see what looks to be the fifth largest drawdown or outflow from markets. I assume that was the buildup to this current energy event that caused that. So you're saying the market correctly discounted what everybody knew was coming, then because it takes six weeks to two months for big ships full of crude oil to transit the entire planet the algorithms and the CTAs didn't really build in that lag effect.

So they're recovering and basically going to massive inflow into the market because the market has proven wrong the prediction that we're gonna have a big energy disruption, or at least that's what the algos think is going on, and that's the reason for this? Yeah. Is that 

Mike: really it? With the exception of the thinking part, right?

They are just mechanically tuned, so a trend following strategy will take consideration of volume and volatility in establishing the trend But most importantly, they ended up getting short, right? They did exactly what you would expect trend following strategies to do as we flattened out in 2025 and basically made no real progress for an extended period of time.

CTAs began to take down their positioning. As we sold off, they increased their net short positioning. And then as the market reversed rapidly, they were forced to cover that, and as it continued to power higher, driven by the inflows in 401Ks, 'cause once the discretionary trader has sold their shares remember the line from speculation or reminiscences of a stock operator, "I'll lose my position," is why he didn't want to sell in a drawdown because it was a bull market.

CTAs are very similar. Hedge funds are very similar. Cover the position and ask questions later. You can construct a narrative at any point in time, and candidly, I think that's what we've by and large done. 

Erik: Okay, what happens next? 

Mike: The way we're looking at it i-is that ultimately those systematic strategies have now returned to basically a fully invested position, and so the market has lost that ammunition.

The 401K flows have shifted strongly in favor of equities. We're now actually potentially looking at a rebalance back towards bonds which have suffered under this environment as you're well aware. Although, for all the hoopla about the directional move in rates, we really haven't gone anywhere there for an extended period of time as well.

And so we're starting to see the inflows into fixed income return but they're not returning at a pace that is yet large enough, and this is particularly true at the back end of the curve. They're not returning at a pace that is large enough to offset the net issuance or lack of demand for that product, particularly as people are moving away from sixty forty type strategies and increasingly embracing things like trend following, which has actually done quite well in its recovery off of off of the, kinda April sell-off.

The quick answer is that my expectation is that our bias should be bullish, but in a much more muted fashion for the next couple of months, and then we'll see if the idiosyncratic event of an actual energy stock out leads to job losses, leads to... Or whether it's coming from AI, right?

Whether that actually begins to manifest itself as actual job losses rather than what we've seen so far, which is a low fire, low higher environment that's particularly affecting the young 

Erik: Let's talk about scenarios of what happens next as a result of the Iran conflict. I'm gonna say it's extremely likely that in many parts of the world there will be an extreme price increase, or there will be caps placed on prices, price controls will be put in place, and that will lead to shortages where it's impossible to get any supply of diesel fuel and jet fuel particularly.

I don't think that's going to necessarily happen in the United States, but I think it will happen a lot of places around the world, and what remains to be seen is the extent to which there's a price transmission. If the price of diesel fuel in Singapore is, $39 a gallon, what is the price of diesel fuel in Santa Monica?

I don't know how that's gonna play out, but it seems to me like there's gonna be at least some price transmission. What would you expect the result of that to be on US markets if that happens? 

Mike: I think there's so I think you hit on something that's incredibly important, and it's one of the reasons why I very much push back on the idea of this is like the 1970s.

There's two primary differences. First, in the 1970s, the marginal buyer of oil on the international stage became the United States. We effectively, moved from a net exporter to a net importer. That meant that the world's richest consumer was suddenly bidding for oil versus everybody else. That more than anything else is what made the 1970s unique in that framework.

The US could afford significantly higher oil prices than the rest of the world could, and they were the marginal consumer for globally traded oil. This time around, it's the emerging markets that are the incremental consumer the marginal consumer for oil in particular, and candidly, they're kinda tapped out in a lot of ways.

You're already starting to see that type of behavior, the demand restrictions, the limitations flowing out through many emerging markets. Many emerging markets are beginning to experience near catastrophic conditions, particularly as it relates to fertilizer and agriculture. They're doing everything they can to avoid those price increases, but they simply are less well-positioned than the United States, and I realize this sounds, crazy given how bad it was in the United States.

But many of those emerging markets are less well-positioned to handle these prices, and they, I, I hate to say it, but I would somewhat include Europe in that mix as well. The second thing is that there's just not the population pressures that there were in the 1970s. And a really interesting chart I probably should have included in the chart pack is looking at real rates relative to population, or more accurately, labor force growth.

The high real rates or the high rates that we experienced in the 1970s were largely, and the inflation we experienced in the 1970s, were largely a function of that oil price shock, as we already mentioned. But then more importantly, just the simple reality that there were boomers and young women streaming into the labor force, demanding the capital that's required to keep a labor capital ratio somewhat constant.

If you allow that number to, the quantity of labor to exceed the quantity of capital, you will experience falling productivity. The 1970s were all about trying to maintain that pace of business activity, and it required significant capital that the Federal Reserve candidly stepped in front of and somewhat prevented by raising interest rates as high as they did.

This time around, labor force around the world is actually shrinking. The United States labor force growth over the last five years, even with the population adjustments from the surge in immigration that has not yet been removed from much of the labor force statistics, it really only hit about 1% versus about three and a half percent per year in the 1970s.

My hunch is that we're not gonna see anything even remotely close to the sort of gasoline or oil price spike that we saw in the 1970s, where we saw 500% sort of increases. But the pain that is gonna be felt in the emerging markets is significant. And as you're correctly pointing out, the answer in many situations will be, we'll do without.

That means that we will likely see, dramatically reduced production levels for many food stuffs, etc. We are somewhat fortunate in that we're very well supplied. We've had extraordinarily strong growing seasons. Many forms of soft commodities have been over-supplied for the past couple of years, and so we're looking at inventories that are relatively high there.

But there's no question that this is going to flow through as price increases in agriculture, assuming that the harvests, y- you know, are diminished by the reduced application of fertilizer. Likewise, the ability to get stuff to market. If diesel prices are extraordinarily high, the vast majority of agriculture is transported by truck.

That means there will be less shipping available or less transportation logistics available for the delivery of those crops, and some may very well rot in the fields unless prices are much higher. And so this is the paradox of capitalism, right? In some ways, we should be celebrating higher prices because they're sending a much needed signal And they are allowing agricultural producers to somewhat offset the cost of fertilizer.

But that's painful for households. And in the United States, we're already seeing a growing fraction of households being forced to do things like increase their pawn shop activity at the lower end or their credit card activity, and that becomes very difficult as we look at credit card delinquencies beginning to spike, Etc.

This is creating conditions under which people are just gonna have to do with less, and that means lower household formation. It means households are going to decide to move out of a individual apartment and move back in with their parents, for example, where you would reduce your net consumption.

We're seeing the signs of all of that, and I, I, I joked on Twitter the other day that, BNPL, buy now, pay later, is actually turning into buy now, pawn later as households are scrambling for cash. 

Erik: Donald Trump is set to meet later this week with Xi Jinping. It seems to me that China's reaction to all of this and Trump's ability to negotiate with China is gonna play a major role in it.

China has more crude oil and frankly everything else stockpiled than just about anyone. So it seems to me if China says look, get some positive PR by coming to the rescue and saving a few c- smaller countries around the world by sharing some of our strategic petroleum reserves and helping them out in exchange for some concession," that's one thing.

If China goes the other way and says, "Every drop of oil that we have is for us, and we're going to, block any export of finished products to other countries until this mess is over," that's a very different outcome. W- Am I reading those tea leaves correctly, and how do you think this is likely to play out later this week?

Mike: I agree with how you're reading it. So far what we're seeing from China is largely every drop is precious. We're not going to share any. that makes sense. China is a very insular society and candidly has always prioritized China over any other country. That's not a bad thing, by the way. I wanna be clear.

That's part of the process of capitalism broadly is we all should be seeking our own self-interests. But we need to recognize that has implications for how we're perceived going forward. In the United States we see very clearly what's happening in our society and our economy. Our news is very attuned to it.

We don't have that sort of transparency as it relates to what's happening in China or candidly for that matter Iran, which is largely in a blackout from the internet. And so the real question that you have to ask yourself is how much is China suffering in this process? And the evidence that we do have is that they are actually being hit quite painfully, and they've stayed remarkably quiet in this engagement with Iran.

my hunch is that, Trump will find a relatively receptive Chinese audience that is basically looking to cut some sort of a deal and ameliorate some of the pressures that are being placed on the Chinese economy. The flip side of that is, the downside to putting in a mercurial individual like Donald Trump is candidly I don't think anyone knows what he's thinking as he goes into these discussions and negotiations, and is he going to settle for a quick deal that may be much less than he could otherwise extract?

Candidly, we don't know, and I think that's been one of the real challenges for the U.S. military as well in conducting operations in Iran, has been the uncertainty around what policy is going to emerge in the next twenty-four hours. It's a very challenging environment that in some ways can be helpful.

My, my wife used to call it the crazy monkey approach, right? If you just act crazy enough, people will largely leave you alone and try to placate your behavior. But the flip side of that is it makes it very hard for the people that are, quote-unquote, "partnered with you," like the U.S.

military with the commander-in-chief, to anticipate the direction that you're gonna move. And I-- this is very much a wild card. But what has been communicated to me is that China is much more interested in this in this meeting than the U.S. is, candidly. 

Erik: It seems to me that China is absolutely pivotal to the outcome of the Iran situation, because if China takes the stance "Look, Mr.

Trump, we are trying to be patient here, but we're not going to tolerate much more of your interfering with our ability to import oil from the Persian Gulf, and you've got to work this spat out right away within a certain amount of time, or else you're gonna lose a lot in your relationship with China, and it's going to only make things worse."

If it goes in that direction, it seems to me like, that's very different than if China says "Look, we're willing to cut a deal with you and help you in Iran," which frankly I don't see is very likely. But it does seem to me that China is in the position of greatest power here. They could throw this Iran situation either direction.

Mike: I, I think there's definitely some truth to that. I think it would lean more towards if they were to decide enough is enough and basically communicate that to Iran. I agree with you that seems unlikely given that they have been an active partner with Iran, and Iran is a significant source of their crude oil.

This is gonna be an interesting question. We don't know what the Iranians are thinking at this point. We don't have full transparency in terms of what their actual position is. Part of the reality of why I would argue entities like the UAE are choosing to leave OPEC is if Iran continues down the current path and damages its oil production capability, China is gonna have to recognize that and will be looking for alternate sources of supply as well.

And so it, it does feel like this is that we're in a point where the narrative within the United States has been very much about the impact on the United States without significant consideration for how things are really playing out in Iran or China or other regions where we have much less transparency.

Erik: Since you mentioned UAE pulling out of OPEC, I'm very curious to get your take on what this means to the future of global oil market reserve or spare capacity. Seems to me like we were already down to the point where really the only OPEC countries that had any spare capacity were UAE and Saudi Arabia.

Feels to me like s- UAE has signaled pretty clearly that they're gonna pedal as fast as they can and make as much oil as they can and keep selling it. Does that mean that we've reached a point where either Saudi Arabia is the only spare capacity on the globe? Or, a- and I would think in that situation, they probably pedal as fast as they can too.

So it seems to me like maybe that creates an illusion of a recovery in the sense if everybody's making as much as they can coming out of this crisis, it probably drives prices down in the short term, but it also means there is no spare capacity going forward. Do I have that right? 

Mike: I think you have that right.

I wanna be careful on that, though, because again, the miracle of high prices is that it does stimulate production. And so it, it is important to recognize that right now we are beginning to see some of the supply response. UAE would be a good example of that. Likewise, we're finding lots of alternate ways out of the Persian Gulf.

Pipelines are running at max capacity. By and large, they have not sustained significant damage. And it is becoming very clear that there need to be alternate approaches, and this is gonna be particularly true if Iran is successful in articulating that it is in control of the Strait of Hormuz on an extended, period of time the other reality though, and this is something I wrote about in '22, and if you remember, the projections were that, we were gonna see a surge in oil demand and that oil prices were going much higher, and that as China reopened from the COVID events, that we would see an incredible surge of demand that would power us well above the 106 million barrels that were the forecast.

My argument was that we actually had multiple demand curves. The developed world was already in decline in terms of its oil usage. China has proven to be far less hungry for oil, despite the fact that they have been stockpiling, as you pointed out. Their demand has disappointed expectations from that time period.

And when you see price surges like this, it rapidly leads people to seek ways of conserving oil and trying to do the same thing more effectively. Again, that's the beauty of capitalism. You send a price signal through, and people adjust their behaviors to it. My hunch is if anything, this actually pulls forward the peak oil demand story with a notable caveat being that you'll likely see some significant restocking demand.

But I'm less worried about the supply side in oil, in the same way that I'm not that worried about whale oil populations. I'm much more concerned about the demand implications as we look out past the inelasticity of a three to 12-month time period. 

Erik: Speaking about longer term trends, let's talk about inflation more generally and where it's headed.

We just had an inflation print. You told me off the air you're a little bit concerned about the stale birth/death model data. Give give us some perspective on that. 

Mike: Yeah. So there's a couple of narratives that are going on. One is that there has been, a re-acceleration of inflation.

Again, another chart I probably should have included, I posted it on Twitter earlier today, is that we are dealing with residual seasonality in our inflation prints. The non, atypical seasonality associated with COVID and then the Russian invasion of Ukraine threw off the seasonal adjustments from the BLS quite dramatically to the point that we're print-- in, in the fourth quarter and first quarter, we're typically printing about half a percentage point higher than the actual inflation is running.

That's due to the seasonal adjustments being made against an atypical seasonal pattern. if you look at the second half of this year, I wrote a Substack on this called The Year was 1816 or 1815, which was the year without a summer. We're not seeing any of the seasonal pressures that we traditionally see on things like rents, Etc which make up a far larger portion of the CPI That is a really critical thing to understand.

The second is that the birth-death model, which you were referring to, this is the assumption of entrepreneurship and new jobs that are created. It has also been the source of the terrible downward revisions that have been made. Birth-death was originally introduced as a tool to try to reduce revisions.

Unfortunately, a number of technical changes in how data is reported and collected have led to the BLS continually overestimating how many new jobs are being created by new businesses being formed. That is, that those corrections won't emerge until what's called the Quarterly Census unemployment and wages, which is the gold standard for measuring that data.

We have that through September. That's why we had such terrible downward revisions in the '24 and '25 time period versus what was initially reported. That is on hold until basically next month when we'll get the updated fourth quarter data. My assumption is that the birth-death continues to be over-reported and adding about 100,000 jobs.

And so if you include that in the data, we actually are not really seeing any improvement. We continue to lose jobs. And importantly, even if you look at the official data, I would highlight that our labor force is now starting to shrink in the United States. We have a drawdown from peak labor force that is roughly in line with the worst recessions that we have seen over the past, 50 years.

It's very hard to reconcile those two data points with the idea that the US is suddenly accelerating and that what we're seeing is an overheating of the economy. I think unfortunately, we're just, w-we are dealing with really bad data quality, and the revisions will likely pull that lower.

All else equal, that suggests that there is less inflationary pressure over the summer and into the fourth quarter. And beyond that point, I don't have the same clarity because I don't have the ability to model fully what the seasonal will do until we've received that data. But it does appear that we are shifting back into a more normal seasonality and all else equal, that should lower both inflation and then we'll get the downward revisions in employment.

I continue to think there's a reasonable chance that, Kevin Warsh comes in, and by September he's suddenly looking at inflation running less than we had anticipated. The tariff surge will have been over at that point. People are highlighting that we anticipated that would flow through in goods.

The crazy data is that goods inflation is basically really low, which suggests that companies are eating most of the tariff increases either in the United States or in supplying countries And I think there's a very high chance that Kevin Warsh suddenly wakes up in September, October and realizes that he has to cut and cut more aggressively than anyone had anticipated.

Erik: That's fascinating because it seems to me that you and I have m- broadly agreed on what's about to happen energy-wise, which is we're gonna have a real energy crunch globally as a result of this Iran conflict. If that happens, doesn't that create a fairly long-lasting and persistent inflation driver?

Mike: Not really, because if you think about what we're talking about, we're talking about the fastest moving components of inflation and also the most inelastic. And so if we do end up seeing, businesses shut or air flight curtailed that prevents activity from happening. And I think it's important for people to recognize that unlike COVID, we now do have the potential to work from home.

We've discovered that is a solution. And so could I see an oil surge accompanied by another dramatic reduction in people's mobility and reduced demand from transportation, Etc? I think the answer is yes. And as you pointed out, one of the key risks becomes a supply response in oil that is met at the same time with a demand reduction.

Y- I'm not gonna draw the direct analogy to 2008 'cause I don't think it's actually quite-- it's actually fair in that analysis. But remember, oil prices can fall just as quickly, if not faster, than they can rise. 

Erik: That's definitely true. Oil prices increasing is definitely inflationary until they cripple the global economy and cause a Great Depression.

Yeah. In which case it's definitely- Yeah ... not inflationary at that point. It's 

Mike: definitely not inflationary at that point. And that, th-that is, that's the uncertainty. And again, most of this pain is being felt outside the United States, and by outside the United States, I'm including California which, has just absolutely absurd restrictions on oil production that make it much more like an Asian, a Southeast Asian country in terms of its import patterns.

And there we're already seeing pretty strong evidence of behavioral change associated with gasoline prices hitting the levels that they are in California, where you know, one of my team members works out there and was sharing with me, pictures from the pump where they've exceeded $7. I laugh in a crying sort of way that Trump found it appropriate to highlight how cheap gasoline prices had fallen in January, February and now, is basically trying to ignore that they've moved in the opposite direction, putting incredible stress on many of the households candidly that had hoped that Trump would strengthen their position.

 But, the simple reality is that is the way it plays out. If we end up with actual shortages, meaning that we have to reduce consumption, you could simultaneously see a supply, a positive supply shock and a negative demand shock that would manifest as oil prices falling very quickly.

Erik: So when you say that Kevin Warsh may by September be in a situation where he unexpectedly has to be cutting aggressively, are you implying that means he'll be reacting to a not necessarily 2008 sized, but a global economic slowdown that would be bringing that about? 

Mike: It certainly seems that's the logical conclusion from what we're experiencing, and that's particularly true, as you point out.

If the current disruptions that have been largely ameliorated by the release from strategic petroleum reserves, if we find that we cannot draw those down significantly further, and I would highlight that many countries that have tried to keep pricing basically keep pricing capped, had their balance sheets stressed already in an attempt to do that in 2022.

The UK would be a really good example of that. the capacity to continue to support that is just significantly less. And we are looking at a situation in which i-if this continues for an extended period of time, the absolute shortages of oil will really begin to hit those areas that are the marginal consumers, primarily the emerging markets.

Erik: I certainly agree with that. So what happens, let's say we get to September and Kevin Warsh is cutting rates aggressively because of a global economic slowdown. What happens to your chart then? Do we get an even bigger inflow into semiconductor stocks?

Mike: it depends on what happens to employment on our path there.

And it depends on the mix of employment as well. So part of the perverse dynamic of the low hire, low fire environment is that by and large, we've retained relatively high earning individuals who are fully trained and capable of operating at high productivity. What we're seeing is a reduction in the hiring of new labor force entrants, those who need to be trained, those who don't meaningfully contribute to productivity, but actually disproportionately contribute to marginal demand.

You move out of your parents' house when you get a job, you move into an apartment. Somebody had to build that apartment, put a dishwasher and a, oven in there and a refrigerator, Etc. All of those things have to be done in advance of that. We're seeing very weak hiring at the younger level, And unfortunately, that means that demand is likely to be relatively hit in those segments, and that certainly is being supported by data we're getting from apartment rents, Etc.

On the flip side of it, it means you continue to pay the 55-year-old because now instead of training a 25-year-old, they're training an AI, and that has extraordinary value if we're able to pull it off and it turns out to have the productivity impact that many people think it might have. y- the only analogy I can draw to this is the end of the guild system in the 19th century, whereas w- you know, where the Industrial Revolution began to move from things like textile mills into actual factory production.

Many people love Victorian homes without realizing that the popularity of those homes was driven by a collapse in the price of things like filigreed wood that was driven by the Industrial Revolution. That created, that growth created a demand surge for the artisans that were already trained so that they could build the factory jigs that could be used to produce those low-cost products, but it destroyed the apprentice business.

And so unemployment became highly cyclical and very sensitive in the mid part of the 19th century. In the panic of 1837, for example, unemployment hit 63% in New York City. I don't think anything like that's going to happen because we don't have the same rates of population growth, in particular in the United States.

But I do think it's really critical to understand that we are basically putting, those who should be rapidly moving up the productivity curve and the learning curve, we've basically put them on ice and told them, "Congratulations, you've got a an engineering degree or a degree in French medieval literature from a prestigious institution that qualifies you to work at Starbucks or drive for Uber."

 that's a real cost, and it's similar to what we've seen in recessionary periods where it creates much lower lifetime earnings, and we don't yet know how that is gonna play out, but it's showing up very much in the data. The hiring rates for those 55 and up is up 84% year over year. The hiring rates for those 29 and under are down 25% year over year.

It has all the signatures of that sort of breakdown of the guild system and the apprenticeship system and a- again, if I told you I knew how it was gonna play out, I'd be lying to you. 

Erik: Let's move on to the subject that you are famous for and in fact have now literally written the book on, which is active versus passive investing, or p-probably more accurately, the potential unintended consequences of the passive investing trend of the last several decades.

It seems like the chart that we looked at earlier was pretty strong evidence that you're right that these passive flows do funny things in the market that it seems to me eventually lead to some potentially very negative outcomes. Am I right to be worried about this, and how worried should I be?

Mike: I think you're right to be worried about it. I think we have to acknowledge that we continue to see strong flows and we are not yet seeing the negative outcomes. What we are very clearly seeing are the inflationary components of the impact of passive investing, where buying at any price is actually required by fiduciary duty, not by a thoughtful application of discounted cash flow analyses, Etc.

W-we experienced two remarkable events in our lives, Eric. The first was the transition from defined benefit plans to defined contribution plans. There's a fantastic white paper that was just released in 2025, made it into the Financial Analyst Journal in March of this year by a gentleman by the name of Coimbra, and what he highlighted is the mechanical properties of the importance of that shift.

When you move from defined benefit plans, which guarantee you an income stream, to a defined contribution scheme in which you have to accumulate assets in the hope that either the income from those assets or the sale of those assets are going to allow you individually to secure your retirement. It creates an extraordinary outward shift in the aggregate demand for financial assets.

As an individual, I have absolutely no idea when I'm going to die or how long my retirement is going to be. As a result, I have to accumulate as much assets as I possibly can. In a defined benefit plan, the statistical properties of a large population allow me to accumulate assets and try to generate income against an actuarial o-outcome.

The reason that system failed in the 1960s and 1970s was because people began living much longer than we had anticipated. The retirements were much longer. Now we're looking at a situation where everybody is basically being forced to assume the worst case scenario. That means that they are both accumulating more financial assets and they are spending less out of that financial asset base than they otherwise might.

The traditional 4% withdrawal has been replaced by something closer to a 2% withdrawal Which means that we are hoarding financial assets, which naturally causes prices to rise. The second phenomenon is the growth of passive investing. Because we basically told secretaries and janitors that they needed to become experts at stock picking, we arrived at a conclusion that minimized the amount of activity that they had.

Market cap weighting is unique in an index construction in that it doesn't actually require you to continually rebalance your portfolio. The market pricing, by and large, does that for you. The only impact is on the marginal flow, your net contribution or your net sale. That also has an inflationary impact.

And so we have had two distinct phenomenon that are related and both inflationary to financial assets over the course of our lives. And because of the demographic bulge of the baby boomers, that's gonna eventually reverse, and we will find ourself selling-- ourselves selling those assets in order to secure retirement.

The relative shortage of labor suggests that those retirements are going to prove to be much more expensive than people had anticipated. We're likely to see inflation in elder care at the same time that we see much more deflationary pressures in areas where we're beginning to see population growth turn significantly negative.

Colleges would be a good example of that. we're watching basically the reverse of what happened with the baby boomers coming into the system. When the baby boomers came into the system, we had to build a ton of maternity care, maternity wards. Most hospitals in the United States were built in the 1950s and 1960s primarily to accommodate the surging population and the growing number of births.

Now we have a growing number of deaths, and we've done a terrible job of preparing for it. And so it's only logical to conclude that y- you know, that which we need less of will likely become less expensive and that which we need more of, i.e., end of life care, is likely to become significantly more expensive.

And this is one of the real tragedies of where we sit today because old people are candidly scared, understandably they don't know how long they're gonna live. They don't know what the high volatility asset mix that they have gotten themselves into is ultimately going to yield. And they continue to see headlines from including people like myself that say the expected returns to equities, given these levels of valuations, should be quite low.

If I heard that and I was uncertain about my retirement, and I was uncertain about when I might, run out of money, I would be less willing to spend as well. And then we have the paradox of thrift, which basically says the lack of spending from the old impacts the income of the young. And we've created a condition under which the old people are scared and the young people are really unhappy, and it's not a good mix 

Erik: You've written a book on this subject.

I know that because as a follower of your Substack blog, w- I've been teased by a number of sample pieces of that writing. The book is titled "The Greatest Story Ever Sold: The Unintended Consequences of Passive Investing." It looks like it won't be released until the end of June, but it's available right now for pre-order.

Listeners, we've got the pre-order link on Amazon linked in your research roundup email. Mike, what is the book about? Tell us what to expect when it's released in June. 

Mike: So the book is really actually about the destruction of price discovery. The implications of passive investing and the demand for financial assets has created conditions under which the most important price that we really receive in the economy, the price of equity, the price of debt, are increasingly being outsourced to algorithms.

And so it brings us full circle back to that chart that I shared, where systematic strategies that have never done a discounted cash flow analysis in their lives are dictating the prices that we're seeing on screens. We're trying to attach meaning to that, because that's really what price is. Price is the mechanism of information exchange in a market-based economy.

If you destroy that process of price discovery, the consequences are understandable and foreseeable, and perversely create many of the conditions that we now experience in our lives. Everything ranging from gambling and the growth of speculative activity in financial markets can largely be tied to the phenomenon and the choices that we made in how we choose to fund our retirements.

Those decisions were made back in the 1970s when we had very poor information on how financial markets actually work. Since I began my work in 2016, there's been an explosion of academic research that is highlighting the adverse effects, on price discovery of the growth of passive investing and the demand for defined contribution plans and the government sponsorship of certain areas as being preferred, what's called the qualified default investment alternative, that by and large is directing the retirement assets of the United States into the largest public companies that until very recently had no real reason to receive those inflows.

And so the book is actually about the, what happened why it matters, and what is likely to occur given that we have severely impacted our capability for price discovery in a capitalist economy. 

Erik: And again, that is available for pre-order right now on Amazon. Mike, you also- 

Mike: Now with one caveat.

I just wanna actually highlight that date has been pushed back. We're actually targeting a release on October 19th, which will be the anniversary of the crash of '87. Oh, 

Erik: okay. So we should not not believe the June 30th date on on Amazon. 

Mike: Don't believe the hype. Correct.

Okay. 

Erik: Coming from the the source itself. You gotta trust that signal, folks. Let's also talk, you manage several funds for Simplify Asset Management. You also write a Substack. Tell us about those as well. 

Mike: Sure. It is a hedged high yield product, and so it attempts to mitigate the impact of credit spreads.

That has been a very challenging period since April of 2025. We've seen credit spreads by and large tighten significantly, even as we're seeing signs of credit deterioration in the broader economy. Part of that is, of course, due to the passive bid. As money flows into these strategies, they buy the highest priced securities disproportionately.

That has driven a bifurcation in the high yield market, just like it's driven a bifurcation as we've seen in U.S. markets where there's the 493 and the Mag Seven. the but that product is certainly something that people can check out and take a look at if they are interested in a more protected version of income generation.

And candidly, I think this is gonna be one of the real critical realizations that people have is that they should be taking advantage of these high prices to rotate into areas in which income can be generated. The Substack is Yes I Give a Fig. It is yesigiveafig.com. It's available on Substack.

You can search for Michael Green or Yes I Give a Fig. It is available weekly. I try to put it out early Sunday mornings more or less every week. It is the outgrowth of my own personal note-taking and thought process more than a desire to put charts or trades in front of people, and it covers topics ranging from a discussion of the poverty line, a piece that went viral to the type of work that I'm doing around passive, to insights in terms of markets that, people would be more familiar with seeing from other areas.

As I describe it, it's basically how I clean out and clear, and straighten the attic that is in my mind behind my overly large forehead. 

Erik: Mike, I can't thank you enough for another terrific interview. Listeners, be sure to stay tuned 'cause we've got Rory Johnston coming up for an update on Gulf oil flows and what comes next in the Strait of Hormuz.

Patrick Ceresna and I will be back as Macro Voices continues right here at macrovoices.com

Erik: Joining me now is GavCal co-founder Louis-Vincent Gave. Louis, I'm so excited to get you on. I always enjoy your non-US based perspective being having lived in France and in Hong Kong and all over the world, I think of you as a very international perspective kinda guy. If ever we needed to step away from the biases of of US and US foreign policy and so forth I think it's now.

Without me preloading you with any of my thoughts, what do you think about this Iran situation that's going on? The market seems to be pretty darn certain it's just no big deal. We're off to, new all-time highs. Nothing to worry about with twenty percent of the world's oil potentially cut off in the Strait of Hormuz.

What do you make of this?

Louis: First of all, again, thanks for having me, and I wanna commend you for the lineups that you've had in recent weeks. I've really enjoyed listening to to Rory, to Anas, to to everybody you've had on here. And look I'm not sure I have great insights on on what's happening in Iran.

I would say this. I would say it is fascinating that the oil markets, have behaved in a certain way. They've-- obviously gasoline prices have ripped higher, oil prices have have ripped higher. And yes, to your point the equity markets have mostly brushed it off and, we'll go into that, I think, p-perhaps a little bit later.

Now, the reality, I think one of the reasons the equity markets have been able to so far brush this off is that while so far the energy price spike, and let's say oil is at, depending on which benchmark you wanna use, Brent, WTI, Etc, but you're essentially hovering around hundred to hundred and ten bucks.

It's high, but it's actually not punitively high. If you take a hundred dollar WTI or if you take today's gasoline price and you look at it adjusted for CPI and you look at it as a percentage of US disposable income either of these measures, you're getting close to the upper band where things start to get really uncomfortable, but you're not hitting sort of recession band yet.

So all this to say, hundred dollar oil, sure, it's not great, it's not ideal but perhaps one of the reasons the equity markets are brushing it off is that it's not a crisis. Hundred dollar oil is not a crisis. Hundred twenty, hundred thirty, that's when it really starts to take a bite. That's when the pain starts.

So the question really becomes do we get there? Do we get to the hundred twenty, hundred thirty? Now, I think- If we go back to a month ago there was that period when the Israelis bombed the Iranian energy infrastructure, and Iran responded by bombing the Qatari gas field.

And at that point, it really felt oh my God, they're really-- it's not gonna be just about the straits being closed, they're actually taking each other's infrastructure away. And, which l- you know, opened up a much more nightmarish scenario. 'Cause right now, if you look at the oil forward curve, essentially, you look at oil in six months' time and it's at 85 bucks, so-- or 80 bucks.

So the market is essentially saying, "Yeah, you know what? Hormuz is gonna reopen. I don't know if it reopens this week or next week or in a month or two, but in six months it'll be reopened, and so by and large we'll be fine." Of course, if we start to bomb each other's infrastructure then even if Hormuz is reopened, then you're still left with busted infrastructure and a whole other quandary.

So I think in the first few weeks of the war, that was the big uncertainty. Do we bomb each other's infrastructure? And it looked like we walked back, then the whole question became, oh, does Hormuz reopen? And the market started to price in you know what? I d- I don't know when it's gonna reopen but it's gonna reopen.

So all this to say, there's different ways in which the market might be right or might be wrong. The first question is are we really done with the threat of bombing each other's infrastructure? Or was that just a short-term truce? Because if we go back to bombing each other's infrastructure then we're not talking whether we go from 100 bucks to 120 then we're at 200 very quickly.

And with 200 comes economic devastation. So the first problem is what probability do you put on that? The idea that we go back to bombing each other's energy infrastructure. The second problem is the probability on reopening Hormuz and reopening Hormuz smoothly.

And here if I'm Iran why would I wanna reopen Hormuz? This is what I keep coming back to, is today Iran is saying, "Look, you wanna put your ships through there, it'll cost you two million bucks." And if we go back to a world in which 100 ships paid 2 million bucks to Iran, that would be equivalent to roughly 20% of Iranian GDP.

So now that they have this potential revenue, why would they give that up? Put yourself in the shoes of the IRGC. Pre the war, they were selling their oil, they were selling between half a million and a million barrels, mostly through Iran's dark fleet, and they were selling it at 20 buck discount mostly to China.

And mostly to teapot refiners in in China who were buying this oil at at a $20 discount. So again, half a million to to a million barrels at at 60 bucks. Now Iran is conceptually selling a million and a half, maybe two million barrels a day at huge premiums to spot because as the Oman benchmarks, Etc, are much higher.

So they're probably selling a million and a half barrels at, I don't know, 120, 130 bucks. And at the same time, for the few ships that go through, they get two million a ship. It's for them, this is pretty awesome. This is like financially they're doing better than they ever have.

So as long as they don't get bombed, like the ceasefire is a good deal for them. You know-- I firmly believe in Charlie Munger saying that, "Show me the incentives and I'll tell you the outcome." Iran's incentive is to not get bombed. And and the way they don't get bombed is they say, "If you bomb us, we're gonna bomb the energy infrastructure of the other guys."

Which, is a pretty scary thought for everybody involved. So right now the market, if you look at the curve, Etc, is essentially pricing in a reopening of the straits in the coming weeks, which I'm personally dubious. I don't see what Iran has to gain. And then you get to the third big player in this arena, which is Saudi Arabia.

Now, Saudi now has they can export through the Red Sea. They can export four and a half, five million barrels, which is down from the roughly eight or nine they were exporting before. And but before, remember, they were exporting eight or nine at 60 bucks. And now they g- they move into a world where it's we can export five maybe at about 120 bucks or we can export eight or nine, but then we have to give a bunch of money to Iran for every ship that goes by, and we don't really like Iran, and we definitely don't wanna give them two million bucks a ship.

So maybe we just sell five at 120 bucks rather than eight or nine at 60 bucks and have to pay Iran a toll on the way. So again, show me the incentives and I'll tell you the outcome. I think the futures oil market is pricing in a return to Saudi, to UAE, Etc, to f- you know, essentially producing fully and sending their oil through the Hormuz straits.

I'm not sure that comes back. I-- or it's not obvious to me that it does. So perhaps the better bet today is the idea that oil in six months' time is still too cheap

Erik: Louis, you said this is not that big of a deal at $100 oil. It's not the end of the world economically, and I agree with you completely.

But hang on a second. This is a much bigger physical market dislocation in terms of delivery of oil than something like the Abqaiq bombing that happened a few years ago. But we're not seeing that price dislocation. So I guess what I come back to is, okay, yeah, it's 100, it's not 150. But why isn't it 150 when every single oil analyst that I listen to is saying the same thing, which is this is the absolute biggest physical disruption in the history of the oil market ever.

Okay, we've had lots of much bigger price dislocations than this one. So it seems like the whole investment community's kinda shrugging it off, saying, "Oh, those oil guys are just talking their book." What's going on?

Louis: That's right. What do they know? What do those guys know? No look I completely agree.

And to your point, and I know it's a point you've discussed with previous guests, it's of course not just oil, it's natural gas, and it's fertilizer, and it's urea, and it's and it's helium, and it's like all sorts of stuff. We don't wanna reduce the Middle East to just the oil.

I think perhaps most importantly, what this highlights, this whole war highlights a message we already had gotten when... with the Houthi things and something that you and I discussed before. But the days when we... you could always count on the US Navy to patrol the oceans and to deliver whatever goods you, you ordered are now clearly over.

And this isn't because of Trump, and this isn't because of Iran. It's just in this new age of drone warfare, controlling the world's ocean is, has just become impossible. And this matters a lot because I think it, it really means that every country that for years and years just always saved in US Treasuries because you could...

or you knew that in a crisis, the Treasury market is the biggest, deepest liquid market in the world. You could always transform your Treasuries into whatever commodity you needed. That is no longer true. Look at India. India's got $700 billion in US Treasuries, and they're out of fertilizer.

And so they call China and say, "Hey, you guys have a lot of fertilizer 'cause you've been smart enough to stockpile it for the past decade. Can you sell us some, please?" And and China says sorry, mate, I'd rather keep what I have. But good luck selling your Treasuries for fertilizer."

I don't wanna belittle what we're going through. I think it's a dramatic shock to the system. I think coming out of this, every country will say, "You know what? I can't sprinkle treasuries on my field to grow wheat. I can't shove treasuries into my car to make it go." So every country will have to build inventories of refined products, inventories of fertilizer, inventories of stockpiles of oil.

If you want to essentially have an independent monetary policy and an independent foreign policy, you will now need to stockpile commodities. It's just that simple because the days when you can rely on the United States to bring you what you need are now over. And I think, th- this was, I think, already obvious for anybody who paid attention following Russia-Ukraine and following Houthis but now it really is in your face.

So I completely take your point that, energy prices should be higher. The question has to be why isn't it? And the only thing I can really come up with is that oil is a sort of unique market in that we have a lot of buffers in the system.

Obviously, the oil on the ships and the inventories and the strategic petroleum reserves. There's a lot of buffers in the system, and that maybe in this crisis, maybe, following Russia-Ukraine following the Red Sea thing, people did build up their buffers. The most obvious one, of course is China.

Officially, China has roughly one point three billion barrels in reserves. We've actually published various reports highlighting that the number is actually probably c- closer to one point eight billion barrels. So China today has the has more oil in storage than the rest of the world combined.

And the reason this matters, of course, is China's the biggest oil importer in the world. Having this massive oil inventory gives China the ability to go into the market when prices are down and to back off when prices are high. Now, what's fascinating is I would've actually expected in the back of all of this for China to back off with the price of the s- the spike.

You would've expected to see the price spike, you'd have expected China to back off. If you look at official import numbers for March, we don't have them yet for April China's imports of oil were still up eight percent year on year in March. So it doesn't look like China's backed off.

Although, maybe you take the official numbers with a grain of sa-sand. Maybe on the official stuff they backed off, but all the teapots, refiners, all the the dark fleet or all that stuff, maybe that faded. That, that's always very hard to know. The bottom line, I think perhaps the market is assuming two things.

The market is, A, assuming that Hormuz is gonna reopen in the not so distant future. And here, I just discussed, given the set of incentives, I'm not sure that that assumption will turn out to be right. So that's number one. And I think the second thing the market is assuming is, look, there's all this storage in China, so we're not gonna hit a crisis like, say, 2008 when China came into the market following the Go-Gansu and Sichuan earthquakes and just, hit, hit the bid on absolutely everything.

Everything that was energy related. So I think these are the two market's assumption. And both turn out to be right, but they may still both turn out to be wrong as well. The bottom line for me, if we step away from the day-to-day, if we step away from the, why are markets reacting, Etc, and we project ourselves to six months, 12 months, 18 months from now, I think you're still left in a situation where individuals, where companies, where countries will be building more inventories.

Where we will look at the supply shock and decide, "You know what? I need to stockpile fertilizer. I need to stockpile more natural gas." Why does Korea have less than a week's worth of natural gas today and China has more than 50 days? If I'm a Korean voter, I'll say, "You know what? I'd rather have fewer US w-weapons, I'd rather have fewer US Treasuries, and I'd rather have more natural gas in storage, thank you very much."

And so I think every country will head down this way. So however you cut it, you end up with a structural outlook for commodities that is, for me, pretty darn bullish

Erik: I definitely wanna come back to both China and structural bullish argument for commodities. But first, a-as you said, I've spoken to quite a few guests about everything from fertilizer to, to other knock-on effects.

There's one I've been saving just for you, Louis. ... Before this, let's set the way back machine to before the-

Louis: Is it Bordeaux wine that you've been saving for me?

Erik: No. You've, ... you've already got the market cornered on on that one. What I wanna go back to is before the Hormuz crisis broke out, the AI trade was kinda running out of steam, and the reason, or at least one of the reasons that a lot of people were starting to question whether we were about to see a bursting of the AI bubble was because AI was getting constrained by energy.

We didn't have enough electricity to really build all the data centers that AI wanted to build. People were getting really concerned about there being enough energy, and that was maybe gonna pop the AI bubble. Now, add an oil crisis, and that means that there's even more reason for worry, and semiconductors are through the roof driving this massive rally in the S&P to all-time to new all-time highs.

Apparently, the AI trade is back, and back with a vengeance. Why? Because there's a looming threat of a global energy crisis that could make the reasons that the bubble was gonna pop even worse. I'm missing something here. So am I maybe misinterpreting? Is the reason that semiconductors are rallying so incredibly strongly not related to AI?

I don't get it.

Louis: Now, look, it's the rise in semiconductors for those of us who, like me, who unfortunately haven't been massively long is is quite painful. It's especially painful for emerging market investors. If you look at the EM index depending on which benchmark you're using but essentially Samsung, TSMC, and SK Hynix are anywhere from a fifth to a quarter of people's benchmarks now.

And in a month like April where they all rip more than 30% you're left scrambling. So you look at the, the EM benchmark has absolutely crushed it. And it's all semiconductors. And yeah, to your point if you look at semiconductors as a percentage of the S&P 500 it was 10% two years ago.

It's now 17% which is very reminiscent... You'll remember this. Do you remember back in 2007, 2008 when everybody was running around talking about peak oil, how there wasn't gonna be enough oil for everyone and oil was hitting 150 bucks? In 2006, was 10% of the S&P 500, and then it spiked to 16% of the S&P 500 a couple years later before it all rolled over with the 2008 crisis.

So there's-- for me, as I look at semiconductors today, there's a strong sense of déjà vu. If you go back to 2008, you had the mortgage crisis, it was already obvious, banks were failing, Etc. But everybody was telling you, "You know what? Forget that. Who cares about Bear Stearns?

Who cares about Citibank cutting its dividend? Who cares about UBS doing the biggest rights issue in history? Whatever. Boring. The real story is peak oil. There won't be enough energy for everyone. All this other stuff doesn't matter." And energy kept ripping in the first half of 2008, even as the world was falling apart.

And today I've got this sentiment of déjà vu because everybody is running around saying, "Yeah, you know what? Energy, who cares? It's not it's-- that's not where the story is. The story is AI. AI is gonna change the world, and there's no way we can produce enough semiconductors to feed the world's AI needs.

It's just we just won't be able to keep up." And so this year, Samsung Electronics will end up being the most profitable company in the history of capitalism. And so I think this is this is-- And people will point out that the Samsungs, the SK Hynix, the TSMCs of this world are actually very attractively valued.

They're trading sometimes at single-digit P/Es. Just like oil stocks back then were trading at single-digit P/Es. 'Cause people forget that cyclical businesses, capital-intensive and cyclical businesses, you typically wanna buy them when they have low price to book and very high P/Es, and you usually wanna sell them when they have low P/Es and high price to books.

The nature of of cyclical businesses. And you look at it and you're like, "Okay, either this is like I said, déjà vu all over again." It's reminiscent of the 2008 peak oil boom what am I missing?

Why in April did semiconductor stocks all of a sudden decide to go up 30%? Now, you mentioned in your question, I'm sorry to be long-winded, but I think this is super important. You mentioned in your question the fact that we were starting to run out of steam in the first quarter of this year on the premise that, yes, electricity costs were going up.

And you'll remember that there was like a referendum in Indiana and I think some other states when Trump was elected re-re-elected this last time around, where people were saying, "You know what? We don't want data centers in our state. Having a data center here means then my electricity cost goes up, and it doesn't create any jobs thanks, but no thanks.

No interest in having this in my neighborhood." And Trump's response to this was a fairly elegant one. To be fair, he said he immediately flew out to... His very first trip was to Saudi Arabia, to the UAE, to Qatar, where he not only picked up a plane, but he also picked up contracts for huge rollouts of data centers all across the Gulf States.

And the idea was simple. These guys had cheap electricity. These guys had cheap solar, cheap cheap natural gas. So let's put the data centers over there. And conceptually, that made a lot of sense until Iranian drones and missiles started to fly. Then I think if you're... Today, if you're Microsoft and Amazon, you're thinking, "You know what?

I probably don't wanna build a $20 billion data centers right next to Dubai especially since I probably can't insure it. So I, I have no choice but to bring it home. And if I bring it home, then I'm left with, how do I produce cheap electricity?" Now, there's a fairly obvious way to produce cheap electricity quickly and plentifully, and that would be to cover the whole of Nevada, New Mexico, and Arizona with solar panels.

And now, of course, you and I both know who would produce the solar panels, and that brings me to perhaps the reason why these things are rip- these semiconductors are ripping higher. If we start off with the premise that the Iran war is an inflationary shock to the system, and right now there's no doubt it's going to be an inflationary shock to the system.

Just on the back of gasoline, oil, heating oil, jet fuel, Etc inflation's gonna go up by at least one percentage point in the coming readings. If we start off with the fact that it is an inflationary shock, then you're left with the conclusion that Trump and Xi, who are scheduled to meet four times in the next 12 months, are condemned to get along.

They have to strike some kinda deal. And there's lots of deals they can strike because Trump desperately needs the rare earths and the magnets to repla-replenish his weapons cupboard that has been emptied far faster than what he'd anticipated when he'd started this war.

The first thing is he needs China to agree to sell the rare earths. That's number one. Number two, he actually probably needs the solar panels now in a way that he didn't before. And he needs them, and all the big tech are gonna be lobbying are gonna be lobbying for the solar panels.

What he wants as well is China to revalue the renminbi. This has been a big demand of Treasury Secretary Bessent, and I think Bessent is absolutely right to argue for this since the renminbi is just... you and I have discussed this before, but it's the wrongest price in the system. It's like it's so stupidly undervalued.

It's absolutely ridiculous. Now, interestingly, the renminbi is going up every day which I think China is doing in in anticipation of these meetings with Trump. The renminbi going up every day incidentally is a departure from traditional policy at the Chinese Central Bank.

Usually, when you have uncertainty in the world, In the past, they always freeze the value of the currency. This time they're le-letting it go up. Now what would China want out of all of this? I think it's pretty obvious what China wants. China wants the lithography machines.

It wants the A- basically from ASML, from Tokyo Electron, and it probably wants the high-end chips as well. Is there a deal to be struck where China sells the US what the US needs? The US agrees that China can get high-end semiconductors. I'm not saying that this is going to happen but perhaps that's what, that's why the semiconductor stocks are absolutely ripping.

And it's all quite speculative, and to be very clear, I'm not participating. I own some Samsung electronics, but that's pretty much the only one I own. And again, I think Samsung is gonna be the biggest, It's going to be the most profitable company that's ever been this year, and I don't think it's fully priced in for that yet for these kinds of headlines.

But maybe the market, as I look at the way the markets have behaved in April, essentially saying, yeah, energy, whatever. S&P energy stocks were down 2% in April, and semiconductors up 30. Either the market is completely delusional and is back to, oh the only thing that matters is AI. And note that the AI propaganda on the media is absolutely relentless, right?

It's constantly, oh, AI is going to replace half the jobs out there. This is the most important macro trend, Etc. It's absolutely relentless. So maybe that's just the simplest explanation. We have market participants that are like goldfish in a fishbowl that just play the chess, one chess move ahead.

perhaps the market is sensing that you're going to get a China-U.S. deal that will be beneficial for Chinese rare earths, beneficial for solar panel manufacturers, and beneficial for semiconductors everywhere.

Erik: What do you think Trump could have lined up? He had a meeting with Xi Jinping. Then that seemed to get delayed at a time when nobody was really expecting it to be delayed.

It almost feels like Trump wants to get to a certain point with the Iran conflict where he has more leverage to negotiate. I'm not sure what's going on. How do you read that situation with the upcoming summit between Trump and China?

Louis: I think when Trump launched the offensive in Iran, I think he thought or was told by Netanyahu that it would be a one-week deal, that he'd come in, that all he needed to do was kill Khamenei and 170 schoolgirls, and that the regime would fall all by itself.

Unfortunately, that didn't happen. And he ended up being stuck in an operation that's obviously taking a lot more time, taking a lot more attention, costing him a lot of political capital. And yeah, he had to postpone the China trip because instead of rolling into China as the victor of Venezuela and Iran, he didn't want to roll in there while having to take phone calls about what was happening in Iran.

He wants to be able to sit down with Xi and negotiate without that concern in the back of his head. Now, as it turns out, he's going to have to go almost regardless. But incidentally, I think all these rumors that, oh, the war is going to start again, That we're gonna get a second wave. The US is moving more assets into the region.

I think if something is gonna happen, it's gonna happen after the China visit. I think at this stage we're getting too close to the China visit for Trump to launch a new a new round of offensive. So that-- I think that's the situation on the ground. I think that's where we stand.

And for different reasons, but mostly for domestic political reasons, both Trump and Xi need a win out of these... the summit that's coming up and then the next three following up. And by the way, I don't know if I mentioned this earlier, but it's the first time in history that the Chinese and US president are scheduled to meet four times in 12 months.

And again I don't think they're meeting to discuss the World Cup or the weather. There's a lot on the plate a lot of things to discuss. I think FX policy is a big one and that one is fairly obvious. Everyone's aligned on this. China wants a higher RMB. The US wants a higher RMB. It's the most undervalued currency in the world, but it's the currency with the strongest momentum today.

The way I work is I try to look for the easier trades. There's... I have a bucket of easy trades and a bucket of hard trades. The easiest trade in the easy trade bucket is the RMB moving up. Everybody wants it to happen. It is happening and it's a trade with massive valuation tailwinds.

So from there, unless the meetings go really bad between Trump and Xi the obvious consequence if the meeting goes well, then investors all across Asia will say, "Okay, meeting went well. RMB is now definitely structurally going up, so will the other Asian currencies." And I think that means that absolutely anything with a, with any kind of yield in Asia gets bid up ev-even by local savings.

Local savings that up until now have mostly been recycled into Max Seven, into Bitcoin, into gold, into anything with momentum. All of a sudden, if you know that the RMB is gonna go up 6.5% a year, which is what it just did in the past 12 months, if it is gonna do f-five to 8% a year for the next three years, then you look at a lot of the local stocks that are yielding six, 7%.

Your PetroChinas, your China Mobiles, your... Some of the life insurance guys, Etc. And you're like, "Okay, I can get 6% dividend yield, 6% on the currency. That's 12% without taking too much risk." That seems like a pretty attractive proposition. So I think the... In the easy trade bucket, it's Asian currencies going up and anything with a yield in Asia gets gets re-rated.

But going back to your question, sorry to ramble on, but going back to your question what happens in the in the meeting between Trump and Xi? First, I think the meeting happens. And secondly, I think they both need the meeting to go well. They both need domestic wins. So the incentive structure for things to happen and for things to go well are very much there.

Erik: I very much agree with you on almost all of that. There's one dimension of it, though, that I just want to make sure I understood correctly, because the place we agree is Trump wants to go in from a position of strength. He doesn't want to be negotiating with Xi Jinping when things are falling apart in the Middle East.

He wants to come in with, we kicked ass in Venezuela. We kicked ass in Iran. We're the tough guys. You better not mess with us. So I agree with you on that part, but you're saying, therefore, it's more likely that any further escalation in the Iran conflict would happen after a meeting with Xi.

I would have interpreted it the other way, which is Trump is more likely to try to go for the Hail Mary and say, we got to get a win in Iran before I go meet with Xi. We can't go in, from a position of weakness where we are now. We got to get a win first and try to get the win. And if he doesn't get the win, postpone the meeting again.

Louis: That's possible. Like it's Trump, anything's possible. What I would say is the window of opportunity to get the win in Iran before the meeting is starting to close pretty quickly. It's if he was going to do it, he should have done it by now. Because unless the plan is to really bomb Iran to absolute smithereens for which, I'm not sure there is a political appetite even in the U.S.,

For literally, is there the appetite for hundreds of thousands of civilian casualties? I want to hope that, there isn't the appetite for that in the U.S. for such a murderous type of action and behavior. And and to be honest, if they did do that, if they went ahead and murdered hundreds of thousands of civilian population, then it probably wouldn't be Trump who would postpone the meeting.

It would be Xi. He'd say, look, in these conditions, I'm not like you have blood on your hands. I'm not really keen to shake your hand, my dear president. So it's all this to say that it's, I think Trump actually needs, I take your point. He wants to come in strong, Etc, but he actually needs this meeting now.

Like the U.S. is getting to the point where they need they've emptied the defensive armament cupboard. They really need the rare earths. They really need the magnets. And they really need some kind of solution on Iran. Now incidentally, how do you get a solution on Iran?

Option one is yes, you bomb them to the Middle Ages, which Trump keeps threatening. The second option is you lean on the one country on-- that does have influence in Iran, namely China, and you tell China: "Look, if you help us out here you sort Iran out, you reopen the straits for us we can do stuff for you on semiconductors.

We'll decide actually China is not the bad actor that we were saying it was, and we-we'll help you on the semiconductor front. We'll help you... maybe we'll allow BYD to open factories in the United States and open our car markets," so on and so forth. And so there, you could twist it around and say, I think what Tr-- does Trump care more about looking strong to the Chinese, or does he care more about looking strong to the American electorate six months before six months before a midterm?

If he cares more about looking strong to the American electorate six months before midterm then actually he needs to go to China and he needs to cut a deal that where he comes back and says, "I got the Chinese to revalue the RMB. I got them to buy a bunch of Boeings. I got them to buy a bunch of Nvidia chips.

And and they agreed because I asked them to sort out the Iranians who are a pain in everybody's neck." So y-you can slice that, slice and dice that in many ways. But for me, if really they were gonna go militarily for Iran I think the window to do it before the meeting is closing fast.

'Cause I don't think he wants to restart a war and have to be in Beijing as the war goes on

Erik: It seems to me that the new risk for Trump is that the political opposition is really pushing pretty hard now for, "You don't have congressional approval for this. You're at the 60-day mark." Trump's defense to that has been to say no, the 60 days doesn't count because we're in a ceasefire."

As soon as we're not in a ceasefire- Yes ... which as of we're recording this on- To

Louis: restart

Erik: the clock ... on Monday yeah, w- we're not in a ceasefire anymore as far as I can tell. On Monday things have started to heat up again. So he's gotta do something in order to not have his political opposition in the US shut the war down on him.

And so a- as you say, we went from any export of Nvidia chips to China is absolutely embargoed because they're evil. Now Trump's gotta make a trip to China and try to get a, a salesman's commission on selling a bunch of Nvidia chips to China. That's right. That's the new twist.

Louis: So I think that's one possible explanation for this face-ripping rally in semiconductors from 10%, again, of S&P 500.

Erik: You think the market sees that Trump has no choice but to basically cave to China and say, "Okay, you can buy all you want"?

Louis: So the argument against this, again, I'm scratching my head, you try to put the puzzle pieces together.

The argument against this is that if this is what the market was seeing, you would expect a better performance from Chinese equities, right? And you really haven't seen it. Now, interestingly, if you look at the Chinese equity markets the performance this year you had a great '24 for Chinese equities, you had a great '25.

This year's disappointing. And what's been fascinating, what's been really disappointing has been all the big tech stocks, your Babas, your Tencents, your Baidus. The... Meanwhile, the Chinese hardware names the CATLs, the BYDs the Cambrian, the-- like all those guys, they've done very well.

So Chinese hardware has done well. Chinese internet plays and and other sort of Telecom and media, Etc. That's all really struggled. So in that respect, it's, it actually hasn't been that different from the US where software stocks have gotten crushed and hardware stocks have thrived.

You've had the same dynamic in China. The big difference is that the hardware stocks in China are, pretty much meaningless in, in the broader benchmarks. They're very tiny. And your Babas and your TenCents, Etc, are massive and all those names are down fifteen, twenty percent y-year to date.

But I would imagine that if, the scenario I painted where it's okay the market is starting to price in the fact that the US and China can no longer trip each other up. That because of the Iran war, they're condemned to get along, they have to find a deal to curtail inflation, so on and so forth.

That if that was the case, Chinese stocks should be doing better. If really we're on the verge of a big US-China d-deal, then you would expect all the guys in the White House who seem to be front-running every decision to be front-running this one as well by going out and buying Chinese equities.

And so far there's been a little, again, there's been good performance in things like CATL, the biggest battery maker in the world, m-maybe that's where the US-China deals focus on in the broader EV space, in the broader battery space, 'cause that part of the market has actually done quite well.

But it's so far, I would say that the Chinese part of that equation isn't really giving a confirmation of the scenario I just made out

Erik: Louis, the most striking thing to me from this interview has been your comments going back 20 years or 21 years probably it was e- almost exactly, to the peak oil fears in the ear- early mid-2000s.

It was January of 2005 when Matt Simmons published the book "Twilight in the Desert," which started a whole bunch of doomsday bloggers writing about a theory, a speculative possibility that we might run into a real oil crunch. And just that speculative blogging led to $147 oil. Inflation adjusted today, that's $212 oil in 2026 prices.

That's what we saw in in early 2008, just because some guy who was discredited by most of the serious people, Dan Yergin was making fun of Matt Simmons for that book back in the day. Yeah. So a guy who was discredited by most of the serious oil traders writes a book and it leads to $147 oil prices.

Now we have all of those same serious guys in the oil business who were making fun of Matt Simmons. They're circulating on Twitter that movie clip where Leonardo DiCaprio is talking about, "There's a Mount Everest-sized comet hurling toward the Earth." "We took a picture of it on radar. It's coming, and you guys aren't taking this seriously."

That's what the serious oil guys are saying now. And Street's "Yeah, but we could buy semiconductors," and those oil guys are just talking their book.

Louis: Yep.

Erik: This seems to me like a setup. Really, it f- what it feels like to me is the COVID pandemic, when everybody was ridiculing me and calling me a fearmonger when I said there's a pandemic, global pandemic coming in early February of 2020, and it took a month before the market finally figured out the obvious.

Are we in another setup that's just like that?

Louis: I think that's a distinct possibility, Eric. And I would say that the longer the Straits of Hormuz stay closed, the more your COVID-like scenario becomes credible. I think so far what has happened is that, cars are still driving and planes are still flying, and we haven't really dealt with the sh- the possible shortages in the system because they haven't emerged for two reasons.

First, there's a lot of buffers in the energy industry, so we could draw down these buffers. But now, on our calculation, by early June, we run-- the buffers run out. So that's the first point. The second point, I think, is we haven't really hit shortages because The last boats that left the Gulf were still arriving at their destination by around mid-April.

They-- If you left in late February, you were arriving in Australia or in the US or in Japan by early to mid-April. And so it's now that all of a sudden nobody is showing up at the ports, right? That nobody's showing up at the refinery. It's now that we have to draw down on the inventories that have been built in, the buffers in the system that will take us to early June.

But if by mid-June the Strait of Hormuz is still closed then yes, I think th-this is when you start to hit panic moment. And again, I think when you look at the forward curve, the market is very much pricing in the idea that the Straits of Hormuz are gonna reopen. So nothing to worry about.

Let's keep going. Now, and I said it earlier, but I'm doubtful that it reopens so quickly because I don't see the incentive for Iran to reopen this so quickly number one. And number two, there's also the sort of Damocles sword scenario the nightmare scenario that instead of just having the Stra-Straits of Hormuz closed, we go back to targeting each other's energy infrastructure.

And if that happens, then w-- then it's a whole other can of worms. And then things get, get nasty very quickly because once you take out each other's energy infrastructure, even if the Straits of Hormuz reopen, it's not like things are back to normal because th-they won't be. So I completely take your point that the downside scenario is actually quite scary.

It i-it is a scary scenario, and I think perhaps because it is such a scary scenario, just like your pandemic parallel, it's like, "Ah, you know what? I'd rather not think about it." This is like-- This seems like doom mongering. It's like too scary. Forget it. The AI is the trade. Let's go back to AI.

That's more fun. Thinking of the end of the world that's no fun. So let's just think of AI and how AI is gonna be so exciting. so yeah, I think there's, there is a certain level of discomfort wh-when you look at today's market behavior. Essentially I think the clock is count-- is turning.

The clock is ticking, sorry. We s-probably still have the month of May to be okay, but i-if by the end of May things aren't open, then we're setting up for a pretty horrible summer

Erik: Now, I really wanna push back on that part of this, 'cause this is the one place where I just don't understand the logic of the market.

Almost everybody I think would agree with what you just said, which is we've got maybe the month of May to be okay. But, if we can get this resolved in the month of May, then things are gonna be okay because we don't run out of those buffers until early June." But here's the thing, Louis, you-- we agree that in early June we're gonna run out of those buffers.

Louis: Yep.

Erik: If we've solved this, if we solved it tomorrow before this episode even airs on May seventh, if Hormuz is totally solved and all the ships are flowing freely, it still takes six weeks for them to get where they need to be, and we're gonna run out of the buffers in early June. So we need to have solved it, I would say past tense.

Oh, yeah, no, we need to solve it now. It needs to have already been solved in order to avoid something utterly colossal starting in June. And everybody seems to be acting like but yeah, if we solve this in May, then that won't happen in June." I think it's set to happen in June no matter what.

Louis: So it's, look, here I'm gonna sound terrible, but it's it's the old story of th-the rich do what they want and the poor suffer what they must. What's gonna happen is the real victims, and it's already starting to emerge, but if there's not enough to go around, it's gonna be the Sri Lankas, the Pakistans, the Kenyas of the Bolivias of this world that get cut off first and foremost.

Oh,

Erik: so if millions of people starve to death

Louis: in countries that are not

Erik: really that significant to the S&P 500, it's fine.

Louis: This is what I said, I'm gonna sound terrible. This is exactly what I meant. I-- like I said, I'm gonna sound absolutely dreadful. But this is how the market is gonna take it.

It's gonna be, "You know what? If there's no electricity in Manila do I really care?" And I think that's the mentality right now. And look I'm not saying this is awesome. And again, I'm an EM guy, so for us it's much more problematic. But I think that's the... Perhaps that explains the S&P's behavior today, where it's like, "Yeah, you know what?

Yep, I'm very sad for people in Sri Lanka, but anyway, let's what are Apple's earnings? 'Cause that's what matters to me." And all this to say that if it reopens now, I agree with you that we're still set up for some dislocations in June and July, but those dislocations will happen in the poorer markets first and foremost.

And either way, though, I would say that right now as things stand You know, w- debating whether if we reopen now, whether it will be okay in June, Etc, it's a bit-- it might be a just a specious debate because we're not reopening right now. And it doesn't look to me as if there's any attempt at diplomacy in the United States, 'cause this thing is only gonna get solved through diplomacy, and it doesn't really look like there's genuine attempts at the US at diplomacy.

The u- the way the US is conducting diplomacy is through a long list of demands that are equivalent to essentially Versailles in nineteen-nineteen, where we told the Germans, "This is it. Sign here, and here," as if Iran had been thoroughly defeated in the field. But Iran doesn't believe it has been thoroughly defeated in the field.

Iran believes its position is strong. Iran doesn't feel it's negotiating from a position of weakness. And I think that you must have seen this many times in your life either, people going through divorces or people going through fights with business partners or whatever. The worst results in negotiations happen when both sides are, A self-righteous, and B, believe that they're in a stronger position than they really are because the willingness to compromise is then not there.

And that's when you get bad outcomes all around. And to me it seems like we're still there in the Iran US situation where both sides believe they're very much in the right that the other side is profoundly evil talks about things in very Manichaean term of good versus evil, and both sides very much believe that they actually have the upper hand.

And so if that's the case, like it's pretty hard to reach compromises on anything. You and I could debate, "Oh, but look, if we reopen now, what's gonna be the impact?" Etc. The reality is we're not reopening now, so that's what matters.

Erik: What happens if Trump gets his war-making abilities taken away from him because of this sixty-day rule?

What if he loses in Supreme Court says, "Look without congressional approval, you have to stop." Does Iran open the strait at that point with a toll, or do they just say, ha, we won, and we control the global energy infrastructure from now on"?

Louis: No, I think Iran says "Yeah, you wanna go through the straits, it'll be two million bucks."

At that point, I think the ball then moves to Saudi Arabia. The question becomes, does Saudi Arabia wanna pay two million bucks a ship? Does the UAE wanna pay two million bucks a ship? Two million bucks that goes straight into the pockets of the IRGC. Now, if you're the UAE... By the way, the UAE leaving OPEC and essentially thumping their nose at Saudi Arabia strikes me as somewhat odd of an odd move because essentially UAE is saying we, here they are, you look at a map, they're stuck in between Iran and Saudi Arabia.

They're in a fight with Iran right now. UAE has received about three times as many missiles and drone hits as Israel. So they're in a fight with Iran and they pick this precise moment to pick a fight with Saudi Arabia. It's mind-blowing to me where it's like it'd be the parallel I would use is, in World War I when Germany invaded Belgium and if Belgium had turned around and decided to thumb their nose at France.

I think when you're in a fight, you typically you want to look for friends rather than make new enemies. And what's particularly surprising, I get Saudi Arabia's, UAE's point. It's we're going to need to rebuild after this. So we, we got to go. We want to produce 5 million barrels a day.

We don't want to produce three and a half. But how are those barrels going to move? Are you going to move them by ship? Then you're going to have to pay Iran. Or are you going to move them to pipeline through pipeline and then you're going to be fully dependent on Saudi Arabia? So you're going to be dependent on somebody giving you geography.

Why would you say stub your nose at both? It's to me, it's a little surprising. Anyways, to answer your question, if the U.S. Congress decides to tell Trump, OK, this war's over. You've had your fun. This has been a disaster diplomatically. It's been a disaster for the image of the U.S.

in the world. It's been a disaster for the U.S. consumer. It's been a disaster for the U.S. military. We've spent all of our weapons for no for really no concrete outcome. So we've done all this. So now you're done. You're out. You can't do this anymore. I think the ball then falls into Saudi Arabia.

Does Saudi Arabia decide, you know what? I don't want to pay Iran. So I'm only going to produce five million barrels a day and ship them out through the Red Sea. And that's that. Not only that, but I don't really have an incentive to move the UAE oil. You know what? UAE, you might want to produce five million barrels.

If you want to produce five million barrels, you have to pay the IRGC their two million. And the UAE is way more against the IRGC than Saudi Arabia. So politically, it's going to be very hard for the UAE to say, yeah, fine, we'll pay two million bucks a ship to Iran. Will they want to do it? So you're still left then on the other side.

If I'm Saudi Arabia, if I'm MBS, I'm saying, you know what? I'd rather sell five million barrels at a hundred and fifty than eight million barrels at sixty bucks, thank you very much. I'll just do that. And you might say that's gonna really piss off the US." But by that point, the US doesn't have military bases in the Middle East anymore, and the US has just shown it doesn't have the willingness to defend the Middle East.

So if you're MBS, do you still worry about what the US thinks? No. You just say, "You know what? I'll sell five million barrels at a hundred and fifty bucks and leave it at that."

Erik: Louis, I can't thank you enough for another terrific interview. I always really enjoy our conversations.

Before I let you go, tell us a little bit more about what you do at Gavkal, how people can find out more about what's on offer there, particularly for our institutional audience, since you are an institutional advisory firm, as well as how to follow your work generally.

Louis: Thanks. Look, Eric, I always enjoy our chats.

It always helps me crystallize a lot of my own thinking, so really thanks for having me on. Thanks as well for all the interviews that that you did in the past few weeks. It's really helped me think through a lot of issues, and y- I think you had some great guests in the past few weeks, so thanks a bunch.

Anyway, for me yeah, the best place is our own website. It's gavkal.com, G-A-V-K-A-L. We really do three things. We publish research for institutional investors. We we manage a series of fund, mostly Asian-focused funds, so Asian equities Chinese fixed income, Chinese distressed debt. And we we also have a private wealth business run out of Bellevue for the US, for US clients, and run out of Mauritius for offshore clients and Hong Kong where our headquarters is.

So if any of your listeners come through Hong Kong, they should feel free to reach out. Always happy to meet new people. And yeah, best place to find out is gavkal.com. I am on X. I... I'll post the the occasional thing, but Yeah, I'll post every now and then a paper that that I've either liked or that clients have asked me to unlock.

So don't hesitate to follow me on X.

Erik: Patrick Ceresna and I will be back as Macro Voices continues right here at macrovoices.com.

Erik: Joining me now is Tressis Chief Economist and fund manager Daniel Lacalle. Daniel, it's great to get you back on the show. It's been way too long. Maybe you can set me straight or maybe I'm just missing something. But we are speaking on Monday morning before the open in Europe. So right at the very beginning of the week, the news over the weekend, the Iran negotiations basically completely collapsed to the point.

There was no meeting and no negotiation. S&P500 futures rallied. New all time highs on the news. I don't get it. What's going on here? Am I missing something? Because I think this is a pretty darn big deal and I think that we're about to see delayed impact, effective of six weeks of supply disruption to energy markets.

Seems like markets are just not worried about it.

Daniel: I think it's staggering to be fairly honest. But I think that there is a fundamental reason is that money supply growth is soaring. We have the fastest money supply growth since 2021, globally now led by China. It's true, but also in the United States, Europe, a little bit more subdued.

But in the UK it's also soaring and that obviously. Considering that the war is generating a significant impact in investment decisions, consumption decisions, credit demand, Etc., all those things are reducing money velocity. But if money supply is growing, but money velocity is stable or declining, as in some economies, what ends up happening is that.

Asset prices in financial markets saw or at least discount that destruction of the purchase and power of the currency.

Erik: Let me just probe a little bit on why that's having the effect that it's having. 'cause I completely understand. If we go back to say, a 2021 analogy, you had, COVID crisis. It was a really big deal.

Daniel: Yeah.

Erik: So we print money like it's going out of style and that kind of recovers the global markets and economy. Okay. You. Print energy and

Daniel: yeah,

Erik: as much as it was a really difficult time in 2021, even though there weren't a lot of people flying on the flights because of COVID and the restrictions and so forth, we had the jet fuel, we had the diesel fuel, we had everything we needed to run the economy.

We were just choosing to shut it down.

Daniel: Yeah,

Erik: I think we're headed into a situation where in some parts of the world it won't be everywhere, but especially in places like Australia there. Just really gonna be hurting for diesel fuel and a lot of other finished products, and it'll all get worked out.

There's no doubt in my mind. It's gonna be worked out in a few months. A few months is a long time.

Daniel: It's a long time. I completely agree. I think that there's going to be very severe disruptions so that there are big winners and big losers. I don't think that anybody wins in a wall. Let's start with there is nothing, no one that gets a benefit.

No. Consumers all over the world are feeling the damage created by the elevated oil and gas prices. But obviously, what's interesting about this crisis is that it's showing the resilience and the ability of the United States and China to endure this kind of situation. And actually in, in, in the case of the United States, it's exporting record levels of jet fuel.

All these things are certainly. The elements that are important to take into account relative to other crisis. China is also maintaining the security of supply banned exports of refined products. And continues to have a very strong level of competitive advantage coming from its supplier agreement with Russia.

But the problem is in Europe, the big problem is in Europe, it's also a problem in Australia. You just mentioned it quite is that many economies have not prepared themselves for this type of disruption. In 2022, we had a very, let's say, benign outcome of the beginning of the Ukraine war.

You had an immediate spike of natural gas prices, of oil prices, coal, grain, you name it, everything. There were huge. Concerns about security of supply in cereals, in energy, of course, Etc.. But because of the flexibility of supply chains and all the things that you just mentioned, no.

What ended up happening was that added to a very mild winter, Oil, natural gas prices, Etc.. All of them ended the year well below the levels at which they started throughout the Ukraine War and a lot of countries. Instead of taking that as a warning signal, particularly in the European Union War and Signal, we have to make an extra effort to guarantee our security of supply, the flexibility of our sources.

Etc.. Instead of that, what they did was to think it was a policy success. And obviously now we read that Europe has basically a few weeks left of jet fuel. It's not going to run out of jet fuel is going to pay five times. What it usually pays. And that is obviously. Eroding consumer sentiment.

Consumer sentiment in the European Union is at the lowest level since since the pandemic. It's also having a very substantial impact on companies investment decisions, on the ability to manage. Working capital, all these elements are going to come later on in the process. Right now we have the effect of oil prices, which is very evident on gasoline prices, things like this.

But what we are going to see later is the challenges coming from big erosion of margins, reduction in the ability of to manage working capital and the challenges of supply chain disruptions that are. Going to be solved with very high prices because if there's one thing that we see every day on our screens is that China Asia is certainly bidding up any flexible cargo of anything. And in the European Union, we don't seem to see that urgency. It looks like it's they're continuing to bet on a, on obviously what is going to be a hot summer to mitigate all these impacts.

Erik: Let's talk about staying power and who really has how much of it, because it feels to me like this has turned into a contest of who can tough it out for the longest.

It seems like the United States is saying to Iran, look, we can blockade you. We can stop you. You eventually, you're gonna be to the point where you can't export your oil. You're gonna run out of places to store it. You're gonna be forced to shut in your production. That's gonna cripple your economy. We can wait you out.

Daniel: Yeah.

Erik: And Iran is saying no, we can keep the strait closed and we can wait you out. And I think there's a dimension of this where China comes into it and the US is almost as a proxy, economic war.

Daniel: Yeah.

Erik: Signaling to China. Look, we can control all of this stuff. And China's saying, oh yeah, we can wait you out because we've got bigger stockpiles of everything.

Than anyone else. So first of all, Daniel, who really can wait? Who out the longest? How long could this go on? If people are in a contest of staying power or wait, you out power, first of all, do you agree that's what's happening? If so, how long can they wait it out?

But then the next question is, what about. Not those principle actors, but what about the rest of the world? How long can they afford? Yeah. Including Europe, to wait out this pissing contest between Iran and the United States and China.

Daniel: I think that both the United States and China can wait for quite a bit of time.

China, as you have rightly mentioned, has the largest stockpiles of a, of any essential commodity that they need. And on top of that, they have banned the export of petroleum products and other critical elements in this, in the supply chain right now. Also. We have to mention the very substantial competitive advantage that China has by continuing to be the main partner of Russia in this aspect.

So China in that aspect can hold on. And can wait it out for quite a bit of time. And I think that it's certainly going to be, at least until the summit with President Trump, there's certainly going to be no move from China trying to force Iran to take action on allowing a full flow in the strait of Hormuz in the case of the the United States is now the largest oil and gas producer in the world.

It is. Exporting export record levels of petroleum products. It's at net exporting of 2.8 million barrels a day. So net exports very significant. Same with jet fuel, same with other elements. The problem is in the European Union and it's certainly also in emerging economies. Emerging economies, some of them are going to see some benefits from the rise in commodity prices.

Brazil, Argentina, Etc., are going to see that benefit because obviously they're big soya and oil producers and exporters. All those things may be positive, but in. An overall negative impact on countries like India, countries like Colombia, countries like Mexico, because Mexico, for example, has demolished its domestic production.

PMEX is in, in an absolute shambles, no. So if you look at what we told discussed prior, no, Europe does not have the possibility of waiting it out until. The end of May or whenever the summit between president Trump and President Xi Ying Ping happens, that's a problem. So I think that is this is the situation that certainly leads many of the expectations and estimates that I see out there to be, in my opinion, way too biased to try to make everything equally damaging for everybody.

I think that is. Incredibly evident for anybody that the United States and China have a huge competitive advantage, be it on their own or be it because of the strong relationship with the second largest oil producer in the world. But. Many emerging economies are going to suffer quite significantly.

Some of them already started the year at much higher levels of inflation than the, than their central banks, and certainly markets would feel comfortable. So that is already a big situation. There is something that is debatable, which is. Is the Iran regime going to change its position in an environment in which the Iranian economy is completely demolished because it was already obliterated in 2025 and 2024?

Remember that we closed 2025 with protests all over Iran. 60% inflation lo capital flight, everything. So yes the Iranian economy is doing really badly and the most impacted by the shutdown of the strait of hormuz is Iran itself. 'cause 25% of its GDP and 60% of its government revenues flow through the strait of hormuz, but the regime can stay

In the way that they are for longer than what Europe many emerging economies can actually sustain. No. So I think that all of that creates a quite a significant level of tension because coming back to the example of 2022, when the three sides in this equation that you just mentioned, China, the United States and Iran feel relatively comfortable about

Keeping the stalemate, then it may stay that way for longer than what other economies can endure.

Erik: Daniel, the messaging from the Trump administration about this has been look, I asked for the European countries to help in this conflict. They didn't send their navies. They've brought this upon themselves.

They're on their own to bail themselves out. We tried to work with them. They didn't wanna work with us. That's the way President Trump has presented. The participation of Europe and the conflict to the American people. What we don't hear in the United States is the European side of that. So what's the perspective in terms of how it's reported in Europe, where you live, of both the European Union government, but also just the sentiment of the people of Europe?

Is it, boy, we screwed up and forgot to send our Navy? Or is it more of, okay, maybe we need to revisit our relationship with the United States?

Daniel: Yeah, it's very polarized. On the one hand you have quite a significant part of the population, certainly the media and the political landscape in that follow the following argument, which is we did not feel any threat from Iran.

We don't think that the nuclear program of the Iran regime was a threat to Europe. We were not informed of the decisions made by the United States and Israel, and therefore we do not need to participate in any of this because this has not been let's say, discussed with us. On the other side, you have a part of the political spectrum that feel that the European Union and NATO should be supporting the United States, but not participating actively. In the conflict because in both sides of the political spectrum, there is a certain fear about taking sides with Israel and the United States because a lot of governments from different ideological positions lost a tremendous level of support by participating in the Iraq war. So if you put together the complacent view that Iran is not a threat, while at the same time you add the concerns that it is something that Europe would be dragged into this war, not participating willingly, that creates a, what I would say, a majority view.

That this is something that has been decided by the United States and Israel, and that has absolutely nothing to do. With European countries. And within that perspective there are different shades of gray. The German the French, they continue to support the United States in terms of military support, Etc., but they're not participating actively.

And on the other side, you have Spain that has. The government of Spain very intelligently which is surrounded by corruption scandals, decided, wow, I am going to take the anti-Trump card and I'm going to go Gonzo. On the opposite message, no. So all those things are certainly creating.

Very different perspectives, but if I put them all together within what I would say is a majority position in Europe is that at best what the European Union should do would be to support logistically or diplomatically any efforts to end the nuclear program in Iran and to end this war, but not to participate actively on the military side.

Erik: Daniel, let's talk about the fallout and consequences of this in Europe. Sometimes politicians who don't understand economics are in the habit of imposing price controls right at the moment when they're most damaging and they undermine the price transmission mechanism that's needed to correct supply imbalances.

That usually leads to outright. You can't get something and you have shortages and all kinds of other problems. What's the mood? Is there a reassurance of, don't worry, we're gonna put price controls on this, or is there an understanding that would be detrimental

Daniel: overall? The majority of countries in the European Union don't think that price controls.

Are a good decision, but there are some. You have to remember that there's a huge populist left and populist right in the political spectrum in Europe. The populist left is obviously. Coming very hard. The extreme left is saying we have to start expropriations. We have to start price controls, Etc., Etc..

Always they do this, they did this in the Ukraine war at the beginning of the Ukraine war. They did this in 20 18, Etc., and they've done it all the time. But in general, I would say that policy makers are very, I would say reluctant to impose price controls and certainly very reluctant to justify big subsidies.

Those two elements. Now, as always, in Europe, we always have politicians that will find any excuse to go out and say, Hey, let's put windfall profit taxes on precisely the companies that could. Actually support the improvement of security, of supply and invest in the, flexibility of the system in order to avoid.

Challenges like this. So that unfortunately is less I would say consensus. There's more of a consensus of putting more taxes rather than than price controls. And certainly there are some countries putting subsidies on energy but quite limited.

Erik: Let's talk about the economic consequences and also the market impacts and where the trades are here.

Feels to me like this is a strong enough inflation signal that we're thoroughly into self-reinforcing, vicious cycle, if you will, of secular inflation. I've held that view for a long time actually before this conflict happened that we were in secular inflation. A lot of people. Thought that I was crazy.

Am I still crazy or are we in a secular inflation, and if so, what is it going to mean for markets, equities, and so forth.

Daniel: I think that we are in an environment of persistent inflation. You and I talked about it, it makes absolutely no sense for people to think that there's going to be a radical change in the inflationary trend.

When governments are spending, like there's no tomorrow, they're getting more and more debt, which means printing money. And at the same time when all of the policies are aimed at avoiding any type of. Reduction in aggregate demand. Therefore when all policies are based on increasing aggregate demand at any cost, you get persistent inflation because money supply growth is soaring money velocity does not come down as it should in an environment of crisis because governments spend what the private sector stops increasing their expenditure on. And at the same time, we are entering this energy crisis with already elevated levels of inflationary pressures because a lot of people say, oh, come on, inflation was coming down.

Inflation is annualized and inflation is accumulative and more importantly year after year, we have seen all over the world, and this has happened everywhere. The way in which CPI is calculated includes a smaller percentage of, for example, food and shelter. In the case of the European Union, in the case of the uk, those two elements have sawed by twice the amount that CPI Accumulatively has risen in the past seven years.

So the loss of purchasing power of citizens is phenomenal, absolutely monstrous, and I think that is is going to be exacerbated by what starts as an energy crisis, but then spreads out to other goods and services because of scarcity, because of lack of availability of a particular product, Etc..

Erik: How long do you think the elevated oil prices will last? Is the top end or are we still headed to higher prices still? And where's the trade there?

Daniel: In my opinion, oil prices have already reached the top from now on. I think the oil prices are now discounting that there's, and the future's curve is in huge backwardation also seems to be discounting that.

Even If the situation ends in no progress, that the global supply of oil it's going to be managed between the oversupply that existed in 2025 plus the exports of the United States, plus the exports of Russia, plus the exports of Saudi Arabia, and basically those added to higher Venezuelan output are likely to be cushion elements on the marginal oil price. Can the price of oil go higher?

Absolutely. It can. Obviously, we know. But I think that, the risk is tilted to being stable or slightly down. Considering that every time, every day, every week, that passes. The system is start is adapting to both on the refinery level and also in the supply of oil level.

So I would say that if you look at the forward curve of the futures of oil prices, they're basically discounting. A huge level of disinflation into the end of the year, but still, and I think that this is where what we have just said. So important is that the level of disinflation that the forward curve is discounting is still leaving oil prices $15 a barrel above the level at which they were at the beginning of the year.

So I think that is the problem.

The geopolitical risk premium that oil prices. Completely lost in the past three years, which was an abnormality to be fairly honest. It's not only back on that it, but it may probably last for a prolonged period of time.

And that's where we have to focus, in my view, and not necessarily where they can go because they can spike and they can go you can have a post on truth social from Trump and the, and oil prices plummet $10. I think that what is really concerning for me is that the forward curve is.

Discounting that oil prices will still end up much higher than they were in January by December of 2026 and December of 2027.

Erik: If I look one year out on the forward curve on WTI, it's right around $70. Is that the new floor that stays in place even after the Iran conflict? Really and truly is over and the strait of M is open again.

Or do we go back down to $50 oil at that point?

Daniel: The other day I had this fascinating discussion with somebody that I knew from Aramco a few years ago, and he was saying. We need to be very aware that after every crisis in 2008, oil prices went to 140, then they dropped like a stone to 50. We need to be aware of the of that negative effect when you have, when you start to get a cumulative and domino type of demand destruction, I think this is not the case.

Why? Because in 2008 you had a huge crisis, but now all policy makers are focused on maintaining aggregate demand. Therefore, I would say we need to be used to the fact that energy is not going to be the disinflation factor that it has been between 2023 and 2025, unless obviously. We get the United States to go from 13.6 million barrels a day of production to 17.

That would be obviously goodbye oil prices. Or if Venezuela went to three and a half million barrels a day and it completely offsets. Iran's exports. Do I think that is likely to happen in the short term? Very difficult, almost impossible. It is easy to bring the production of Venezuela from 500,000 barrels a day or a bit higher to 1.2M.

That is relatively easy, but is incredibly difficult, is to bring it back to 3.5 million. So all those elements. In my opinion, give me the idea that it's going to be very difficult to bring oil prices down to 50 the same way that it is very difficult to bring oil prices up to 212, which would be in real terms, the equivalent of the old time high.

So I think that basically, just to summarize it, geo, the geopolitical risk premium is likely to maintain prices at a higher level than we have been used to in the past two years. But the United States has gone from being a shock, a amplifier to a shock absorber.

Historically in in 1973, in 2008, the United States being the largest importer of oil in the world. When there was a geopolitical risk problem, it amplified the risk because it did what China is doing today, which is to increase prices at the margin. The United States now is a shock absorber, and the fact that China.

Has its strategic partnership with Russia, and Russia is producing 10 million barrels a day. Exporting around 4.5 is also a shock absorber. Even if China is setting prices at the margin for LNG and for other energy products, much higher than what people would be comfortable with. Again, summarize is I think that the bottom is higher and that the top is much lower.

Erik: Up until March 2nd, gold was operating as a geopolitical risk catch. Bombs fall. Gold goes up. Oil goes up, gold goes up together. Now we've got this inverse relationship where the bombs start dropping and gold goes down as oil goes up. The opposite of usual. What's causing that and how long does that last?

Daniel: One of the most fascinating elements about this change in the global landscape of energy that I just mentioned. The United States going from being the largest importer of oil to the largest producer of oil is that the US dollar in this crisis has behaved like a petrol currency. It has basically risen when oil prices were rising.

And if you look at the correlation between the dollar and oil prices, it's been almost phenomenal. Huh? But so I think that what happened was the following, particularly in the past 18 months. A lot of us saw that there were a lot of positions being built in the market with very little equity, very leverage positions on gold using as a source of funds, the US dollar so long gold, short the US dollar, because it's been a phenomenal trade.

And because it's been a phenomenal trade, a lot of people were putting less equity and more debt. So what happened is that once the geopolitical risk scenario got worse and people starting to demand more dollars, the dollar stopped falling around relative to most currencies around July, 2025, and has been stable, then started to rise.

So margin calls started to appear. A lot of people had to sell their winning positions in gold in order to reduce their losses or their possible losses in this trade. No, and I think that what has happened is basically that at the same time. A lot of the central banks that had hoarded gold in the past three years aiming to rebalance their asset base, they have decided to sell some of that gold in order to reduce the impact on their local currency of the revaluation of the dollar, but also the depreciation of their local currency relative to their trade in basket. So those two things now very big leveraged bets on. Gold using the dollar, the treasuries as a source of funds and the central banks that have decided to reduce a little bit, take some profits on some gold and mitigate the impact on their local currency.

And that's why gold has not continued to rise, but it has also behaved pretty well. It's, it has not collapsed in, in any shape or form.

Erik: Let's come back to the US dollar index. The dollar was in a downtrend pretty darn clearly before this conflict started. Now we're back up to not quite a cycle high, but pretty close to it.

Is that a change in direction? Is this a new secular move, higher in the dollar, or is this just safety trade that only lasts for as long as the Iran conflict lasts?

Daniel: I think that the upward trend of the US dollar is clearly a sign of risk-off environment and also is clearly a sign that there was an uncomfortably high level of shorts on the US dollar in 2025 in particular.

I think that all of that has cleaned up a little bit, but I don't see the US dollar strengthening. In an environment in which the conflict ends, I see it stable. I see it, the DXY index there. As we speak at 96.5, it moves up. At a hundred, 101, it moves down. I think it's that's the the trend that the US administration, that the Federal Reserve, that the market sees as the logical trend for the US dollar.

And obviously if tomorrow we have a piece of news saying. The conflict has ended. There's an agreement it ha and the strait of hormuz is open. And Iran has stopped his nuclear program. If we get that piece of news, I can guarantee you that the dollar index goes to 96.

Erik: Another aspect of this conflict is the impact that it will have on fertilizer.

I've seen a few reports that least American farmers are having difficulty sourcing all the fertilizer they need to fertilize their crops as much as they would like to. Yeah, I would assume that's probably the same situation in Europe. Maybe it's worse there. I'm not sure.

How does that play into this?

Are we looking at a big food inflation coming?

Daniel: There is certainly a big problem of. Availability and price availability of fertilizer. So far, those producers, those farmers and those agricultural firms that are able to accept higher, much higher price of fertilizer are not having a problem of supply.

What is the problem? The problem is that, for example. The European Union, the margins of the farming and agricultural sector have been obliterated in the past five years through taxation and completely misguided environmental policies, Etc.. All these and regulations all over the place. So for the European Union is a much bigger problem, but obviously at the same time Ukraine.

Is likely to be there to mitigate a little bit that problem. And Russia for China is also likely to mitigate that problem. In the United States. The fertilizer problem is a problem of price. It's not a problem of availability. They can get fertilizers from its main. Sources outside of China and that's going to be more expensive.

That's why if you think about this, everything that we're discussing, today, everything that we're discussing today leads to a point in which Trump and Xi Jinping get together. And they reach an agreement that is beneficial for both or things get really nasty for everybody.

You see what I mean? So that's why I think that all these little elements that are creating tensions are likely to come together into some form of agreement that that sort of wraps the trade war. And the geo geopolitical challenge or the Iran War right now in a in some form.

And obviously that may take some time

Erik: For the traitors in our audience. Daniel, what can you think of beyond what we've already discussed that might be a consequence of this conflict that will play out in markets? Is there a shortage of X, Y, or Z that people need to be thinking about?

Daniel: I think people need to be thinking about the challenges for the financial sector of continuing to lend and not face significant provisions, particularly in the case of the European Union.

There're always a lag effect. I think that people need to be aware of the problems. In the aviation sector. I think that, obviously, I think people are already aware of that, but I don't think that they're aware of the, of how quickly the margins in the aviation sector go to negative. I think that's what people are still not paying enough attention to.

The automotive sector is going to have huge problems of spare parts, Etc.. This is the thing. Everybody's trying to find solutions right now in the world for. Essential raw materials and minerals and, and right now we're seeing the price to availability element playing out well.

But nobody seems to be or at least obviously that is a second or third derivative of the solutions. It seems that all of those ships that are currently stopped or unable to get. To the place where they're heading to, most of them are actually taking spare parts, elements that are essential for the production of cars, for the production of different parts of the economy.

I think we're going to have in The services sector, tourism is going to have a big problem into summer. Particularly in the European Union, it's already evident that you've seen the services sector in contraction for the first time in, I think three years, four years. I think you're going to have big problems in the automotive sector, and I think you're going to have big problems everything that has to do with air travel and apart from that.

You're going to continue to see equity markets doing pretty well.

Erik: Daniel, I can't thank you enough for another terrific interview before I let you go. You run to fund at Tressis. You're also a published author. You've got lots of different things going on. Tell people how they can follow your work.

And for our accredited and institutional investors, how can they reach out to you with respect to your fund?

Daniel: To invest in our fund, you just can contact Tressis, T-R-E-S-S-I-S, and they'll be able to give you all the information. In terms of following me, you can go to my website Delacalle.com There's a part in Spanish and a part in English, so don't worry about it.

I also have an X account in english delacalle_IA and my official YouTube channel in English. I always say that it's easier to find me than to avoid me. So just put Daniel Lacalle and you start to get everything. But remember that for everybody that is listening that. You can find for every account that I that you see, you'll probably see the first one in Spanish.

I have one in English, so make sure that you look for the English or international account.

Erik: Patrick Ceresna and I will be back as Macro Voices continues right here at macrovoices.com.

Erik: Joining me now is Ole Hansen, who heads up commodity research at Saxo Bank. Ole prepared a slide deck to accompany today's interview, so I strongly encourage you to download that as we'll. Be referring to those slides over the course of this interview. The download link is in your research roundup email.

If you don't have a research roundup email, it means you're not yet registered at macrovoices.com. Just go to our homepage, macro voices com. Click the red button above Oles picture that says, looking for the downloads Ole. Obviously the big story is oil. And Iran, and I shouldn't say oil, it's energy generally and Iran and other commodities that are affected by this whole conflict.

We just had a dip, which hopefully many of our listeners were listening last week when I suggested there's going to be a big dip that came on Friday morning. Hopefully people bought $79 crude oil when they had the chance to do you've missed that opportunity If you didn't do it then. Tell us your perspective on the big picture of what's going on with energy, how long this is likely to last, and what we can expect for energy markets out of this conflict.

Ole: Hello Eric. And thank you very much for having me back. I think there's no doubt that even though the market is behaving relatively benignly, especially if you're just watching front bonds, the futures price in, in the crude oil market, you would you would be saying what's the whole Fs about?

But this disruption we're seeing right now is just so profound because it's not only the energy space that we are seeing being impacted, and then, and one thing is crude oil but another thing is the older, refined products where we are really seeing the tightness right now, diesel, jet fuel, petrochemicals, and so on.

But it's also the associated impacts because I think many were probably not aware how the importance of the Middle East besides energy production, that in, in recent years the Middle East has obviously expanded. Its production base. And why it just why just sell sell oil outta the ground and send it on the ship when you can actually make some money on the process of refining these into other areas.

And that's why we suddenly left with a market where besides gas obviously, which is a cat and a major supply to the global market, we have all the associated productions of commodities that, that takes place in the Persian Gulf simply because they have an abundance of cheap energy available.

So the energy intensive commodities that's anything from from aluminum to especially fertilized, which requires a lot of gas, which the main feedstock they have become key issues. Reason we just come to know as well that miners in South America then needs sulfuric acid in order to break down the copper from the, from their mines.

And that basically means with 50% of that coming out of the Middle East then we also suddenly face a potential shortage in that area we talked about. We, helium has been mentioned prior to, to to the chips industry. So the it's just a whole how the breadth of this breadth this this crisis and how it impacts not only energy, but anything through to metals and agriculture as well.

And the duration is really the one that everyone is trying to work out because looking at the forward curves, especially in the energy space in crude oil, you would imagine that you'd think that this would be over by by, well within a few months. We're seeing still, we're seeing a very extreme backwardation right now, which basically means the price is further out, trades relatively cheap.

If you look at Brent's crude December contract is trading just above 80. And you could, you can easily argue that having gone into this year with with all the talk about ample supply with, was the biggest supply lot in, in living memory as as touted by the IA, which potentially was, too high compared to where the market was actually signaling.

We started with trade the year in the 60 to $75 range. Looking at Brent. And I think that there is an argument that once, the dust settles, and we on the other side of this, we should expect prices to settle in at a, at least 10 higher level, maybe even to 15 higher. So the floor has moved higher for this, and that basically means if you're looking at Brent Crew for December at $80

That's potentially where the new floor should be. So I'm struggling to see any, so see these these these Ford prices really reflect what potential will unfold in the coming months because it will take time. It will be a logistic, a nightmare. Ships are not in the right place. We have refinery damages.

We have wells that needs to be restarted, but before they can restart. The oil tanks needs to reduce the the inventory levels has to come down so that, so the tanks can free up space for the production to restart. So we're easily looking at two to three months from a peace deal before we can start to talk about any kind of normalization in my book and.

And this is getting a little bit long, Ari, but I think also interesting to note that in the last six weeks, how much has the US crude oil production risen by zero barrels, how many additional rigs has been employed in the US shale area, zero rigs? Basically, where are the US producers? Why are we not seeing any response?

And I think part of that is, is clearly the fact that the curve is very backwardated. So if you are an oil producer needs to hedge your production three to six months out. The prices Are still not, that great. And similar, maybe also just raising question. Are we getting close to a saturation point in terms of how high US production can actually go at this stage?

Erik: You mentioned backwardation, and this is something I've really been surprised by over the years, even among professional investors, people who are not professional commodity traders seldom understand how important term structure is in commodity trading For. Particularly for position traders who hold a position because of a macro viewpoint for several months to several years, you can make money in a down market and you can lose money in an up market depending on what the term structure is.

You're probably the only person I know who's put a chart together that really clearly explains this. So let's Jump ahead to page four of the slide deck.

Ole: Yeah.

Erik: So I wanna go back to what I just said a moment ago and ask you to explain it. 'cause it sounded crazy. I said you can actually lose money being long in an up market and you can make money by being long in a down market, depending on what's going on with the term structure.

Explain how that's possible.

Ole: Simply because if you are a passive long investor, Eric, you are no, almost no matter how you invest into a commodity space, whether it's through an ETF or through a swap, the whoever provides you the ETF or the swap will always go back to the clean market.

And the clean market in this case is the futures market. And if you have a market where, which is backwardation IE, it's seek a signal in a relatively tight supply and you are holding a futures position to as a, to hedge your exposure to the ETFs and the swaps that you have issued every time you roll that position.

If we are in backwardation, you'll be selling an expiring contract at a higher price where you buy the next, that is giving you a positive roll yield over time. And the, obviously the opposite occurs if you have a time period with ample supply where spot prices or the first future months is cheaper than the next, then you'll be selling low, buying high.

That's that's basically one of the reasons why natural gas is such a dog to trade from a long-term perspective, because the return there is just is so difficult to to achieve because. This long periods of time during during a calendar year, we have periods where natural gas is trading a really steep contango.

Basically when we are moving out of peak demand into lower demand season, where we have this very, we move from a very high price to winds to a very low price during the summer. That period is just killing you if you're trying to just be belong because you're constantly selling high and buying low. But, how does that impact you as a return? Real returns. And that's really where it starts to get interesting. Because one thing is that there's a lot of investors looking at commodities. From that perspective saying the outlook potential look looks good for commodity.

We like to have some hard assets in our portfolio, but we don't wanna be get killed by the by a potential contango. What I put up here on, on chart for slide four is simply the performance between the Bloomberg Spot Index and the Bloomberg Total Return Index. The spot index is basically reflecting the movements in the underlying futures price.

And the total return takes these roles that are mentioned into account. And we had a five year period let's just do it in five year cycles here. We had a five year period from 2016 up to 2021. I could have gone further back, so we just hit the nail where we had the bottom in 20, but that's just for argument's sake.

The, those two, those five years. During that time, the spot index actually indicated that if you had bought a, an investment in commodities tracking the Bloomberg Commodity Index, you would've made 52%, but your actual return was only 14. That massive difference is basic because we had a period, a number of years where most markets were trading contango.

Basically there was ample supply. We come out of a period where producers had responded to higher prices in the past, and we also had the re recession that a weakness that in the economic, that was under holding demand out. So basically we had a market that was amped, supplied.

Fast forward to the last five years from 21 to 2026. Once again, if you look at the spot index, the yellow line. It's based more or less performed, done the same performance up 57% against the 52 in the previous five years. But if you look at the total return, you actually up 83%. That is a massive difference in the performance of your investment.

And that's why backwardation is so important to keep an eye on. And if we are seeing a future where we see tightness emerging in several, across several commodities, and that backwardation will continue to be present, then that would basically provide an investor with some tailwinds besides the actual movement in the price.

Erik: Now coming back to the oil market, I want to jump ahead to slide seven in the deck where you show a forward curve chart. Now for people who are not commodity traders might not be familiar with a forward curve chart, this is not showing the price action over a period of time. This is one snapshot of one instant.

The price is not just a price, it's a bunch of prices. Explain what the forward curve chart is showing us on the left here, and particularly that's a lot of backwardation and what we just saw in the previous chart was the more backwardation is, the more that. Actual realized return exceeds the return on the underlying spot price.

So what does this all mean for crude oil investors and boy, look at the difference between the front month and just say the December

Ole: Yeah.

Erik: Of 26 contract.

Ole: That's huge. Indeed, Eric and it reflects several things. But first of all. It does reflect the fact that we have this that we have the war, we have the tightness, which is which is mostly impacted, which starts at the spot, at the various spot.

That's why we, if we added some like data print, which is the the price that barrels are exchanging, hand, physical barrels are exchanging hands in the North Sea, then that would be trading at at an even higher price. So basically a very backwardated curve because the stress is in the front end of the curve because that's where we have the tightness and where we have the worries about where the next barrel is gonna come from.

And that's driving this kind of this kind of curve structure. In addition to that, there is also a speculative element. And I highlight that on the right hand side, but basically where we look at what managed money is, so that's hedge funds and CTAs, how they position themselves in the oil market.

And we come out of a at the start of the year, basically, you can see that we literally had a net short position if you look at the WTI and Brent combined , I can't recall I've ever seen hedge funds being being so weak in terms of the positioning started, moved into the year and then and then suddenly basically it really took off.

And you can see primarily with Brent that took off, Brent as the, is more reflection of the global situation. And where do hedge fund buy into the market? They do that at the front end of the curve, simply that's where the liquidity is best. So that's also underpinning the front end and driving up the backwardation.

So some of it is related to tightness, but also some of it related to speculative interest. And that's also why we see these five to $10 corrections. We've seen two now in the last couple weeks. And that's part of that is most certainly driven by. By Spectra is having to get out a long position because we have to remember hedge funds, if there's one thing, they're not, they're never ever married to their positions.

If something goes wrong, if there's a technical change or fundamental change, they'll seek a divorce as soon as possible. Whereas the rest of us potentially can sometimes get bucked into a position where we think we right in the market is wrong, but hedge funds, they respond when there is a change in the market.

And that's, that helps add to some of the volatility we see at the very front end. But, Also just returning to this, the curve the steepness of the curve. That does obviously mean right now when we are moving now from the June to, to the July contract in Brent, and more or less the same, in, in double high, you're basically gonna pick up $5.

So that be, they would be rolling out of, at 95, buying back in at 90. And if the on, if the market in the month's time is still on change, then we still have tightness and we're back to 95. Then basically that was, that's your $5 that just come in. Come in as a as an additional as an additional game.

So it's further out the curve. That's really where many of the producers they're operating and that's where they're looking if they need to hedge their production further out. And if we imagine that the new floor in Brent is is closer to 80 than than 70, that as it was just a few months ago, then you can see further out that we dip below at two levels where.

Potentially could be which potentially may not be warranted given what we, how the world has developed in the last three, two months there, where we've basically seen a massive reduction in the overhang of global supply, we are seeing more than half a billion barrels of production that has not has not been lost, but has not been produced.

And that's really tightening up the global market. SPR Strategic Reserves needs to be rebuilt. And that basically also means there's an additional layer of demand into the market. So I'm just basically questioning that, whether that, whether we are going to how soon and whether we are going to see a significant drop back below ac even when we get through this this current crisis.

Erik: Let's talk a little bit more about that because what this curve on the left slide of page seven is showing us is about 12, 12 and a half dollars of backwardation between the June contract and the December contract. So that means if you bought the December contract and waited for it to come to expiry in six months, you'd be making 15% on that investment in six months.

Yeah. So what does that annualize to a whole lot. Even if the spot price stays exactly where it is, it doesn't go up or down. Of course somebody might say, oh, but wait a minute. That's just because of this situation, which is about to blow over. The president said on tv it's gonna be over any day Now.

Hang on a second. I'll let this began in February. By the time this episode airs, we've got one week left in April before we're into May. And we haven't even seen the beginning of the disruption yet because the tankers that left the Persian Gulf at the end of February are just now arriving at their destination.

So the big disruption of supply is only about to start and go on for at least six weeks. H how does this blow over to the point where oil prices are back to normal in six months? I don't get it.

Ole: Nope. And I agree, Eric, and I think the only thing that really in the short term could potentially drive them down there is if we see an extended phase of long liquidation from the, from from hedge funds, as I mentioned, basically holding around 500 billion, 500 million barrels of of longs.

But I think a lot of that has still be initiated above levels where we are right now. So yeah, there could potentially be a piece piece sell off. But then once that is done, I think the market will very quickly turn around and ask the hard questions. When is the normalization going to occur?

And then that's really when I think we, we will come to the conclusion that it's not gonna happen anytime soon. And that basically means that we will have to live with higher for longer in, in the oil market. And as you mentioned, if if 80 is around 80 in December, the longer it takes, the more we will move towards the actual current level.

So that, that's why the the back, that's the beauty of backwardation, how it works over time. And just looking at Brenton on Friday, we drip we dipped all the way down to 77. And one could argue that below 80 there is some value to be be found in Brent, basically based on the fact that this is going to take a long time to to sort itself out.

Erik: I wanna move on now to another potential trade opportunity that I think might be even more ripe than the energy trade. Because let's face it, even though it's resulted in this steep backwardation, the front month has been played here, it's priced in. Everybody knows that there's a war on, although frankly, I'm not sure it's priced in as much as it should be given that so many people seem convinced that this is ending when I'm not persuaded that it is, but I wanna come to something that I don't think has been priced hardly at all yet, which is it seems to me that the fertilizer deficit is near certain to result in diminished crop yields next year. 'cause you know it's planting season right now. Everything I'm reading says that American farmers, and I'm sure it's probably the same in Europe, the farmers can't afford or can't get their hands on enough fertilizer to fertilize the crops as much as they normally would wanna, so they're planting under fertilized crops.

Seems to me like that can only mean undersized yields. That presumably results in higher prices. Am I right about that? And more importantly, has that already been discounted and priced into the market, or is that something the market isn't really pricing yet?

Ole: It's priced in a to a certain extent, Eric, but I think the the reason why it has not significantly impacted the market at this point in time is simply because it's still too early.

We are also a lot hinges on on weather in the coming three months during the growing season across the Northern Hemisphere. But if we have a combination of adverse weather and the fact that the amount of fertilizer that was available and it has been used if we see a combination of those.

We will see downgrades to to crop production targets for this year. And that will start to eat into an overhang of supply because we're coming into this, just like the oil market, we're coming into this fertilizer crisis, which we can call it with ample supplies of some of the key crops soybean, corn and wheat.

But it really only takes one, one bad season for that whole equation to, to change around. And that's really the worry in the coming months that that if we see some troubled the weather potential as well. We already now in, in the US it's been, and that's why natural gases.

Dirt cheap. US natural gas is dirt cheap because we've had a very mild end to the winter but also a very dry start to the, to this season. And that basically means something like wheat prices are struggling or wheat crops are struggling in some of the major wheat belts production areas.

And that has already added some a bit to to wheat prices. But wheat is one that is probably most exposed. It is the one that's most nutrient or nitrogen intensive of the major crops. And the one that's least intensive is soybeans. And and that's why we as well, we have seen the response in the crop market being strongest so far in corn and and wheat prices.

But then we have other associated impacts which is also lifted some like soybean oil. So the question is really whether we are. Wether This benign performance we've seen in agriculture now for the past couple years. Just looking at the, agriculture sector as a whole.

In the last year, the total return on the agricultural sector has been 1.3%. Two years is only 5%. So it really has been bumping long near some multi-year lows. Some of these key crops. But the risk is. Clearly that the cost of fertilizers and adding to that also the cost of diesel into a system where farmers already struggling from having produced at low prices in the previous few years, that will add to the pain.

You could argue that across the northern hemisphere, as we were so close to the planting season when this started, that fertilizers were not coming from middle East because it would've arrived in the US and Europe way after the the planting has finished and the need for the fertilizers was there.

But it, so it's, the focus is probably much on. Some of the regions closer to the Middle East in the coming months, be India, Africa, but also later on South America. And south America has become the, one of the biggest, is the biggest export of key crops, especially to China. So all in all.

It raises concerns that we are potentially facing higher food prices in the coming months. And that basically means that while agricultural or me, metals was a driver last year, energy was a driver at the start of the year. Potentially agriculture become another driver as we move into the second half and into into 2027.

Erik: Now the challenge with agricultural commodities normally is they're typically contango markets. Contango is the opposite of backwardation, meaning that the price goes up over time, and that just makes it very difficult to make any kind of bet on what's happening next year because if you try to go long next year's agricultural commodities, there's so much price premium that you're paying for buying in advance that it ends up canceling out.

You don't make anything on the trade, even if you were right. Have these markets moved into backwardation as other markets have in this crisis?

Ole: Not yet to the extent that we've seen seen in, especially in the energy. If I'm just scrolling down, looking at my one year and the one where we have the most significant ation right now is soybean oil.

And and again, that's the energy related story. Soybean oil is has been in strong demand. And now with the biofuel link to to diesel. Then the the soy oil is in backwardation wheat and corn still in 10% one year contango. And and then elsewhere we have some like coffee, which is actually in a decent as well.

But generally, as you said, Eric and mentioned. And crops tends to be in cont. So just the mere fact that we're moving towards a anything less than 5%, which is basically reflection of the one year funding cost. If you look at the dollar then that basically means that we are moving towards tightening market.

What we need for that to return to proper contango back validation, sorry, is really just what we see as similar as what we see in the oil market that the spot market is becoming stressed because inventory levels are being drawn down and for worries of supply. And then again, It's not a situation now I would ideally like to avoid because one thing I talk about talk about gold prices doubling. That's fine. But talk about wheat prices doubling. That's a complete different in terms of global food security and what it does to to nations. But it's one we cannot ignore simply because the impact of fertilize and the lack of it right now.

Key markets, sewers, watch in the coming months, I would say.

Erik: Let's go a little bit deeper on that. Suppose that my trade hypothesis is its planting season right now in the Northern hemisphere. Suppose I think this crop is probably not going to be as productive as prior years have been because of this fertilizer situation.

First of all, what's the right timeframe? Would it be, say, December of 26 futures that I would be looking at to try to trade the outcome of this year's planting season? And because of the contango that you described, it seems like we gotta figure out how to hedge that somehow. So what would you think about something like a pears trade long wheat, say December 26?

Wheat futures short soybeans, basically betting on the more nitrogen dependent, more fertilizer dependent market, outperforming the non fertilizer dependent market of soybeans.

Ole: Yeah, that could be that could be a way of of expressing it Eric yeah if it's purely the nitrogen balance that we are looking at, and and it is interesting if you look at and you mentioned us, where we're on the curve and really depends on whether we should include the next Brazilian harvest.

Obviously wheat is not a major product in Brazil so it's mostly the northern hemisphere and then later on in Australia as well. But if you look at December or the current front months in wheat, it's trading just above $6 a bushel. If you look further out, which is the new crop, which basically is concentrated in the December contract.

Then we're looking at a price currently at six just below six 40 per bushel. So there is this contango, but if we do see the market start to tightening up in the coming months then December, then the December contract out there will will show will start to, to increase.

And we also seeing just march next year, trading again. Quite a bit higher, and that's when we start to take in the southern hemisphere via harvest into into account. But generally, if you're looking at not this harvest or not the present situation, which is basically anything you trade right now with, in terms of front that's basically what's left.

You're trading what's left in stocks around the world in inventory. If you wanna trade what's coming outta the ground in the coming months, you'll be looking at December corn, December wheat, and November soybeans.

Erik: Let's move on to the longer term effects of this crisis situation. One of the things I've been fascinated in the study of inflation is the extent to which it tends to be a self-reinforcing process once it gets going.

It seems to me frankly, I thought we were headed into secular inflation even before this whole Iran conflict. Came about, but it seems to me if we weren't there already, we ought to be by the time this is done, because the effect that this is having on energy prices, I think is going to send an inflation signal into the economy that's likely to become self-reinforcing.

Do you agree with that? And if so, what does that mean for commodity trades?

Ole: Commodities, will be a major input to, to that risk. And as we talked about is because it, the broad nature of the current current stress that we are seeing, it's not only energy and fuel markets is also spreading to to some of the metals and some of the food commodities.

Then the impact will be felt. And and yeah it just raised the question where to be positioned if in, in such a scenario. And I think just simply the looking at the commodity space, how it's recovered from the pandemic low in 2020, and how we basis since then has has risen almost 200%.

If we look at the commodity index.

The underlying reasons for holding hard, hard assets. I think the argument for that probably has only been strengthened by developments in the last last month because we are increasingly facing a world where we are moving from. I don't know if whether it was Jeff, Cory or one of the others said you had on the show recently that, let say we moved to, from a just in time to a just in case world where the economy is basically the disruption we're seeing to the global.

Trading system to trading to the breakdown in normal relations basically means that we are much more focused on having ample supplies instead of just having enough supplies and being reliant on supply chains, being able to deliver. So you don't run into any shortages, and that basically means that, that.

That means that there will be a demand for, to, that it will drive higher drive demand because inventory, the in inventory levels needs to be kept around the world at higher levels than it was in the past because of this change in, in, in the way we look at the world and then we'll have to see how that feeds into to some of the darlings of the, of last year, which I think is basically just right now just taking a bit of a breath as some of the metals.

I see the I see the gold market just consolidating right now. I think we actually. Seeing some of the macro tailwinds starting to return but as I mentioned before, the. The Speccy community, especially hedge funds they don't have a signal here. There's nothing really we basically just bashing around a bit aimlessly around that $50 or 50% reation of the big seller from the highs to the low we had last month, which were ended up at the 200 day move average, which was quite a strong level of support.

But I think the. Once we're on the other side of this we'll start looking at some of the reasons why we drove these up in the first place, have not really gone away, and if we had that with the risk of high inflation. if we had that with central Banks having to Stock between two sitting, stuck between two chairs. You focus on inflation or should just start focus on the economic support. I think that's still, and then the whole fiscal debt situation there, which is, has anything worsened in the last last six weeks that based all, I think still points back to in investments in hard assets where.

Where gold is one of the go-tos, but also the energy sector, simply because we need, we're gonna see a higher floor than we saw in the before, and that will benefit the energy producers. So the energy, the recovery that we started to see in the energy sector last year, which accelerated obviously has accelerated, which may go through a al consolidation.

Now if we do get a deal, I think the what's what we're left with is the fact that higher prices will be higher going forward. And that should be benefiting the the earnings. So again, the, so the energy sector and all the producers are also the sector, which I think will benefit in, in, in the future.

Erik: You mentioned in the course of that answer that we're up about 160% in this cycle since 2021. I want to go now to slide three in your deck where you talk about the super cycles that commodities tend to trade in looking at. This slide here, the 1970s were a famous bull market and commodities and bear market and almost everything else.

It seems like there's a strong correlation with that famous inflation of the 1970s there. These cycles seem just from the looks of the slide here to last about 10 years, where five years into the present one, does that mean we're halfway done, halfway there. What should we expect in terms of the current cycle?

Where do you think it's headed?

Ole: I think we're heading higher. Simply because what can we call this third wave is it, and I think we can probably call it the energy transition simply because of the increase.

We are still in a power hungry world that where demand for power continue, or energy continues to go up. It's increasingly we focusing on power, which is electricity. We all know some of the major culprits for that increase in demand, but also and we need to make sure we in situation where we can conduct all that that power.

And and that is just very commodity in sense. So we have this, again, I think that's actually Jim was Curry's phrase that we have the old world is striking back against the new world because the new world wants to accelerate at a at a hundred miles an hour down the towards progress.

But the old world is bumping along at a much lower speed because they can't keep up with the demand that is that is coming from all the different, all the new technologies and all the direction that we want to go. I think that basically leave us in a situation where this, the old saying that the best cure for high price is a high price because it incentivizes supply and it also impacts negatively the demand side.

I think that is still obviously relevant in many areas. The most striking one recently has been cocoa prices, which went from two and half thousand to 12,000 only took utterly collapse back to where we came from. Simply because there was a response both from the demand side, which slowed and the supply side, which increased.

But I think if you look at some of the, both the energy and the metal space, the the, what we're missing or could be missing in such now is simply the supply side, not being able to respond. To higher prices. And that leaves us in a precarious situation where prices could actually still go up even though economic, growth is not great or potentially not at levels that we could invest it simply because the demand for many key commodities at is at a level where.

The physical world is struggling to keep up with the to deliver all that all that material and energy that is required. I think we are, perhaps we are halfway through. Perhaps it could last even longer. Depends really on the speed of it.

And I think if anything, what we learned from the 2022. War in the Russian invasion of Ukraine was the was house of renewable sector. Obviously it had a massive boost in the months that followed because the realization that we need to be less dependent on fossil fuels.

I think what we're already seeing signs of that reemerging now with the very high energy prices we have that. So perhaps so we are seeing parts of the power sector or the that part of the energy equations having a, having another arena on. And that again will just speed up the process in terms of tightening some of the mar markets that are, that delivers the materials and commodities that's required to to go to to sustain this this energy transition.

Erik: You also mentioned gold a few minutes ago, so I wanna move on now to page nine in your deck where you're talking about gold Here, it seems like some very fascinating things have happened. Gold normally functions as a geopolitical hedge. So bombs drop, gold goes up, something flipped like a switch, Ole. Yep.

At about 11:00 PM on March 2nd, where all of a sudden a bombs drop, gold goes down. What happened there?

Ole: The market panicked. And when the market panics, it's a question of just getting out of position or getting reduced. Getting your exposure down to levels that you find that's manageable and so gold to a certain extent, to some of the other metals well suffered from the success that had in the previous months.

So they become very wild. Wild wildly held investment, meaning that they were also exposed, when that situation unfolded. And we've seen similar situation. The the Liberation Day last year, was another example. But it takes some of the major crisis we've had in the last 30 years.

The dotcom bubble, the global financial crisis. We've had a couple of others. The initial response in gold has quite often been a selloff only to recover very strongly and making new highs in the months, and quarters that followed. And and I think we, it's it's.

It should not be taken as a surprise that when we have such a major event that the gold is struggling, at least in the short term, and then the depth of the correction $1,500, which is pretty insane. But then again, just looking at the chart, it's not simply because of the distance we traveled in the months and quarters up until that peak point in back in January.

So we could, we corrected $1,500. We found support of the 200 day moving average. We're now just treading waters. We've gone from a bit of a liquidity and inflation shock, perhaps now more towards a growth shock where the implications of this this crisis will start to to play out in the coming months in terms of soft economic growth.

And with that also the central bank struggle business between focusing on inflation on one hand and perhaps focusing on economic stimulus on the other side. And I think that's that, that will eventually send the gold prices higher again. But for now, we are consolidating and it's really just.

If you look again on the chart, it's literally just around the 50% retracement of the big sell off. So it's a natural point for the market to consolidate and try to gather what's gonna happen next. So I see more of the sideway trading in the coming weeks, but I think the foundation that was late and sold in the previous.

For this multiyear bull run has not has not suddenly died. A sudden death. The correction was necessary. It was becoming, especially in silver, becoming completely and utterly unhinged. But now the market has had time just to reflect and I think over time, we'll start to see prices go back up again.

Erik: I very much agree with everything that you've just said, but there's one big caveat or fear that exists in my mind, which is, boy, we've really seen that at least since March 2nd. Gold does not like the idea of an oil driven inflation signal. And the problem I have with this chart is it seems to be recovering as people are un panicking about Iran and the oil market.

And I agree with you that I am not. So persuaded that this is over yet in the oil market, I don't think it is. That makes me worry that another big leg down in gold could be coming maybe even, retesting or moving to a lower low below the 200 day moving average. At what point would you get concerned that, okay, wait a minute, looks like, at a certain price level, this thing's going the wrong way. It's time to maybe step out of gold for a while.

Ole: I would say if it starts to break back below the $4500, 4,600 area then I would also get a bit convert, bit nervous, but I think what you said, the area beautifully reflects what the market is thinking. That that we are trading sideways here simply because there are still, there's clearly still traders and investors out there having some.

Concerns about what may happen next, but I think ultimately we also just need to keep an eye on the dollar. Even though the movements in gold is much bigger than the movements in the dollar, it still sends a strong signal. And we just gone through a massive amount of dollar short covering, which led to a.

We've gone from a multi-year big short position. If I look at the weekly cut data covering futures price the IMM futures market to a the biggest long in, in two years. So there's been a significant amount of dollar buying which now seems to be tapering off again. And I think the low point or the recovery scene reasoning probably is also a.

Sign that the dollar is time to send a little bit of of mixed signals. We're starting to see some weakness coming back in. I think that weakness will eventually continue, but again, if we see a further escalation, then the dollar could once again be the go-to safe haven at least liquidity safe haven in the short term.

And that. That's probably the biggest risk that we, that another major escalation could lead to that, and lead to another round of general and broad liquidation. So yeah it's a two-way market right now. And I think it's a question of probably being a little bit patient here.

Erik: As I look at this chart on page nine, boy, what a beautiful, great big rally. That was from 2024 all the way up to the peak, just at the beginning of the year in January. But oh, it's been so painful since then. It makes you wish that you could have had maybe a little bit less upside for the sake of more stability.

Hang on a second, even though it's gold and silver that everybody's talking about, let's move on to page 11. That, that suddenly looks like a chart. That's exactly what I just said. It's a really solid uptrend, maybe not quite as steep, but without the profound volatility that we've seen in precious metals.

And of course that's copper. And I think the fundamentals are, a lot of speculators love gold, but the real economy needs copper.

Ole: Yeah.

Erik: Is that actually the better trade to speculate on instead of gold?

Ole: It's the it should be the less volatile trade because if copper price only double, then you would also have a you, we would've some problems with some of the the big projects that requires copper.

But I think the. The direction is pretty clear. We've gone through a correction. I actually used a weekly chart here, but if I put in a daily chart, that low point back in March was exactly the 200 day moving average as well. So some technical so some technical support emerged at that area but since then, the recovery has been quite strong.

And again, it's. Copper is not only a question about demand, it's most certainly also a supply story. And what we, what I don't think we knew or realized was that the, that minus in, in Chile, Peru, and Congo and all the places they need to sulfuric acid in order to break down the copper and to release it for, from the underground.

And suddenly we realize come to realize that 50% of global seaborne exports comes out of the Middle East. So part of the recent recovery has been part, partly a story about the recovery in China. I'm actually showing that on the next slide, on slide 12. Where we see that despite having seen a massive surge in exchange monitored copper stocks, inventories, both in London, New York, and Shanghai, copper price actually held up very well.

And what we've seen recently is that the total number of stocks that has started to come down, but it's actually coming down pretty hard in in China. So market has taken that as a sign that has been some pent up demand in China, which still remains by far the world's biggest consumer that has has started to emerge after we saw the correction.

So it does tell me that the prices copper prices are responsive to price changes. So maybe a little bit too expensive. Last year, at least, producers had to, or users of copper had to get used to it. And once we had the correction, they came back in. And the result of that is sharp drop in inventory levels in in Shanghai.

They're now paying a decent premium to import copper. That's the red line, that's the premium they're paying over London. And that indicates that the demand side is starting to recover in China. And then at the same time, when you have the supply side struggles we had multiple disruptions last year, but then you have such a basic thing as a chemical that's required to actually ensure that the production can be can take place, is another, major factor, which is underpinning, underpinning copper. So I think that both of these will continue in the coming year. Supply suppliers will, miners will struggle and demand will remain robust if they or robust to rising.

Erik: One of the biggest stories in commodity markets in recent years has been this just crazy move in cocoa prices, which chocolate lovers are certainly been affected by what happened there on page 13.

What caused that massive, what was it, quadrupling or so of or more than quadrupling of cocoa prices. And it looks like we're back down to what looks on this chart, like a pretty firm support level.

Ole: Yep. As I mentioned really just a complete classic response from the market to a rally that was triggered by by production problems in the, in, in the Ivory Coast and Ghana.

With. At a time where prices simply had been too low for production to be maintained. And then we had a two we had two events of one with too much rain at one point and and too dry at another point. And then, and suddenly the production was challenge that we saw this massive runup.

What do we what do what do we do when prices run to the point of chocolate manufacturers? They start to look at at re reducing the number of the content, the cocoa content that makes obviously the chocolate bar a bit cheaper to produce in some places. We also have shrink inflation, so the buyer is certainly not the size that you were used to.

So the combination of these things basically had a major impact on on on on demand in Europe, which is one of the biggest, grinding grinders of of the region is one of the biggest grinders, and with demand as fell to the lowest since 2013 at some point. And combined with the with the extra, the higher prices that suddenly it was starting to benefit the farmers in these areas.

They responded by increase in production to the point that now we have the reverse situation where too much cocoa is being produced. Demand is no longer as strong because producers have have reduced the content. So we're now going for another painful process, which potentially could lead to another spike in the coming years on less.

I think I read somewhere recently that someone was trying to was Israeli company that. They can replicate cocoa a lab grown cocoa. I'm not quite sure how much we can put into that but it's just. This is just a classical example of how it goes through these various big cycles where supply and demand responds to both lower prices and higher prices.

Erik: We spoke earlier about where the trades might be that are related to the oil crisis, but are less obvious and not necessarily priced in yet. Most people would never make a connection between oil prices or a oil market dislocation. And cotton prices. Explain what the connection is there. And is there a trade there?

Now I think we've got a cotton chart on page eight on the right hand side.

Ole: We come through a, as you can see on the chart there, we've been in a downtrend for cotton prices for quite a long time. We had low energy price. And what is the competitive, what is the competition for cotton?

That's in a synthetic fiber. What's that? That's a petrochemical derived product. And and that basically that's where you have the link. Partly as well I have to add, driven by some the drought that has underpinned the w winter wheat crops in the US has also been underpinning cotton price because this is New York cotton futures.

And they have also been supported by the by some dry conditions in the cotton regions. But, no doubt that quite a lot of that is also the substitution. If synthetic fiber goes up then you can return to the real deal to the real cotton and and that's underpinning, underpinning prices.

And then we have others where, as we, we talked about the direct link between fuel prices is both biofuel. That's soybean oil, but it's also ethanol especially in Brazil, which where the sugar canes are either used to produce biodiesel or biofuel or ethanol is called or to produce the sweetener that we that we unfortunately eat too much of still in the world.

And and when those substitutions occurs, then we do have impact on prices. We're seeing sugar prices move high as well. Only to a certain point because there's still ample supply in the world. But there is a direct link, and that's why we see these these movements on unfold.

When suddenly food becomes food becomes or agricultural response to an energy development.

Erik: I can't thank you enough for a terrific interview, and I have to tell you how much I appreciate and really enjoy your work. You're one of the most insightful people in the commodity market and you publish a whole bunch of stuff for free.

You, you make a daily podcast you publish, I think the best analysis there is of the commitment of traders report which is the Government data on who holds how much of each commodity. Tell us and let's take a look at page 14 in the deck. Tell us about the various different things that you produce and how people can follow your work.

Ole: Thank you very much for that, Eric. As as you probably know, but now I work at Saxo Bank. I've been doing that for 18 years as head of commodity strategy. So obviously what we produce here is primarily is first and foremost produced on our publish on our platforms, but also on our web webpage which is the bottom at home at Saxo.com/insights

Otherwise when it comes a little bit more, quick and sharp small updates. I'm still quite actively on X and you can find me there. Hanson the n has just disappeared. We can move that, but but yeah reason also moved on a substack. Multiple different ways of finding me.

But the most, UpToDate most for now is I'll say is on X and that's also where I link back to stories that are published on our websites. Patrick Rena and I will be back as Macro Voices continues right here macrovoices.com.