Transcripts

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.

Erik: Joining me now is Forest for the Trees founder, Luke Gromen. Luke we're recording this on Monday afternoon. That's only three days before our listeners will hear it, there could have been two or three wars between now and then at the rate things are going. Why don't we start with a recap of your understanding and.

Perception of the current situation with the Iran conflict and what it means to markets. And listeners, obviously please understand that we have to record in advance of airing this. The news flow is coming pretty fast, so it may have changed by the time you hear this.

Luke: Fast and furious indeed. Now, thanks for having me on again, Eric. I appreciate it. For me, I think this is simultaneously. At the moment, both the easiest and the hardest macro event to trade in quite some time. And the reason I say that is it's the easiest because it's a one factor market, in my opinion. Is Hormuz Open or is Hormuz closed?

And as long as it's still closed, we are accelerating nonlinearly toward a really bad outcome. And if it reopens, then we can start looking at secondary and tertiary explanations, outcomes Etc As things stand now. You know Hormuz when this war started, it was started, it was supposed to be a weekend and then maybe a week, and then maybe a couple weeks, and then a month, and it was supposed to be open quickly and when it started, my worst case scenario was that this could end up being a US Suez 1956 moment and now seven weeks in hor moves is still closed. Supply chain issues are just now really starting to stack up. Whether you look at social unrest over fuel in Ireland, you look at, I thought interesting data point today. Toto, the Japanese toiletry maker or toilet maker had to new orders for raw material.

The stock down percent today. So I think the base case now for me is that this is a US Suez 1956 moment where, until Hormuz reopens I think supply chains are gonna keep getting worse exponentially from here. I think we still have at some point that's gonna matter even more to sovereign bond markets, particularly in the West.

You're already seeing Japanese bond yields. The US has had, I think two or three different Trump tacos once the tenure has hit 4.4%. A couple weeks ago, we had three straight really sloppy auctions. So there's some noise in there that is being managed as well. And at the same time as all this is going on I'm just astonished still how complacent that consensus appears to be about these supply chains and bonds.

Number one, but then number two, how complacent consensus is about the fact that this is not just existential for Iran and for Israel and for the US but it's ex existential for China and Russia too. And so every analysis I see practically it seems that sooner or later we're just gonna beat up and we're down the Iranians.

And maybe that's true. It's probably true. None of these analyses I see are factoring in that this is existential for China and it's existential for Russia. And what does that mean? And people say they can't do anything. China supplies our military China's factories back the S&P500, essentially.

There's a lot they can do. I think where this is all headed is forcing the US into a choice. So what does Suez 1956 mean For us, I think it means we're forced to pull back. Or we're forced to print money into an oil spike to contain the bond market. Or we let rates rise in a recession, in an oil spike and let the economy take the hit, which is not really an option, but it's for very long.

At least it's an option in the very short run, conceivably. But, so I guess just overall. I've been doing this 30 years in investment research and I've only seen two other times like this that I can recall, and the first is in 4Q07, where I was in a former seat and I was seeing, we were doing bottoms up fundamental equity research at Cleveland Research and I was seeing the US economy and financial system collapse in real time.

And yet the equity markets hit an all time record on the S&P in the fourth quarter of oh seven. And it also reminds me of 1Q20 when, obviously with COVID. And quite honestly I didn't think COVID was a big a deal initially, and I was wrong about that. But the same way markets were just blissfully.

Complacent. And then Tom Hanks said he had COVID and then they shut things down and the markets absolutely, had a fit. The view I'm I've had, and the view I'm sticking with Hormuz is all that matters and every day that it stays closed is it brings us closer to a nonlinear break in supply chains.

And my view has been that's not gonna be good for markets if slash when that happens. And I just, that's why I highlighted that Japanese toilet maker today, down 7% on the day like. If they had gone up 7% or up 10% on announcing that they couldn't make anything anymore, 'cause the supply chains, I'd probably would've have to say, all right maybe I'm just not getting this, but the fact that individual names are getting crushed on supply chain problems I think means that if this continues, the market's gonna get crushed probably sooner rather than later.

It just feels like a Wiley Coyote moment.

Erik: Let's go a little deeper on that issue of consensus, complacency. I have a theory I'd like to run past you, which is I think it's as simple as the people in finance who are not physical crude oil market traders just don't understand the logistics lag effect, and trust me, the among professional physical market.

Crude to oil traders. There's no complacency crisis there. They're scared shitless. And I think what people don't understand is the last tanker to transit successfully on February 28th before all of this stuff started. That hor is oil will arrive at its destination next week. That's how long it takes for oil that's flowing through the Strait of Hormuz to get to where it's going.

So there hasn't been any supply. There's been speculation, obviously about this is a big deal and what could be coming, but the actual disruption of supply hasn't even started yet. It seems to me like it sets the stage if we saw some kind of resolution in the next week or so. Fingers crossed.

It really sets the stage for the market to breathe this huge sigh of relief where all the people who don't understand the physical logistics say, okay, that's over. Wow, glad we got through that. And they don't realize that there's like this six week complete stoppage of flow of crude oil. Into the whole rest of the world.

That's going to happen no matter what. And you don't just take the, let's say we resolve this and we open the strait completely and totally next week. You don't just call up the captains of those vccs and say, Hey, engage your warp drive and, get to Asia in a week instead of a month and a half.

It still takes more than a month to get there. It seems to me like that's a setup, if I'm right about that for the market to really have kind of a final blow off of complacency and then a, oh shit, this is reality. What do you think?

Luke: I think that makes perfect sense. I've seen that in conference calls where, someone asked me on a conference call, and this was probably six days into this, and they said, okay, what do you think?

And this should be over another week. I said, another week. Are you kidding me? Based on what I was hearing was, what I said is, I said, my base case is we're gonna be, we're gonna get to at least mid April. I said, and that, that kind of stuned them, I said but. I would actually be risking, your portfolio for Hormuz is still closed on the 4th of July or for mid-May, late, or mid-May to mid-June.

And it looked like their face, looked like I jumped through the screen, kicked their coffee into their lap, and then, just shock them. And their response was you understand, you're saying if that happens, like hundreds of millions of people could starve to death, right? I said, I know exactly what I'm saying.

This is why I'm so worked up. that people in finance are just hey, just, hit, control P and. We'll print oil or, we'll, the oil will be where it needs to be and the sulfur will be where it needs to be and the fertilizer will be where it needs to be.

'cause oh, by the way, on fertilizer as I'm sure Eric, we're on the clock for a growing season. Like you're not gonna be throwing fertilizer down in June or July. It's too late at that point in, in the Northern Hemisphere for a lot of places. So I think it's that. And then I also think too, there is.

We are in, generously, we're in fog of war, not generously. We are being subjected to very good propaganda and control of the message, which is to say from day one, I was getting very credible rumblings that this war was a going to last longer than we thought, and b, it was not going as well as we were advertised as we were being told.

And. When I started hearing that, it was probably 3, 4, 5 weeks ago, and last week and a half, we've had in the Wall Street Journal the news come out that the US Embassy at Riyadh not only was hit way harder than we had admitted, but that the Iranians were so accurate that they didn't just hit the embassy.

They picked out the very part of the embassy where the CIA office was and destroyed it. They were so accurate. I hear credible rumblings that much of the CIA evacuated much the Middle East, early in this war, not a peep from. And so I had heard that relatively early on. Then you hear things like fifth Fleet at Bahrain again.

Heard that it got hit very hard relatively early on, that our air defense stuff wasn't as good as we were being told our air defense missiles and the Iranians were far more accurate than we expected and that the Russians were helping target and the Russians helping Target came out relatively early on.

And then again, last week we had an article saying that 1500 people at the head, the home of the US. Fifth fleet in Bahrain were evacuated so quickly. They couldn't, at first, they weren't even gonna let them take pets and they finally let 'em take pets. But it's basically grab your pet, grab a bag, grab your toothbrush, and go.

And they evacuated them back to the US. I'd heard about that three, four weeks ago. And so it's publicly reported now. And my point here is that. Between the physical constraints and the lagged effect of that, that people in that world are seeing. And then just this, you would never gather, hey, the Iranians, and to be clear, I'm not hearing the Iranians are winning. That's not my point I'm hearing they're getting beaten up tactically very badly. And I'm also hearing that they are doing some very damaging things to our infrastructure and bases in a way that absolutely point to this being a much longer than we thought, which I was hearing three, four weeks ago, five weeks ago, and b.

Like the whole dynamic of weed are just, there've been all kinds of reasons why Hormuz isn't closed. Like when you tell people on the ground in the Middle East MOUs isn't closed because they don't want to, and it's ship insurance and all this stuff. Like they laugh at you and they're like, that's stupid.

The reason it's closed it's cause no wants to get blown up. And, We've seen sort of the proof in that of, hey, not only did they get by our air defenses, but they hit, they hit our embassy and they hit the part of the embassy where the CIA a was not where the families were. They hit the fifth fleet base at Bahrain is very beat up.

I hear. If they're getting through those things, which presumably had pretty good air defense, like by all accounts, sailing a ship through the strait of Hormuz is like. Shooting fish in a barrel for that kind of stuff. When you pair that with what what you're hearing in the physical world, what the physical world's okay.

The war we have not even seen the shortfall yet. And then the guys in the defense world are going, this is gonna last longer than we think, and it's gonna, if we really do this the wrong way, it's gonna be bloodier than we think. Then you start saying, okay. I'm not, still not optimistic.

It's gonna be open in a week, in two weeks, in a month. I like, to me, I think it's very possible this thing's still closed on the 4th of July. And if that, like nobody's position for that at all. So I think between your point of, Hey, we've not even seen the lag effects and look, I don't, it's, is it my base case?

It's still closed on 4th of July. No, but is it, my base case is still closed in a month. Yes. And you and I both know what that implies for the second half of the year for supply chains. It's a disaster.

Erik: Let's talk about some of those knock on effects now and how they're going to affect the economy and what it's gonna mean in terms of trades and markets.

Let's suppose you're right that the fertilizer shortage that's already occurring is gonna mean that farmers don't. Plant 'cause it's planting season now or it's coming up on planting season. Depending on, on, what latitude you're at. If they're not able to use as much fertilizer as they would like to, or they can't get the fertilizer they need or whatever it means, crop yields this year are not going to be as strong as they've been in past years.

We won't see those effects hit the real economy until after the harvest season, but it means six to 12 months down the road there's a very significant food inflation effect there potentially, if you're right, that it's at least another month. That's going to cause the backwardation to steepen even further.

And we're going to get to where, the people who need the diesel fuel most urgently, especially in Asia, Australia, the hardest geographies. We're gonna be looking at double, triple prices that creates. An inflation shock wave that potentially becomes self-reinforcing and changes behaviors because as we know as our listeners know the study of inflation says that once it gets going, consumer behavior changes.

As people know that things, the prices are going up, they start hoarding and, that just exacerbates the problem. Are we headed into some of those feedback loops that are, are they avoidable at this point? And if they're not avoidable, where's that gonna leave us a year from now in terms of inflation bond yields and so forth?

Luke: I think you absolutely nailed it. I'll simplify I'll use a stark, but I think straightforward. Simplification of it, which is, our world and data put out a chart data is 2015, but it shows world population of seven and a half billion. And then it shows world population supported without synthetic fertilizers.

So to be clear, this is what population would go to if we didn't have synthetic nitrogen fertilizers via the the Haber Bosch process and. World population in 2015 with fertilizers, seven and a half billion world population without synthetic nitrogen fertilizers in 2015, 3.9 billion. That's the dynamic we're talking about.

And so it, there's a, obviously it isn't a, we've not been completely cut off, but it is a margin. Everything happens on the margin and on the margin. Yields are gonna fall, supplies are gonna fall. Supplies down demand for food is constant. And if anything, it's probably up here. You saw the Trump administration take the E 15 limits off of ethanol.

So I don't know if anyone's blending higher levels, but conceivably they could, which will chew up more of the corn crop here in the US and further reduce any sort of you know Tighten global corn, markets. Yeah, you're looking at a situation where later this year you're gonna be looking at starvation across, in parts of the, in the poorest parts of the global south, possibly quite bad a humanitarian crisis.

You're gonna see food inflation that is pretty pronounced across. The richer countries and that then gets into important implications for obviously for politics. You can if food inflation and gas inflation is short soaring, you can certainly short the it's probably a good idea to short the incumbent.

So you'd be talking about a blue wave probably in midterms this year. But from a market's perspective. Mar that's, we're gonna be talking about a spike in inflation bond yields already at problematic levels and not able to go much higher without creating market feedback issues.

I had thought that number was 4.6% of 4.8% on the US 10Y treasury yield. Last three weeks, four weeks have shown me at least that. Bessent and Trump seemed to think that number's 4.4% because every time it breaks 4.4%, like the war goes away for a couple days and some sort of positive announcement.

Or the last week or a week and a half ago, Bessent did the single biggest treasury buyback in a single day in history at $15 billion. So clearly four point percent, 4.5% in a tenure is a bogey they're watching for. And we're at what, 4.32 today? You get more food inflation, it's gonna wanna go through that 4.4% on the upside, like a hot knife through butter, which if it did, would then create, okay, this decision point again, do we let.

Stocks really tank and the dollar really rip, which is gonna create a dollar debt spiral of, higher yields, higher dollar, lower stocks, lower receipts, higher deficits higher issuance, higher yields, higher dollar lower stocks until we crash into the ground at, 500 miles an hour.

Or do they come in into a food spike and an oil spike and print money to cap yields, which I think is what they would do, which will only make the problem worse. Yeah, it is a, it's a huge issue. And again, if they fixed it today, it's gonna be a huge issue. And I don't think they're gonna fix it today.

And I don't think they're gonna fix it for another month at least. And that makes it a huge issue. And if it goes the 4th of July, which I think is, 10, 20% chance. Holy cow. Like you we really are talking about looking at the possibility, one of the worst humanitarian crises in my lifetime.

And then you get into, from the financial standpoint of, all right, you're gonna have food riots all over the global south. You're going to have political instability, you're going to have bond problems. And that's, it's just, it's not a good environment for risk taking, for investing. It's a good environment to, own cash.

Own gold and go to the beach and have a, ha, have a drink because it's gonna be, it's gonna be a tough environment.

Erik: Based on the things that you're saying and that we both agree on, governments would need to get very heavily involved in coming to the rescue. If you have a humanitarian crisis where people are literally starving to death, obviously governments have to step in and do something to help.

California's already announced an intention to suspend its gasoline tax in order to help people through this crisis. Okay I support all those things, but wait a minute. If all of the governments around the world. World have to subsidize a whole bunch of things. Doesn't that dramatically exacerbate a government debt crisis that you and I both agree is already, you've famously made the comment that government deficits and excessive debt don't matter.

Until they do, then they matter a lot. I thought we were getting close to that matter a lot moment already before this all hit the stage. Now we're talking about events that it seems to me are necessarily going to force governments to step in and subsidize a whole bunch of things with a whole bunch of money that they don't have

Luke: a hundred percent.

That's that really awkward. Moment of you gonna print money into a food and oil spike, are you gonna, how are you gonna, and some governments have other options, right? Depending on the government. For example, Chi Japan's probably one of the first that is already right there, teetering on the edge of a bond market problem.

If, you know something we've been repeatedly highlighting declines is if you look at, for the past six to nine months, if you look at. The 10 year US treasury yield minus the 10 year JGB Japanese government bond yield. And then you compare that to the the yen against the dollar. You can see that those two have been very tightly correlated up until about six or eight months ago.

They've diverged massively with and so what that's telling you is the Japanese government bond yield is getting higher and higher relative to the treasury bond. But Instead of that strengthening the Yen, it's weakening the Yen against the dollar. And that's emerging market price action. Like people are watching that with great curiosity in the developed markets going we've never seen this before.

And everybody in the emerging markets is doing like the Leonardo DiCaprio meme, right? Where you agree with the beer in their hand on the sofa pointing at the tv. I recognize that's I know what that is and that's the market saying. Higher yields are not gonna strengthen your currency, Japan, they're gonna weaken it because we know you can't afford a higher yield and you're gonna have to print it.

So you know, Japan's already dancing along the edge. But Japan has some has an option that say the US doesn't have and that Britain doesn't have and Europe has less of, which is, Japanese have this massively positive net international investment position, which is just.

Japan's piggy bank, all of the years that Japan's been running massive trade and current account surpluses, they've invested a lot of 'em into dollar assets and they've got trillions of dollars in dollar assets. And if this hits Japan, something Japan can do something Korea can do, something Germany can do to a lesser extent.

And parts of Europe is, do we print the money or do we not print the money and we just sell treasury bonds and sell us dollar assets that we've saved up for a rainy day. They're gonna sell the bonds, they're gonna sell the stocks. And that's where, people say there's this view that.

The plan of what Trump is doing is he's an agent of chaos and he is just gonna create chaos, and that's gonna be an opportunity. And it's not it's going to blow up his own bond market because people aren't gonna hold treasury bonds and certainly not gonna buy more of them. They don't have enough food if they don't have enough energy.

Treasury bonds and stocks are below food and energy on Maslow's hierarchy of needs. And you know the countries that have been running surpluses for a long time, they have some leeway to sell dollar assets, and the world in total owns $70 trillion in dollar assets. Gross $27 trillion in dollar assets net, and they'll sell every one of 'em to get food.

Get food and energy in the same way that you or I would sell everything we own to feed our children or feed our loved ones. The world will break down, now the poorer countries that are barely have not really run current account surpluses like. They're gonna have to print money, and it's only gonna make it worse.

The Americans are only are gonna have to print money. The Brits are gonna have to print money because us is a Twin Deficit Nation. Brits are a twin deficit nation. Turkey is a twin deficit nation. These places are gonna have to print money to buy food and it, it will be orders of difference, right?

Rather be in the US than in Turkey, rather be in the US than Britain. But it's all gonna be highly inflationary. Yeah I agree. It is very problematic.

Erik: You mentioned gold a minute ago. Let's come back to that. 'cause this has been really fascinating. At the beginning of this crisis in February, gold was acting in its traditional role as a geopolitical risk hitch.

The bombs drop gold goes up along with oil. Then on March 2nd, everything changed and we got this inverse relationship where its bombs drop, oil goes up, gold goes down, presumably because the market was sensing that oil driven inflation signal was going to tie the fed's hands and pretty much rule out any possibility of a rate cut.

It started to look like gold was maybe starting to go back to its its historic behavior over the last week or two. But then Monday we saw, eh, muted recovery on gold. But as, and just think about this, Monday was a day, first. Over the weekend there was supposed to be this big peace talk and everything would be worked out that failed.

We didn't get to a peaceful resolution to the the crisis in Iran. And The S&P breaks out to the upside through. Its a hundred day moving average in reaction to that news, but gold, which had been suppressed because of the, the Iran crisis and the perception that it was gonna create this inflation signal.

It's not breaking out to new highs. It's struggling. What gives here,

Luke: I think your explanation for why Gold got hit initially was exactly right.

And, there were a lot of tourists in gold at those prior price levels and so there was some fuel for it to head lower when there were concerns about higher rates. And people were complacent initially about stocks, and then people were like, oh my gosh, this actually is a big deal.

And they hit stocks. And so people have been out of off sides for, for a lot of these moves. So a lot of people who got, for the first week, oil didn't really move that much and then it moved a lot and then, then it came back. So it, a lot of people have been offsides both ways on oil, and a lot of people have been offsides both ways on gold.

A lot of people had been, hey, I'm, okay, markets don't care about, the stock market doesn't care about this. And then the next week you cared about it a lot. And so people had to position by the time everyone repositioned and then it started going the other way. And so I feel like there's a lot of that still going on.

In the context of the broader context of investors, have had 30 plus years going back to 1990, 35 years. So everybody in a senior seat today has gotten paid for buying. When the bonds start falling and, once the bonds drop, you buy stocks and you sell oil, and you sell gold.

You don't need, and they've not revisited their priors. This thing was supposed to be over three, four weeks ago. It ain't, and it's not it's not getting better. Now, I also I'll that's my Occam's razor explanation. I think there is, look in, there's in, there's a, an old saw, there's no atheists and foxholes and in wartime there's no such thing as free markets.

And so these markets make no mistake, are being managed. And I'm not gonna say that they managed gold. I think look, gold was due for a selloff. And I think that's the reason gold sold off. Now you had three really ugly auctions, including in a two year treasury auction. You should never have a bad two year treasury auction ever.

And it was a really ugly one. I think it was three weeks ago, followed by an ugly five, and I think an ugly seven or ugly 10, I can't remember what, but they were all ugly. And then literally five days later, we get, this huge treasury buyback program. And again, is it new liquidity? Not technically, but if you're putting in bills and taking out notes or duration, like it's, it's a management it's a manipulation.

And it like that is what it is. Because the reality is if, the reality is the, is bestin and Trump are not going to let the bond market. And the stock market beat them. And so the release valve is gonna have to be something else. They're not gonna let the price of oil beat them. The former commander in chief of the Iranian the IRGC came out like a week and a half in and said, listen, our plan is simple.

They were planning on a very short stay. We can see that from their logistics. All we're gonna do is we're gonna hang in here and we are going to create a financial crisis like Hormuz stays closed, the world economy is gonna collapse. That is not a guess. That is a mathematical, physical certainty. We can debate how long it'll take Hormuz to stay closed for it collapse, but it stays closed long enough.

The world economy will absolutely 100% collapse. That's their plan is, Hey, let's keep Hormuz closed. And we'll collapse the global economy and we'll see if Trump wants to continue to be a warmonger. His word's not mine we'll drive oil up a whole bunch. So I, I think part of what's going on here is you're getting the military guys like, hey, some of what they're doing over there with these airstrikes are shaping operations.

I think Besson and his team are doing shaping operations in the market, which is. If people want to take yields to a bad level, they shape those people wanna run away with oil. They shape those, they, they there's I think it's a very challenging environment as a result of that because again, that there is zero chance, in my opinion, that Trump and Bessent are going to allow the US to lose because of free markets.

They have absolutely have the firepower, the means mode of an opportunity to do these things. And I would just, people don't wanna make, might think I'm crazy, but I would just point you to the blatant front running in the oil markets, which I'm sure you saw, right? Somebody, on the 24th of March, somebody front ran on $500 million in notional on shorting oil ahead of Trump's tweet.

And then last week somebody front ran the ceasefire $950 million in notional, that's. Big boy positions who's getting the heads up, right? Why is these are not clean markets. These are not exactly the these are not your, these are not our fathers or our grandfather's markets of, Hey, this is just supply demand and there's no political impetus here.

There's a huge political impetus in these markets.

Erik: Let's talk about how this inflation signal plays out, because at first glance it seems just overwhelmingly clear that if you have an oil crisis, the oil prices have to go dramatically up. That's a huge driver of inflation. Food prices. If you have crop yields diminished as a result of a lack of fertilizer, that is.

A huge driver of inflation. But wait a minute, Luke, you said just a minute ago that it is an absolute certainty that the entire global economy crashes and stops if this thing goes too far. Wait a minute. That's deflationary, right? At what point does the inflation signal go the other way?

Luke: Yeah, it's a great question because it isn't a very short run. You're exactly right, which is to say that once these oil prices get too high as a deflationary impulse. Now if you have right now, the new fiscal numbers just came out for the us It's through it's halfway through the year, right?

So we're six months in through March. I ran the math on Friday. If you look at US true interest expense, which is entitlements plus gross interest, or actually in this case, net interest. Plus Veterans Affairs through March, which is six months of the fiscal year, we're at 102% of receipts. In other words, the interest and interest like obligations of the federal government are 102% of the receipts.

And it's, it is this tricky dynamic where there is a pass through inflationary impulse of commodities. On the one hand, which all else equal raises inflation expectations, there is a deflationary impulse from the recessionary aspect of higher of an oil price spike and commodity price spike, which takes away slows growth, takes away discretionary spending, Etc.

And then there's this, you know that it tho both of those two factors get layered onto the dynamic, which is if you have a recessionary deflationary impulse, you're going to send your receipts well below your interest and your entitlements. And then you're in real sim. Another very simple decision market, which is the US government going to print money to pay for interest and entitlements?

Or is the United States government going to default and miss a payment on entitlements and interest? And I think there is zero chance. They do the latter. I think they're gonna print the money now, to be clear. Until they do. That's gonna be a market we can get dollar up rates up everything else down. And we've seen a number of those markets since 2019.

And so there's this very. Sensitive. Okay. Inflationary impulse of higher commodities, higher oil, deflationary, impulse of those things, and then a deflationary impulse of those things. Hitting receipts, which are going to create dollar up rates up, slow things down. But then it also is going to raise the question of.

Are they gonna print money? Are they gonna default on treasury bonds and entitlements? And of course, they're never gonna do those things. And there's, there is nothing that is more inflationary in the long run than a government who needs to print the money just to pay the interest on their existing debt and obligations.

So that's the sort of when I let off by saying it's both the easiest market and the hardest market at the same time, it's the easiest. It's is hor moves closed? Yes or no? Okay. That's pretty easy. The hard part. Okay, when is it inflationary? When is it not inflationary? Are they, how long are they gonna let people twist in the wind until they print the interest and the entitlements?

How much is the US and other governments involved in markets, whether that be subsidizing food or, if you're long oil, what, if Trump comes out, you're long oil, you're feeling good, bombs are dropping. Trump comes out and goes, Hey, I'm thinking about doing export controls on oil. Ah, now oil's gonna go limit down.

What? Like it's. It is very simple and very complex. I personally, for me, I put it in what, my friend Lynn our friend Lynn Alden calls it the too hard camp, right? Just too hard. So for me, it's too hard to try to trade the very short run. I feel very confident that an oil spike and a food spike will drive a slowdown, if not a recession.

Particularly when married with higher rates and the disruption from supply chains, and I'm not trying to bet on, on exactly when they're gonna pivot. I feel very strongly it's gonna create an air pocket and I feel very strongly that Air Pocket will send receipts below their interest and their entitlements.

And I feel very strongly that we ultimately, due to them having to print money probably into a commodity spike,

That's the sequencing. I see. And in the short run, I'm just sitting in cash and bullying mostly because. It's just too hard to try to, it's too hard to try to nimbly work my way through that. I'd rather just wait, maybe give up some upside and wait for the, okay. They're having to do QE and they're they'll do it, whatever, they won't call it QE. Probably they'll call it reserve management purchases or, food purchases to help the poor or some BS.

It'll, with the masses. So at any rate, that's, I'm rambling now, but that's you're right that it's this yin and yang to inflation, deflation in the context of the fiscal situation.

Erik: Let's come back to my favorite Luke Roman quote, which you've been saying for more than a decade now, which is government deficits don't matter until they do, and then they matter a whole lot.

It seems to me like when you talk about market complacency, the complacency we have in the United States is everybody is just always assumed. Look the US dollar is the world's global reserve currency. There's always gonna be a market for us treasuries. Always there. There's a special privilege, the exorbitant privilege that the US government has.

They're always able to print the money. They're always able to go into further debt. They're not going to have a fiscal crisis or runaway interest rates because they got. too indebted because they're immune to it, thanks to being the world's reserve currency. Hang on a second. Didn't we just see most of Europe completely unwilling to support the US in this Iran debacle?

Aren't we seeing changes where around the world? A lot of central banks are a lot less inclined to really focus on US treasuries as their primary reserve asset. Are we headed toward a US fiscal crisis that, everybody was too complacent to see coming

Luke: in a word? Yes. And you can see it, it's been slow motion.

People say, look, foreign demand for treasuries at all time highs, which is true. When you break that down, what that actually looks is well. Foreign central banks who once upon a time were the one of, if not the biggest holder. They haven't bought any new treasury since 2014 on net.

They're actually down slightly. Japan's bought a little bit more. The UK's bought a bunch more, which is primarily investors and hedge funds. And then, you look at where the biggest marginal buyer is in foreign, fed did a white paper in October of 25 that pointed out that 37% of the net issuance of US treasury notes and bonds.

Belly the curve and duration 37% in net issuance over the last four years has been the Cayman Islands. Which is heavily US hedge funds. It's this treasury basis trade and where you're buying cash bonds and you're shortened futures on insane amounts of leverage.

And yes, nominally foreign demand is absolutely at highs. That's correct. The makeup of it has been, we've gone from financing with very patient foreign insurers and pensions and central banks to. Highly levered hedge funds who sell treasuries when risk goes off, which is why treasuries, when you look at the correlations, have become risk off at risk, off risk on assets.

They've stopped acting. Even in this crisis, the weekend we, the bomb started flying around. I was having a discussion with someone on X. They're like, oh, 10 year yields are going way lower. I'm like, sold to you. They aren't going lower. They're going way higher.

Sure enough, right? We're up 50 basis points, give or take from, in seven weeks from where they started this war at, I don't know that they ever traded down at all from 3.94 on the tenure. So we have the foreign demand is nominally better, but it is lower quality, low, less patient creditors.

And in the meantime, the biggest marginal buyers have been, besides. Hedge funds in the Caymans have been us the Fed itself and US banks as well. And so people say when's it gonna start? And you go, when's it gonna start? Since Central Banks stopped buying treasuries and started buying gold.

Long-term treasury bond futures priced in gold are down 90% since 2014. And it's like the dream trade for a macro, the sharp ratio on it's beautiful. It's like up and to the right at a 45 degree angle if you look at it as gold over treasuries. But it is a one-way trade long gold short treasuries has just been an absolute beautiful, very minimal drawdowns, very minimal volatility.

So I think we're already there, but in terms of it going critical. That's the part to me that I just think the administration and a lot of investors were just super complacent on, or just out to lunch on, which is there's this view that the Chinese have no move, and I think that's totally wrong.

I think they just need to squeeze supply chains a little, get inflation going. And

The bond market will do the rest, and if the bond market doesn't wanna do the rest. Point being that if. They don't let inflation print the real number or they cap yields or whatever they do, then, real inflation's gonna show up politically no matter what. Because Trump and vesting can say, Hey, inflation's only three and a half, and if it's actually seven or eight, they're gonna be, they're gonna be spending the next two years of their lives dealing with impeachment hearings for Trump for the last two years because he'll lose the House and the Senate.

One way or another. China has a way to force this dynamic in terms of cost on the bond market. And so yeah, I think it is, that's where I think it is going to further accelerate. There's nothing more inflationary than war. So if you already had a very delicately balanced situation and here too, I would just point back to what we talked about earlier, which is this net international investment position dynamic.

Look, Japan needs oil, they need food other places that own a lot of dollar assets, including treasuries. They need food, they need energy. They're gonna sell those things. And so your net supplies of treasuries. May potentially rise dramatically, US deficits, especially if we have a recession, foreigners selling.

Your biggest marginal buyers have been levered hedge funds and, when volatility goes up in equities or anywhere else, they're gonna sell treasuries, not buy them. Yeah it is a, it is an accelerant without a doubt to the stresses we've been talking about for some time in the sovereign bond marketS&Particularly western sovereign bond markets.

Erik: Let's talk about where the trades are. I appreciate you said this is, too hard to trade in the very short term. As we start to get through this and see a light at the end of the tunnel, where are the trades gonna be? It seems to me that the food, if you look for things that have not been priced yet, that are certain to be coming.

Food inflation seems to me like a certainty. So how do you play that? Is there a curve steeper here in the bond market? That makes sense. What else? Where might the trades be when it is time to start trading this?

Luke: I think there's a lot here in, in secular, food inflation. There's even things like, grocery store comps will accelerate, it's nominal, but there's leverage there.

'cause it's a high fixed cost model, right? So grocery stores should do well in a higher. Food inflation environment. I would think for me, the cleanest fundamental plays are things around energy and uranium and domestic electrical infrastructure and the industrial selling into that. You've got bottlenecks there already.

You've got an impetus to reshore. So I think every, and anything in electrical infrastructure and nuclear and even oil, ENP, those things all seem very well positioned. I think I still really like gold. I think gold as well. I think there's gonna be a time for Bitcoin, coming up here probably next.

I dunno, a few months later this year I still, I'm watching Bitcoin as a trades still with IGV, the software ETF, and, there's maybe a sign of a divergence in the last week we'll see IG v's broken down again, but then Bitcoin didn't. But I think Bitcoin's gonna follow it lower again if I'm correct about the, the supply chain whoosh down.

So I think all of these things, when you get to the other side of. What I think is this supply chain problem that is going to get very acute and a moment of brief, moment of panic in the grand scheme of things. On the other side of that, I think these types of names will do quite well.

Erik: Luke, I can't thank you enough for a terrific interview. Before I let you go, your firm Forest for the Trees, which is fftt-llc.com has really become one of the most respected boutique investment research firms really in existence. Tell us a little bit more about what you do and what people can expect to find when they go to fftt-llc.com.

Luke: Thank you for that, Eric. I appreciate you. You've played a big role in that and I've always been very appreciative of all the support you've given us over the years. What we do is we aggregate a large amount of publicly available data points in a unique manner, trying to identify developing economic bottlenecks for our clients and and identifying different sectors to that are more attractive and less attractive for investment.

Really appreciate that.

Erik: Folks, be sure to stay tuned as Rory Johnston, founder of commoditycontext.com will be joining us next for an update on the Iran crisis and the logistics of oil in and out of the straight of Hormuz.

Erik: Joining me now is Goehring and Rozencwajg, co-founder Adam  Rozencwajg, . Adam, great to get you back on. Needless to say we live in interesting times. And for our listeners, Adam and I recorded this interview on Tuesday afternoon about five hours before President Trump's 8:00 PM deadline. So needless to say there will be some news flow that has occurred after this interview was recorded before this, goes to air.

Adam, we don't know what will happen in the next few days, but why don't we start with the situation at hand. Almost every physical market expert that I've spoken to agrees that this is the biggest physical market logistics dislocation in the history of the modern oil market, but it's definitely not the biggest price dislocation.

Why is that?

Adam: so first of all, wonderful to speak with you again. It's nice to be back and lots to talk about. As you very well mentioned, it's entirely likely that by tomorrow all the facts will be completely different and, , this might have a short shelf life. But what I'm gonna try to do is talk about some of the fundamentals in the details that we see in the oil market today and the commodity markets in general that are a little bit longer term in nature that are a little bit, stickier. And obviously we might have to adjust everyone's sentiment or everyone's outlook depending on what happens in the next 24 hours or 72 or who knows how long. But I think a lot of what I'm gonna say will be true today. It'll be true tomorrow. It'll be true months from now. So first of all, you're absolutely right that.

From a physical dislocation perspective, what we're seeing right now, is pretty clearly the largest disruption in the global energy markets that we've ever seen. But we're not necessarily feeling or experiencing all of that dislocation just yet. So what is it that we're experiencing today?

What are we seeing in real time and why maybe have we not felt some of the larger impacts of that as everyone. Now knows about 20% of the world's crude market passes through the strait of Hormuz and about 20% of the LNG trade as well. I think some people are beginning to learn that quite a bit of aluminum passes through that Very sensitive choke point, quite a bit of fertilizer as well. So it's not just limited to oil and gas, but certainly oil and gas are incredibly impacted. And since the offensive from the United States and Israel five weeks ago now the Iranians and the IRGC have taken effective control of the, strait of Hormuz and they've been certainly impacting.

Vessel's ability to transit. Some vessels are getting through many are not. And some oil is getting through on what they're calling these bypass pipelines, let's say the East west pipeline in Saudi Arabia being the most notable, which was built over the last, 15 or 20 years or so. Basically for exactly just this contingency to provide another form of ress for Saudi crude.

And basically what that does is it trends, cuts across Saudi Arabia on an East west basis, as the name would imply and allows for Port loadings in the Red Sea. Now that port is not immune from attacks either, and it's also not able to handle enough oil to totally offset what the Saudis relied on the Strait of Hormuz.

four. So it's a partial offset but certainly not certainly not a total fix. By most estimates you're talking about somewhere between at the absolute low end, 10 million at the absolute high end, 15, split the difference, call it 12 million barrels a day of impacted oil. That's essentially not making it to market, which is huge.

We haven't really seen anything quite like that before. Now. One thing that I'd like to point out and particularly for those that have followed us, we really like to focus on long-term supply and demand fundamentals. We like to focus on depletion and geology. We like to focus on capital cycles, and if you read our stuff, we don't too often talk about.

What I would call these logistical issues or these kind of headline grabbing events. Sometimes you get them. For instance, back in 2019 when the Houthis bombed the Abqaiq and Khurais oil processing facilities in Saudi Arabia there was a little bit of a panic there. It didn't last very long.

Only a few days before people realized that the impacts wouldn't. Could be repaired in a matter of a week or two. Similarly, in 2022 when Russia invaded Ukraine, it really dislocated energy markets and you got a spike there and it came off again. We're not the type of analyst firm that focuses too much on those near term dislocations.

It's not that they're not important, but they don't last. They're resolved. In this case, I think it's a little bit different though, and I think it's different. For two reasons. First of all, it's different because the magnitude of this dislocation is just much bigger than anything we've seen before.

So you'll have, I think in the near term, call it weeks, and potentially in the medium term, call it months. I do think you'll see some fairly pronounced disruptions to the global supply chain for energy. I think you're starting to see them already in places like Asia that were more dependent. On Middle Eastern imports, you're starting to see it now in parts of Europe as well.

You're not seeing it so much in North America, mostly because we've been able to produce a lot through the shales over the last 20 years, we've been able to reduce our reliance on, middle Eastern imports. You all remember when the US went to war in Iraq and after 9/11 there was a huge amount of consternation over how reliant we were on Middle Eastern oil.

That's just not the case anymore because entirely of the shales, which have grown, to 13 million barrels of crude and even more when you include the NGLs. We're not seeing the physical crunch here, but that doesn't mean we're not gonna see the economic impact because as we all know, oil is largely a global commodity and prices, arbitrage fairly quickly.

So we are seeing prices move here. We're not seeing, let's say the gas shortages or the gas lines in this country that we saw. Let's say back in the 1970s with the dual oil crisis in 73, 74, and again in 79. That's not to say that might not happen doubt in the future, but this is a really big volume of oil that's being disrupted.

So that in and of itself makes it a bit of a unique event as far as dislocations go. But the second thing that I think is gonna be really much more. Lasting and apparent is the fact that everyone has gotten the oil market wrong. We went into 2026 with oil being, I don't think this is an exaggeration, the most hated asset class in the whole world.

The weighting in the S&P of oil stocks was pushing back down to the COVID lows is a little bit above that, but not by much. And following investors. Positioning was extremely bearish and pessimistic. And in fact, even with. All of that US Naval asset sailing East towards Iran and the Gulf.

People went into the Friday before the attacks were launched with near record. Gross short positions on the speculative contracts at the nymex and on a net long basis. 'cause there's some logs there too. A net long basis. Basically the lowest net length we've seen in almost decades. So people were super, super bearish.

Prices started this year at 50 bucks, and that's too low. The oil market doesn't work at 50. And why was that? The reason everyone was so pessimistic on the oil markets right up until this conflict started was that. People like the IEA and others but most notably the International Energy Agency or the IEA were saying that the global crude market was in the biggest surplus in oil market history.

It had never been in a bigger surplus. And in fact, they were saying that supply was running about two and a half to 3 million barrels ahead of demand. Now, if that were the case that would be really bearish. Situation Indeed. And that would justify a $50 price or maybe even a bit lower than that.

There's only one problem. We weren't seeing any evidence of that surplus. Notably, if in fact supply was running so much ahead of demand, inventories around the world should be surging, right? They think that last year, call it 2 million barrels, conservatively in surplus 365 days In the year that should be about 720, 720 million barrels of accumulated oil that was produced but not needed over the year.

That should have wound up in storage tanks around the world, and instead we saw storage barely budge. Now, I wanna put that into perspective because here we are today on April 7th, I'm six weeks into this conflict. With the Strait of Horror, moving somewhere between 10 and 15 million barrels a day being impacted and lost.

And if in fact we had built inventories 700 odd million barrels more than they were a year prior in 2025, we should be absorbing this fairly easily. We should only be taken down. That excess inventory that we built last year by some, I don't know what, 30 or 40% of that, we should still be in a better position, a looser position, a better supplied position today, right?

Than we were in even April or May of last year, if you believe those numbers. And yet we're finding out that the whole transmission system of the global energy market, is massively desperately searching for crude oil. I am gonna tell you, and this is what our research has said, and we've been saying this long before the situation in Iran.

That the market was not in the big surplus. Everyone thought it was. The market was balanced. That's why inventories didn't grow, and it was balanced. Despite the fact that OPEC surged production by 2 million barrels last year. They brought everything they had back online and they did it, I think in a gesture to help Trump keep the oil price low.

When he announced his tariffs the day that. Trump announced the tariffs last April was the day that OPEC said, we're just gonna flood the world with oil. They did. They brought everything they had to bear. They brought two, two and a half million barrels a day online. And it was absorbed. It was absorbed by really strong demand.

And so today we find ourselves now in a situation where. We should have been able to absorb this. In theory, we don't seem able to, and I think what it, the longer lasting effects of this conflict is that it's gonna cause everybody to take a very close look at the oil market. And in many cases, that's for the first time in a decade there, there's many investment firms in the world that have just written off and gas for 10 years.

And I don't think That that cuts it anymore. I think you need to have a more nuanced view, and as people begin to come back to the sector, they're gonna say, oh my God, we haven't invested in any of this stuff in over a decade. And we're starting to see how fragile the supply chain really is.

Erik: Adam, I agree with you that what's going to happen next is everybody is gonna take a closer look at energy.

Something I've been thinking about though is probably, depending on each investor's own political orientation, some of them are gonna look at this as you were just diluting and say, boy, time to reinvest an oil and gas. Others are gonna say, we gotta do something about the oil and gas problem. We gotta invest more heavily in renewables, while others, myself included, will say no.

We gotta invest more heavily in building out the nuclear renaissance. Do you think that those other themes are going to be big and how do you think the market decides which ones get the most money and what happens next?

Adam: Eric, that's a really interesting question. Obviously, we've spoken quite a bit in the past on our view of renewables and whether we think that renewables are a particularly suitable form of energy.

And to save your listeners going back, the answer is no, we don't. They're not a very efficient form of energy conversion. You take energy from sunlight and you can create energy from electricity from it however. It requires an unbelievable amount of material, of raw material in the form of steel cement polysilicon in the case of in the case of solar, obviously huge amounts of steel and copper and in, in the case of windmills.

And then the fact that the sun doesn't shine at the middle of the night and the wind doesn't blow all the time, and so you need battery backups to do all that. All of these things consume energy and so what you're left with is a really poor converter. Of energy with renewables. And that's why, quite frankly, countries like Germany and England and, all the all the countries that have really decided to push hard for renewables are feeling this energy crisis the most acutely, right?

Whereas the countries that have doubled down on their oil and gas infrastructure, like particularly the United States helped along by the shales, they're riding out the storm in a much better position. So will people argue that? The takeaway from the Iran conflict is to double down on renewable energy.

I have absolutely no doubt that they will, do people in their hearts really think that's the solution. I think the cat's a little bit out of the bag there, and I think people are now beginning to realize some of the challenges, could nuclear help. Absolutely. And I think that will help push along the adoption of small modular reactors, but realistically, that's not gonna be here before the early 2030s.

And even then, it's gonna take quite a bit of time to roll out and scale. So I can only hope that the big takeaway from all this is a big push into nuclear, not just for our portfolio, but more importantly for the energy abundance of the whole world. But that's gonna take some time. I think in the near term though the one thing that.

Maybe people don't have on their radar is. Potentially a return to coal and particularly in what they're now calling the global south or the global third world, or developing markets or what have you, countries India being one of them, let's say that had made real commitments to pursuing LNG imports and have now had to face both.

Russia, Ukraine, and now Iran disrupting natural gas flows over the last 10 years. So if you wanna talk about something that's really sensitive to disruption, I would say that's gas. International gas, and perhaps we'll see this as a catalyst to say, maybe we shouldn't retire all those coal fired power plants.

Maybe we should double down on some of them.

Erik: Adam, let's talk more about what happens next. In oil and gas were, let's assume that one way or another, this war. Eventually ends for better or for worse, and we have to go to the recovery. So now we're dealing with a great big backlog, a logistics nightmare, probably.

What happens next in terms of the market? Do oil prices come right back down or do we see oil prices continue to increase? Is the the recovery from this situation maybe drags on? And where are the investments? What would you be actually moving on next as an asset manager?

Adam: I think the best investments right now remain in the oil equities, believe it or not, because many of them have moved, but they've moved like 30 or 40%.

They haven't had the kind of two to three x move that the spot price of oil has had from 50 up to 120, or I guess dated Brent today, hit 148 or something like that. The stocks are up 30 to 50. Percent. So what gives and why haven't they moved more and why might they move in the future?

The reason they haven't moved more is because outside of the spot price, the price for oil delivery imminently the forward curve hasn't moved all that much at all. It's moved from about 50 bucks to 70 bucks. And so the stocks have moved up in, in concert with that. So it's up, it's up this year.

Doesn't think that I. It doesn't think that things have gotten looser. Certainly, but nowhere near what you've seen in the spot price action. And the reason for that, I think, is that oil traders right now acknowledge that it's awfully difficult and getting a lot harder. Mind you to find physical barrels today.

But that, as you put it a second ago, this will resolve itself for better or for worse in a relatively timely fashion. And from then on, the market will get back to where it was before. Maybe a little bit scarier of a world because of the geopolitical risk, but by and large, back to where it was before that 50 to 70 dollar range.

And I think that's what is going to, people are gonna wake up to because that's not going to happen. And the reason I say that. Imagine, we're losing, call it 10 million barrels a day on the most conservative estimates. So that's 70 million barrels a week, and 70 million barrels a week times 6, 7, 8 weeks.

Pick your length you're going to take the global inventory level down dramatically by somewhere between three to 400 million barrels now. Global OECD countries have announced that they're intending to release 400 million barrels from their strategic petroleum reserves, but that will take their strategic petroleum reserves down to quite low levels.

Because remember, in the US we've already hald ours. And so now that would take it down by another. Material percent to what I would call dangerously low strategic levels. And I suspect most countries around the world, certainly China and I think certainly the United States, if there's a lesson to be learned here, it's that you better, have a good strategic petroleum reserve in place.

So I don't think any country is going to Bach at trying to rebuild those. And so the total global inventory situation is going to be a lot lower than it was in January. And once the dust begins to settle literally and proverbially, I think analysts are going to stop saying, how much is being impacted in the strait today?

How dislocated can this market get? And they're going to start to say. Let's work on rebuilding these inventories, and that's when people will begin to realize the market's quite tight. Because again, remember if you took everyone at headline value and you think we're two to 3 million barrels a day in surplus, which I don't think we are, you could rebuild that inventory in a hundred days.

And so it's no wonder ISI guess, that people in the forward curve are saying, yeah, by the third and fourth quarter, everything will be just like it was in January. I think what will change people's attitude is once the proximal crisis is over, people will begin to realize that inventories just aren't rebuilding the way they thought they were.

And that's when people will say, wait a second, this is a tight market and it's gonna be. Awfully difficult to make things feel comfortable again, that's when the longer end of the curve begins to rise, and that's when the stocks, I think, will begin to respond. Because what they like to do, obviously is they like to price in the cash flows.

And what cash flows do you use? You're pricing it off of the forward curve, which tells you, yeah, there might be a good bumper quarter here, but that within three, six months you're basically back to where you were in January. I don't think that's the case and that's the next shoe to drop from an investing standpoint.

Erik: The inflection point right now on the WTI forward curve is right around the December 26 contract. And it's amazing to me as we're speaking, it's upwards of $114 to buy the front month, WTI future, but you can buy the December contract for 75 bucks. It seems to me like I wouldn't even describe that as a long dated future.

That's a medium dated future. What about just buying December 26? Futures for 75 bucks on the logic that, yeah, everybody's gonna need to re replenish their SPR and they're going to, it's gonna take months to work through this surplus. It seems to me like that's a pretty good bit. What do you think?

Adam: Listen, I'm not a futures trader and so I won't offer any recommendations on how to put out a futures strategy. In principle. I don't disagree with you. However, I think you can make it even easier on yourself. I think you can buy oil stocks and you can get that same exposure, essentially the same, type of exposure as trying to play for a move higher in the $75 december dated, contract. If December contract goes from 75 up to a hundred, a basket of oil stocks, certainly offshore drilling stocks will do very well. And I suspect, depending, obviously there's an element of leverage in the futures contract, but I think you could earn just as good a return in the equities, if not better than you could just trying to play that move in the future.

Erik: Adam, I wanna move on to the knock on effects of this that we've talked to some previous guests about, because I know at Goehring and Rozencwajg, you guys focus a lot, not just in the context of this crisis, but bigger picture on food. Let's talk about what's happening, not just to oil through the strait of Hormuz, but also fertilizer, which has a much longer lag effect.

It's, the crop cycle where it's, if there's not enough fertilizer, it's going to be next year's crop that ends up not being as big as this year's crop. What is this gonna mean for food prices and how does that affect inflation more generally as we look out for the next few years?

Adam: I think that everything that's been happening in the last six weeks can have an impact on inflation.

And if you want to talk about things that are not priced, I think that's exactly one of them. If you look at the fed futures, if you look at inflation tips and things like that, I think again, these are woefully behind and investors should begin. Thinking now about protecting if not a base case, at least protecting the tail risk, that you're gonna have some pretty nasty and difficult inflationary prints.

Ironically, the only. Area of the market and it's a commodity that, that is signaling that maybe things are not gonna follow the playbook that we thought they would six or eight weeks ago is gold. And people have said, why isn't gold doing better through this crisis? And I think one of the reasons is that some gold investors are now beginning.

To price in what could happen if you actually get a rate hike this year, which was unheard of in January and February. The only thing was how do dovish will the new Fed chairman be? I think now there's, at least on the margin, some people saying, look, maybe there is some big disruptions. Another big area like you just said is going to be in agriculture, and that is because a lot of fertilizer does pass through the strait of Hormuz.

It's very clear now that's being disrupted. I don't have the number off the top of my head in terms of how much of the world's fertilizer production passes through, but it's fairly dramatic. And what's, I think really important when you talk about the grain market is let's take a step back.

So for the last 10 years or so, maybe even 15. We've had this very unique, interesting dynamic in global agricultural markets. Demand has been off the charts and the reason it's been off the charts has been rising incomes in developing markets. People like to talk about energy demand. Certainly we spend a lot of time talking about energy demand and in emerging markets, but the first thing you do when you have a couple bucks in your pocket is eat protein and.

If you think about eating protein, and you think about it from an energetic perspective or from an energy systems perspective, what you're do, what you're doing is you're taking the sun's energy, you're growing grain, you're feeding the grain to an animal, which is then growing the animal, and then you're eating.

Animal. And so you're eating a lot of energy, caloric energy that's come through the sun, into the agriculture, into the animal, and then into you. That's obviously a lot less efficient than you just eating the grain yourself because it's not a perfect, the animal's not a perfect converter of caloric energy from the plant into its own into its own meat, right?

So if you were to subsist on just a grain-based diet, and then you move to just a meat-based diet. Just to survive, you would require seven times as much grain as if you just ate the grains in the first place, right? So I'm not a vegetarian, I'm not a vegan. But when people do talk about the environmental impacts of eating meat, one of the things, a lot of attention's focused on bovine flatulence and things like that.

But really what it is it's just a much bigger energy system, right? Because you now need to convert from gr from sunlight to grain to animal to food. And grain demand because of rising incomes in the third world. And because of increased protein consumption, grain demand has just gone off the charts.

Off the charts. And anybody looking at that would've said in the last 15 years, this is a huge bull market for AG. But it hasn't been. And the reason it hasn't been is that our yields have gone off the charts. We've had some of the. Best record yields year after year for the last 15 years. Part of that is better fertilizer.

Part of that is better seeds and better GMOs and things like that. And part of it, which no one wants to talk about is that for the time being rising temperatures across the. The globe have resulted in a longer growing season and better yields. I'm not saying that one day we're not gonna have crop failures.

That's a discussion for another day, for today and for the last decade. The growing season has gotten longer and there has been more ability to get higher yields out of those plants because of that. And so our yields have just been off the charts, and so we approach every year, every growing season, almost like we're going down this razor's edge.

On the one hand, demand is off the charts. On the other hand, yields are off the charts. And we said to ourselves every year, if anything happens to disrupt that growing season, if anything happens to impact the yields, this market will be very tight in a hurry. And I think that this fertilizer issue could be that, right?

You've needed perfection in your crop, year in and year out to meet demand. And I'm worried that finally with this, I. Impact on fertilizer supply we're not going to be able to get another record yield. And if you don't do that, the market tightens way faster. So when you think about it from an investment perspective, it's a classic asymmetry, right?

It's not a normal distribution here. If something happens, the market tightens really quickly and you have this asymmetric move. And I think that's what a lot of people that convexity, that asymmetry is what a lot of investors look for. And I think Grain could potentially give it to you this year.

Erik: Adam, I definitely want to come back to gold later in this interview, but let's start with another metal you and I are both fond of, which is uranium, and even before that, why don't we talk about where nuclear energy is headed?

Seems to me like the outcome of this crisis is gonna be a lot more attention on energy security generally. We already have a formative nuclear renaissance globally. Seems to me like this has to be super bullish for nuclear energy generally. Unless we were to get one of two escalations that I'm crossing my fingers are off the table.

But if we actually saw a nuclear weapon used in this conflict, I think that would probably resensitize people to, nuclear is bad and they. The public can't seem to sort out the difference between nuclear weapons and nuclear energy. So I'm afraid that the use of a nuclear weapon would resensitize the public to fear nuclear energy.

And I'm also concerned about the possibility of military strikes on an operating reactor, which is a violation of international law. But so are several other things that are being discussed in this conflict if that were to happen and you had a worse than Chernobyl radiological disaster because somebody.

Hit an operating nuclear power reactor with a missile that could derail everything. I don't know how to think about those risks. Do you worry about that stuff? And how do you see the outlook for nuclear energy and then of course for uranium,

Adam: Back in 2022 the uranium bull market had started already and we had big sizable positions. And Lee and I discussed just that what happens if something happened to one of the Ukrainian nuclear reactors, which so far has remained intact and or what happened if a tactical nuke was released. And I think. That would not be good certainly for humanity, and I don't think that would be good if I'm being really callous pragmatic.

I don't think that would probably be great for a uranium portfolio. But taking sort of the biggest black swan events off the table I, I think that the future for nuclear energy remains. Very bright. I think we're starting to see some very real advancements in permitting in the United States, notably towards small modular reactors.

And we've argued for some time now that the biggest hurdle to the SMR adoption will be the Nuclear Regulatory Commission. And I remember sitting with someone who was very senior at, in Washington. And we talked a little bit about, what the US could do to really improve its energy security long term.

And I said quite clearly, gut the NRC and put in place people that are actually willing to regulate the nuclear industry and not people who are just hell bent on closing down every nuclear reactor in the country. Which is really what the NRC became following Fukushima, I think after Fukushima.

The regulatory agency was desperate to make sure nobody could argue that they were in bed with the industry that they were regulating, right? I think that was their number one concern. And so they became incredibly hostile towards nuclear energy to the point of making it almost impossible to build a new third generation reactor in the us And certainly the idea of.

A small modular reactor passing permitting, and it's a two-phase permitting process, seemed almost impossible. That has largely been changed. The Trump administration. Has really changed a lot of of things in the NRC and they've moved some of the responsibility to the Army Corps of Engineers. And they've really tasked the NRC with making timely decisions.

It doesn't have to be approvals, but timely decisions on new reactor design. So we've seen, for instance, Terra power get major permit and I think that's wonderful. Team at Terra Power over the years. And I think that their technology probably the best in the industry. And so I do think that we're gonna see a big improvement in nuclear reactor design in the next five or six years.

I don't think you need any of that incidentally, to invest in uranium today because the story between now and 2030 is really a story of not producing enough out of minds to meet the current reactor fleet. And. This is where I think a lot of investors get it wrong. People ask me all the time, when does this really become a problem?

How many years out until you really hit a severe deficit in the world's uranium market? And I tell people it's here already. It has been largely obfuscated by these massive Japanese stockpiles that were accumulated post Fukushima. Those are now gone. Those are all into the market, and so the market is trading pretty much heads up, supply and demand.

That's why prices just keep creeping higher and higher. This is like a really simple, boring story, wrapped in a huge amount of emotion and a huge amount of speculative energy where the hedge funds come in and play it massively on the long side and drive the price up and then become super short and they get it on the short side and drive the price back down.

The longer term true. Signal here, the true trend is very easy to understand, is that we're not producing enough from today's mine supply to meet today's reactor demand, and we don't have much in the way of new mines coming online for the next three, four years. So I think between now and 2030, it's a really boring story and a bullish one.

After that, it's gonna be a question of. How many new mines come on versus how many SMRs come on, do we get the nuclear renaissance that we hope we do? It's all very exciting and full of promise, but between now and 2030, it's just a simple story of supply and demand.

Erik: Do you have a price target for Uranium in 2030?

Adam: That's what's so interesting is that if you look at the total cost of fuel in a nuclear reactor. It's minuscule. Everything is all about the initial CapEx build. So once you have built, for instance, an operating nuclear power plant, what would a fuel buyer at an operating nuclear power plant pay? When would they stop buying uranium?

When would they say, you know what, we're gonna step outta this market and not buy, or just shut the plant down. It's almost never could you get $500 and make your budgets work. Absolutely. It made even more interesting by the fact that most of them are regulated and would just pass that on. To the consumer, and nuclear power is still quite cheap compared to other forms of power.

So even at $500 uranium, you're not gonna squeeze out demand. So I think for the next five years, again, until we inflect and it becomes a story of new mine supply relative to SMR demand, which is a 2030 story. But for now, what's super interesting about the uranium market is that it's. Difficult to find that price that squeezes out the next unit of demand.

So what is a good long-term price? I think 150 bucks is a good long-term price. I'm talking per pound U 3 0 8 because that's really the price that you would need to make. Several good. Uranium deposits begin to make sense. The best ones in the world are Next Gen and Denison. Those need about a hundred bucks, and then there's not much till you get to about 150.

And so I think to truly balance the market, you probably need 150. Could you spike it up and above that? Absolutely, because again, there's no demand destruction.

Erik: Let's move on to gold, which you mentioned earlier, as you said, the fear here, and it's fascinating when you really think through the macro dynamics.

The reason there's a bearish case for gold is because as yields move higher. Gold competes with treasuries, and if gold's not producing any return, and treasuries are producing a return, the competitor's producing a greater return. Wait a minute, Adam. What that means is if people were completely abandoning US treasuries because of some geopolitical loss of faith in the United States and the treasury market was outright crashing, crashing treasury market means much higher yields.

So that means you don't buy gold in that circumstance. At what point does this argument break down?

Adam: Oh, I think you're exactly right. Listen, I think that there's a very big difference between a real rate hike cycle, which historically has not been good for gold and actually was not good for gold in 2022, either despite the fact that inflation inflation was high money was abundant.

We had just printed all these stimulus checks during COVID You had a big market dislocation, you would think that gold did really well. But it wasn't until 23 and 24 that it started to do well. And the reason was that in 22 you had a rate height cycle that was beginning.

I think you need to make a little bit of a of a delineation between. A Fed chairman that surprises everyone with raising rates a couple times, which is more what I'm saying could happen versus a collapse of the treasury markets in which yields go up. This, the net result could be the same, yields rise, but very different beneath the surface of the water.

So I think one is a loss of confidence in the United States, which would probably be quite good for gold. And one is just a more typical rate hike cycle to try to get inflation under control, which historically might. Cause gold to sell off, particularly at the levels that we're at today. So one of the things that concerns me a little bit about gold today is that.

This was not true the last time we spoke. Not so much in the stocks, but in the actual holdings of the GLD for instance. There's quite a bit of speculative money that's come into that that has also chased a bunch of central bank buying of gold. Of the two, I find that the central bank buying of gold is going to be.

Quote unquote, better buying of gold. Not that their timing is better. Obviously, their timing in the nineties was terrible and they sold all their gold. However, their price agnostic. All they know is they will move a certain amount of their treasury holdings into gold. So that's always nice. And second of all, they're not really like hot money.

They're not gonna change on a dime their policies, whereas the speculative money that goes into the GLD that's a bit more trend following. And in fact, as a really good example of that, when did that. Volumes start to accumulate in the GLD. When did Western speculators start to buy gold? It wasn't at the beginning of 25.

It wasn't in 24. They didn't catch the bottom. They put really the majority of their investment into gold in the fourth quarter of 25, in the first quarter of 26. So they were a momentum buyer and now there's a lot of gold that's being held by them. So if that reverses and they start to come out, I think that gold could sell off a little bit.

I think ultimately gold goes higher this cycle. I don't think it's done at 5,000. But I think it's entirely possible in the midst of a commodity bull market, which I think we're in now for precious metals to seed leadership to other areas, notably energy in the middle part of the cycle. We saw that in the seventies.

We saw it frankly from 29 to 40, and we saw it in the early two thousands, and that would not be atypical. And nor do I think that means it's the end of the run for gold this cycle. I think gold could probably double from here, but I think from January of this year. And obviously, here we are in April oil's doubled since then, so it's, but go back and we were saying this in January this year, from January of this year, oil will be the better performer for a couple years I think.

That's for sure. Does gold go down? I think it could. I think you could also just trade sideways and be less good than other areas of the commodity market. But gold is gonna have another run here at some point. It's not done just yet. And what's going to cause that next run? I think it's exactly what you said.

It's a bit of a crisis of confidence in. Whether it's the United States in particular or Western economies in general remains to be seen, right? But we've had so far what has been called the Debasement trade. I think the next shoe to drop, which to be clear, I don't think is gonna happen for a year or two or three will be the insolvency trade.

The fact that a lot of these governments are in really tough shape. That hasn't happened yet. We've had a debasement trade. I think the next step is the insolvency trade, and that'll be good for gold.

Erik: Adam, I can't thank you enough, as always for a terrific interview. Before I let you go, let's talk a little bit about what you do at Goehring and Rozencwajg.

A lot of people perceive you guys to be a commodity research firm because you publish some of the best work in the industry, but that's actually not your real day job. What's the story there?

Adam: Thank you for saying that, Eric. That's very kind of you. We're very proud of our research, but our research underpins an investment process.

We're money managers and we have a fund in the US as well as a fund internationally. And I should point out that this is what we've al what we've always done. My partner, Elise, started managing this strategy back in 1991 and the research and the letters is really just, I think a way to show people and our partners and clients what it is that's driving our investment decision. So we spend maybe a little bit more time polishing it than some other buy-side folks might. But we are investment people first and foremost. And it makes me think a couple years ago somebody asked me how I enjoyed making the transition from newsletter writer to portfolio manager.

And I said no, I think you have that backwards. We made the transition from, portfolio managers to being on podcasts and stuff like that, but we're money managers first and foremost.

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