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Indiana University Narrator
Indiana University strengthens tomorrow's workforce with practical real world experience. IU grads make a difference in your community, serving as teachers, nurses and engineers who rise to tomorrow's challenges and meet them. Learn more at iu.edu impact,
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Podcast Host/Announcer
Bloomberg Audio Studios Podcasts Radio News Under Surveillance this
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Interviewer (possibly Seth)
morning, AI meets the physical world.
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Unknown Intro Speaker
Memory is one of the areas of constraint right now because there's not enough physical clean room space to put the tools in place to build all the memory we need for AI. Months ago the big concern was that we wouldn't have enough demand. Now if we're getting to a point where we don't have enough supply, what that means is there's more duration to the good news. We can't be in a bubble if we don't have enough capacity to supply all the demand right now.
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Interviewer (possibly Seth)
So here's the latest this morning. The Seagate CEO Dave Mosley issuing a warning for the build out, mostly telling a J.P. morgan conference that building new factories would take too long. The comments weighing on memory and hardware makers after plunging in Monday's session. Jeff Curry of Abex Markets writing Capital has chased the trade while ignoring the physical assets it requires to run assets that have quietly become the best performing asset class of the decade. Jeff joins us now for more. Jeff, welcome to the program but excited to catch up with you. Seth. I'm going to take a giant step back and think about the mining bust post China boom. We need to think about the shale bust of a decade ago and why that set the stage for this period of what you call Capex starvation. Just where are we and why?
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Jeff Curry
Well when you look at history going back the entire post war area, there's two sectors that lead the equity market. One is energy, the other is tech. If you can't turn on the lights, nothing happens. If you can't innovate, you never progress. And that's what you see. So we go back. Tech was a leadership in the 90s all the way up to 2002. Then we transitioned into energy 2002 to 2014, 14 to now has been and the way you think about it is in those periods when energy lead and commodities lead, you build overcapacity, that lowers the overall price, inflation gets low and stable, interest rates drop and investors chase duration, which is growth stories, tech and the rest of it. But eventually you run out of out of energy, run out of commodity capacity. And that's where we are today with this geopolitical event. It just pulled forward. You know Jonathan, we've been on here talking about the revenge of the old economy. Over and over and over. This rotation out of tech into hard assets that was already underway before this happened. What this did is just accelerate it.
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Interviewer (possibly Seth)
As you know, Jeff, discipline is really hardened at some of these C suites. What will it actually take to break out of this capex starvation phase that we're currently in? And do you see us breaking out of it anytime soon?
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Jeff Curry
Higher prices, higher returns and. But the ultimately you ask what creates that huge upward trend in prices that you saw in the 70s and you saw in the 2000? It's once investors take capital out of tech, dump it into commodities, they begin to spend, and then you get cost inflation. The PPE that came out last week at 5.1% is telling you you're already seeing signs of it combined with a huge supply shock that you're seeing in the Middle East. So. And you know, in terms of thinking about, you know, where we are on that, we are just in the, I'd say the bottom of the first inning of the super cycle, despite the fact commodities are the best performing asset class this decade. So you're already six years into it in terms of pricing. And when we think forward, you probably got another decade to 12 years left this looking at history, Jeff, this is important.
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Interviewer (possibly Seth)
Let's just compare what's happening with tech then. So I imagine you think as capital intensity picks up, capex intensity picks up at the tech players, we get a rerating and then you get the rotation into the more energy sensitive parts of the market, the mining sector, the energy sector. We're not seeing that equal and opposite move though. In fact, Jeff, those particular parts of the market have lagged so far. That's interesting to me that the energy names haven't done much at the moment. What gives?
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Jeff Curry
I think right now there is no concern about the supply of energy and commodities. Even with the largest supply shock the world has ever seen. 2x what we saw in the 1970s. And I think there's three reasons why they're not concerned. One, we're in the middle of the shoulder months. This is the weakest demand that goes down and then back up. We're in that weakest demand part of the entire year right now. So there's no stress on the system. The second reason is right now we're in a deficit, meaning that demand's up here, supplies down here. We're drawing inventories. Once you exhaust inventories, boom. You have to push demand down in line with supply. That's when the shortage hits, that's when the pain Hits and that's when prices go nonlinear. The third point I want to talk about is that every policymaker, macro forecaster, central banker, tech promoter is telling you right now there is no problem. Problem. Every commodity, CEO, commodity trader, anybody who gets their hands dirty is telling you you have a problem. You have seen this movie before back in 2020, 2021, when remember, inflation is transitory and then you know, a few months later, boom, you hit the wall and you know, we went to double digit inflation. And I think you're seeing the same dynamic here. You know, I, you know, one last point though. Carter in 1977 made a fatal mistake. It was the sweater speech. It was Febr, wearing a sweater, kind of like this. Went out, she was Burr and told everybody, turn your thermostats down. And then prices of commodities explode. And I think every policymaker has learned from that. You know, you don't want to create fear. My job is, you know, if I was advising the President, telling him to do the exact same thing, keep everybody calm, but my job is telling you how to make money. And at this point right now, this is really serious.
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Co-Host or Interviewer
Yeah, Trump definitely doesn't want to come out, especially with the 95 degree weather saying, don't put your air conditioners on. But Jeff, you say that at this moment supply has never been more constrained, yet Brent can barely hold on to 110.
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Jeff Curry
Again, you have that seasonal weakness right now. You're not in a shortage. But another really important point here is because nobody is buying. The energy companies in the back end of that forward curve is anchored to the cost of capital of those companies. It is too low. And you know, I call this the biggest asymmetric trade in modern finance in historical terms. Why? When you look at the free cash flow yield of the oil companies, they're 15.5%, the hyperscalers are zero. Let me say that again. 15.5% free cash flow yield for the oil companies, zero percent for the hyperscalers. We call those oil companies the munificent seven. What does munificent mean? Giving you lavish gifts. And at 15.5% free cash flow yield, I'd call that a lavish gift.
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Co-Host or Interviewer
And just when it comes to supply and demand, you mentioned this. It's going to get rough when inventories are drawn down. When will we hit tank bottoms in your analysis?
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Jeff Curry
It depends on where you are in the world and what products. Some products, you're already there, like motor oil in the U.S. and by the way, motor oil in the U.S. is critical because you Couldn't even turn on your car without motor oil. Even if you had gasoline items like sulfuric acid, you're out. What does that. Cause that's why copper hit an all time high last week because you need the sulfuric acid to produce copper. But when we think about diesel, jet fuel, gasoline, those parts of the world, jet fuel, you're there. We would expect to see here in Europe diesel and jet fuel run into very serious problems by the end of this month. The United States, gasoline by July. And at that point is when you start to get to that nonlinear part and see prices go higher. But I want to emphasize when we look at the spread between spot prices in the back end, this spread has never been higher. And everybody goes, oh, we had, you know, prices were at 122 in the Russian invasion, by the way, the back end of the curve was $10 lower. And then everybody goes, you know, we saw 147 in 2008, by the way, the back end was like 140. So 147, 140. What is mispriced here right now is the back end of the oil. Oil sitting somewhere around 70, 75. This is a long term problem. The cost structure is going to go up. There is no spare capacity left. It's going to take a long time to re establish it. We need to reprice that market that's going to reprice the munificent seven. That's why I tend to think the trade here, you know, just looking at pure economics has the most upside to actually own these oil companies.
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Interviewer (possibly Seth)
Jeff Curry fired up. Jeff, when you're next in town, you need to come host the program with us. Yes, looking forward to that. Jeff Curry of Amex Commodity Exchange over in London.
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Podcast Host/Announcer
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