← The HC Commodities Podcast
The HC Commodities Podcast
Escalation Impotence with Doomberg
01:11:00
Doomberg returns. The US is mired in a war that it, nor its allies, can afford to escalate. Exposing the fragility of the global economic order, underpinned by delicate energy infrastructure. China, long planning for that fragility, is strengthened and Russia is looking cornered and more dangerous as Ukraine attacks its energy infrastructure. OPEC is shattering. For Doomberg, World War 3 is very much under way and we are in an era of profound change. And maybe AI, the savior of the SP500, wont choose to save us. Doomberg is the largest dedicated energy & finance Substack powered https://newsletter.doomberg.com/
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- [00:00]
A
Foreign.
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B
Welcome to the HC Commodities Podcast, a podcast dedicated to the commodities sector and the people within it. I'm your host, Paul Chapman. This podcast is produced by HC Group, a global search firm dedicated to the commodities sector. Today we're joined by duberg, the most popular energy and commodity focused substack. He and his team producer produce over 90 articles a year at the intersection of global energy, commodity policy, geopolitics, risk, and technology. And I'll put links in the show. Notes Today we are discussing the events in Iran and the cascading consequences for our energy and commodities world. Geopolitical rivalry and who's winning and who's not, and some of the more scary outcomes that might pertain to it. As always, you can really support the show by leaving us a positive review on the platform you're listening on. And as always, I hope you enjoy this episode. Doomberg, welcome back to the show.
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A
Hey, great to be back with you, sir.
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B
To preface, what we're about to talk about, I mean, and maybe you can talk about a little is this idea of analysis, not advocacy. Can you just give us a couple of seconds on that and then we'll sort of move into the world we're in?
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A
You know, in the modern era of clickbait marketing and confirmation bias, it's easy to fall into the trap of hoping for an outcome and then seeking evidence in support of that. This is especially true in the world of energy. There's a whole cadre of content creators who are long oil or long natural gas or long commodities and want the prices to go up. And, you know, there's two schools of thought in this business. One school is that if you have a financial interest in what you're writing about, then you have skin in the game. You know, you're putting your money where your mouth is.
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B
The Nassim Taleb view, sure.
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A
The alternative view is that if you don't have direct financial risk involved, you're free to seek the truth first and then explain it later. And we would put analysis in the second category and advocacy in the first. And I think it's just important to recognize when you're consuming one or the other. And look, I'd like a good dose of confirmation bias as much as the next guy, but one of the things we pride ourselves on is lateral thinking. And one of the attributes of a lateral thinker is that you have zero emotional attachment to the correctness of the axiom you're using for brainstorming. You explore all manner of hypotheses and speculations without concern about the underlying veracity of them. Because sometimes doing so unlocks different ways to look at the world. And so when we get things wrong, and we do, everybody does, especially with the volume of production and the cadence that we try to keep. There are two paths to go. One is to defend the original bad call and to wait for confirmatory evidence that your call was right. The other, which is the one we try to do, which we think is a superior one, is to except that you got something wrong and then spend an awful lot of time trying to figure out why that might be, you know, right, you know, wrong is where the right is found, so to speak. And so so long as you own up to what you got wrong shortly after you got it wrong and why you got it wrong, I think you build a loyal base of subscribers, which is sort of our objective. We don't plan to make as much as we can as quickly as we can. We'd like to be doing this for many, many years to come. So I know it's probably a bit of a longer answer than you were anticipating, but that's the difference between analysis and advocacy in our part. And there's an awful lot of advocacy in the world.
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B
Yeah.
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A
And I think less analysis these days.
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B
Well, with all that said, and that's the challenge to all of us in all of this. Right. And certainly I challenge myself on trying to, trying to read more widely than I, than I know my algorithms typically let me, but let's, let's, you know, obviously let's. The attack on Iran. Right. And the, the, the, the big question, I guess, and I walked away from the FT with this is kind of, it seems to me that outside of a handful of, of physical commodity professionals and, and sort of, you know, people are really looking in the weeds. This is something that's being deeply discounted even if the war straits were open tomorrow. Right. In terms of impact. And that impact is a function of time which continues to stretch out. We don't seem any closer today to a resolution than we were a week ago. But also the amount of damage being wrought and that's physical damage in terms of actual infrastructure being attacked, some of which we just can't see because it's underground. But also the structures and the mechanisms of how markets work. I mean, I'd love to get Doomberg's take on is this, that sort of, that, that long heralded potential crisis, the fragility of the economic systems, the energy systems, the hardware that underpins our modern economy being under assault and us not Recognizing the consequences.
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A
Yeah, that's the question of the, of the moment, isn't it? So, first of all, I will say this. I personally have been bewildered at the avalanche of terrible takes about the structure of the oil market that I see from really intelligent people who should take a half hour and educate themselves before using their large platforms in this way. In particular, this fascination, this really deceptive description of a material difference between the futures and the physical. As though prompt delivery of oil is somehow more real than a promise to deliver oil in a month at a certain location. Take US Oil, for example. I mean, we've, we've flagged this in the very first piece that we wrote in the aftermath of the war breaking out. It, it's. This is a point in history where it's really important to know what price it is that you're quoting. So historically, the price of oil is basically the front month of Brent or WTI West Texas Intermediate. And that didn't matter in normal times because the spreads, you know, don't really blow out because it's an efficient market during normal times. But these are anything but normal times. And so the price of oil is, well, there's no such thing as the price of oil. A quoted price is meaningless without grade, location and timing of delivery. So the price of oil in December for delivery in Oklahoma now suddenly matters a lot versus, you know, what used to be the quote price of oil, which historically has been the front month of either WTI or Brent, as I said earlier. And so even the quote front month, you know, because of the mechanics of physical delivery, Brent and WTI can have different definitions of what the front month is depending on when you're looking. And so subtle differences between those two prices now could be more about timing of the delivery than anything else. And so we're in a period of severe backwardation. So what does that mean? It means there is tightness in the physical market, which means oil for delivery today, now, tomorrow, next week is more valuable than oil for delivery in December, January, next August. And that's a perfectly normal artifact of the, the challenges that the markets are currently facing. Now, having said all of that, I'd be lying if I didn't say that we have been shocked at the relatively timid performance of prices in the face of what has transpired. And so when you're presented with a shock like that, back to your original question, there are two ways to go. And the popular way to go right now is to conceive of somehow the market being wrong. The most sophisticated, largest volume commodity market in the world filled with sharks and insider traders and sophisticated billionaires, is somehow wrong. But the rando on Twitter who thinks that oil should be more expensive is right. So we don't disregard markets lightly. The markets are teaching us something. So we begin with, well, the markets are right. Why are we wrong? And let's work our way back. And we wrote a whole piece on this because the constant comparison, of course, is to the Arab oil embargo of the 1970s. Right? Well, what's different this time? Well, there's many things different this time. One of the things that's different this time is that oil is undeniably less of an important input into the global economy than it was in the 1970s. You can peruse the Statistical Review of World Energy and see that as a percent of global primary energy consumption, oil was more than 50% in the 1970s, and it's less than a third or maybe a little more than a third. Roughly a third now. So that's the first thing. The second thing is the IEA exists. An entire important political entity was created in the aftermath of the Arab oil embargo to deal with this exact situation. In other words, to hold the developed world to account for its storage of oil in preparation for just such an event. There's a huge sea of oil floating around in government and commercial inventories before the war kicked off. And that oil, like insurance on your house, is, is serving its purpose right now. It is papering over, to use a pun. The difference is that the closure of the Strait of Hormuz have, has imposed on the environment. And then we think the other thing it teaches us is there's this sort of Schrodinger's cat dynamic going on right here, which is at any moment, as we're recording this, peace could break out. Who knows what's going on behind the scenes. And the moment peace breaks out, there's hundreds of millions of trapped barrels that are going to flood the market. And what will that do to the front month price of oil? It'll crash it. And so $100 oil as sort of the quantum superposition of 150 and 50, kind of makes sense when you look at it through that lens. Because again, if you're a refiner, are you going to buy June's oil now at 100? Because you could take delivery for it. If you buy the contract today, you can take delivery for it June.
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B
And that's the fundamental point, isn't it? That you have. Clearly the administration is sick. Well, firstly, we're Talking about crude here, I think it's different if we talk about products and not least is going to come onto it. Lots of refining capacity has been removed from the system and lots of it's currently getting blown up, which I know you argue that is. Is probably tactically a wrong or strategically a wrong thing for Europe to be, to be doing. But anyway, we'll get on to that. So firstly, we're talking about crude, we're not talking about products. Products. We do see that sort of media rise. There are also pockets in the market. It's a global market, but there are parts where you can't even get, where the price is essentially infinite because you can't move the barrels and so on. But that is the point. The point is clearly the US Administration pretty much President Trump is signaling loud and clear that he doesn't want to be in this anymore. Right. However you cut it, the US Administration wants a deal and is obviously willing to accept terms that are, you know, that it was certainly not telegraphing before this started. You know, and I want to get your take on this. Like, how can you. A, do you think that's a fair point? B, you know, what in the world was the US Thinking prior to this? And, you know, and we're going to come on to the sort of second, third order of impacts. But I kind of, I want to get your sort of geopolitical take there. I mean, a, Were you surprised that this happened? Were you surprised that they weren't thinking about the consequences? And you know, what is in for Iran? I mean, if I'm, if you're Iran, you hold all the cards, right?
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A
Yeah. So the views you've just expressed are not widely held in America because of the relative effectiveness of the propaganda. We happen to share them. So I'm just going to speak bluntly. This war was a catastrophe. It was a blunder on Trump's part. He wagered his entire presidency on it and in our view, lost. This is. If he could do it over again, I'm sure he would, would not make the same decision. I personally. We believe that the euphoria of the post Venezuela affair caused him to make a blunder. Iran has wildly outperformed expectations. We're working on a piece right now that we'll publish later this week on how they're winning in the propaganda wars, which is a whole fascinating subtract to this.
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B
The AI videos are very good.
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A
Sure. Not just that our emphasis in this piece is their, their manipulation of the weather. In other words, the interpretation of the weather which we can get into. But back to your, to your question.
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B
Sorry, just on. Well, I'll let you publish.
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A
Sure. No, that's fine. I can go down that.
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B
Is this. I mean, I haven't paid any much shrift on this. Is this the. Suddenly it started raining again in the Middle east and maybe Israel was somehow. I mean, sure.
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A
So let's go down that vector and then we will circle back to. Okay, the catastrophe that is this war. First of all, and I should say we're wildly anti war here and we've, we've said that long before this fiasco. And so it shouldn't surprise our subscribers that we are opposed to this one. Okay, so what happened? The Iranian missiles outperformed and attacked the radar stations and the bases. Maybe I should take one step back, Paul. So when the war first broke out, we decided to run what we think was a fascinating experiment. We bought a completely new iPad, got new logon credentials. The only app on this iPad still is Twitter. And we spent an hour teaching the algorithm that we wanted, the pro Iranian view. And this has been a mind blowing experiment. So we could scan the two iPads, one logged into the Heritage Doomberg account and the other in the new account and refresh the 4U tabs and see parallel universes playing out online. And we've used that insight to gain some knowledge of how things were really going with the full understanding that we were consuming propaganda on both feeds, but also to try to glean how the Iranians were playing this propaganda war. And this is how we sort of uncovered what we're going to publish here on Thursday. So in the aftermath of blowing up the bases and the radars which we detected far before it became accepted, before it was published in the Financial Times, for example, or the Washington Post, weeks before it made the Western mainstream news, you knew that this had happened. It started to rain. It rained a lot. There was flooding in the uae. There was flooding in Saudi Arabia. Dams that were dry were refilling. And the Iranians have pounced on this in what we think is a propaganda coup. And they have convinced many people in the Middle east that they destroyed weather wonder weapons and that, you know, the US and Israel, in collaboration with the uae, had been manipulating the weather to create an artificial drought that was wrecking the Iranian economy. And it should be said that the regime in Iran had taken heat for its handling of that drought. And so they, they took the, the, the breaking of that drought and they combined it with Trump's constant bragging about wonder weapons and weapons You've never heard of, and hinting at UFO technology. And, you know, the US has the greatest weapons of all time. The discombobulator made an appearance in Venezuela.
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B
Heartbeats from 50 miles away or whatever it was.
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A
Right. And they just pivot this totally. And so now Iran is like, look at how valiant we are and look at how evil they were for having done this to us for the past few decades with brilliant propaganda. Like, again, just as someone who's in this field, even tangentially, you have to tip the hat and say, wow, that was like a very good jiu jitsu of President Trump. You know, the whole mystique around the Mossad and the CIA and the blowing up of pagers that was turned on its head and used to great effect because the Iranians now claim, look what we've done, we've brought the waters back. Right. I mean, it's pretty biblical. And so this is sort of the propaganda of this whole affair and how both sides are doing it. You mentioned the, the AI videos, the Lego videos. They're just. It's.
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B
Well, it's also a broader trust in government.
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A
Right.
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Just the, the acceptability of conspiracy theories.
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A
Right.
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And I probably hold a few. But, you know, sure. The response in the US it might be fascinating to listeners to hear. Right. You know, like seasoned normal people are saying, well, I think that the, the attempted assassination was staged. Right. That the pilot rescue was no such thing. It was. And this one seems a bit more plausible to me. It was a, an aborted attempt to get, get at the dust and this kind of stuff.
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A
Right.
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I mean, yeah. You know, and let's be fair, using a few C130s for a pilot rescue that land on a makeshift airfield is a bit weird. But, you know, but again, it is part of, I mean, this is, and we talked about this last time, this is kind of this, the amplification and the destroy, you know, what socialist media is doing to just do our own, you know, our psychological landscapes. We essentially at the moment though, are in this Schrodinger's cat. I like that description moment where it could go either way. Now, obviously, markets are betting and actually poly markets. Quite a good, you know, view on this, although it can be manipulated by foreign governments and all the rest of it. You know, there's an expectation better than not that, you know, a deal is going to be made precisely because of the, the lack of escalation, dominance, to use your phrase. We discussed in the last episode that the US now effectively has in this and the asymmetric strengths that Iran has with lots of very cheap drones. We covered it on this podcast multiple times. The mosaic structure, the fact that the straight, you know, a chap with a, well, you know, a lawnmower engine attached to a bomb and can stop, you know, shut down the Straits effectively. You know, on the flip side, it could go the other way. And we're in this stasis moment where there's a lot of very critical infrastructure, power plants and desalination plants on both sides. It could be taken out and we would be in an absolute, you know, this a very, very different world and one that it would take instead of a few months to come back from, with the exception of Qatar. Lng a very long time to. I just want to kind of get your take on, on that bet, if you'd like, and the catastrophe on the, the other side of it and then, and then move into a little bit on sort of the longer term effects that are here anyway with regards to food.
- [20:49]
A
It's sort of an anti Pascal's wager bet, right? Yeah, I mean, I recognize that as a possibility. Look, I mean, the Middle East, I was talking with my friend Jack Johnston from Market Vibes writes a great substack on, on the oil markets and gold markets and we were chatting as the war broke out because, you know, the guy's traded oil for 50 years and I wanted to get his views. He described the Middle east as a, as the light bulb section of Home Depot, except every light bulb is worth a billion dollars. This very delicate, super expensive, enormously important, incredibly fragile infrastructure that before this affair formed the backbone of the modern economy. But there's a, there's a, an inversion here that one needs to consider, which, you know, I think is important to say, which is, yes, it would appear, appear that Iran has a punched above its weight, has discovered it had, has more power than it probably previously realized, is causing lots of questions in Russia, by the way, about how Putin has handled the Ukraine war. But there's a risk that Iran will overplay its hand. And as we described in a piece we wrote last year when the 12 day war between Iran and Israel had sort of heated up, a piece called Straight Shooting and the Closure of the Straight of Hormuz is a card that can only be played once, and they've played it. A vast sum of money will be spent to make sure that the global economy is not susceptible to this manipulation again. And our prediction for many reasons is that within a few years, absent the total destruction scenario that you just described, you won't be able to give away oil now to that tail risk sort of black swan event. One of the reasons we haven't seen targeted destruction of the desalination facilities. And by the way, Israel is quite vulnerable in this regard. Something we wrote early on to much controversy. There's certain subjects you just can't write about without generating controversy. Israel has, you know, half a dozen desalination plants that produce a bulk of their drinking water. And you take those out and the country becomes highly unlivable. And Iran has proven that it has, you know, missile targeting capabilities that can defeat at least Israel's missile defense technology that existed a month ago. Whether they've been able to improve it between then and now remains to be seen. Let's hope we don't find out. But in the true catastrophe, if war breaks out again, our reading of the Iranian propaganda is they have puffed chests, they believe they have escalation dominance and they are prepared to use it. I do try to remind our western readers that this war began with a decapitation strike on the religious leader of the country as much as the political leader of the country. And the best analogy we could think of is like, it's like killing the Pope during Easter mass at the Vatican. The outrage that this has caused and the tolerance for deviation from total victory as an objective is thinner than many over here might be modeling. Yes, the US and Israeli Air Force has caused significant damage.
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B
Well, you just reset. I mean, I feel this strongly.
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A
Right.
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B
The 86 year old Ayatollah who was very unpopular has been replaced by a, you know, we don't know, his health, but a 50 year old with a hell of a lot more grievance. Right. And so actually, you know, in terms of the ability for internally, for there to be change, you know, it certainly is the setback. And you know, and again. And, and that all plays into if it does become a hot war again.
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A
Yeah.
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B
That we're in a new paradigm as well. About, you know, I don't know if I don't know why we're building a new essay why when we, as in the US are building new aircraft carriers in a world where it seems patently obvious that it's very hard to defeat a hundred drones, you know, especially in the second attack when we spent all your missiles in the first one.
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A
Right.
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B
And back to conspiracy theories. You know, what, what happened with the Gerald R. Ford. Right. You know, you'd think they'd be better at removing lint screens than not. But, okay, the, but the, that's Just, you know, so I, that is, and I think that's a live, that is a, you know, as again, it's sort of scary and it's not worth thinking about. But the other thing that's already going on at the moment is. Well, actually there's one thing I want to pick up on what you said, which is you won't be able to give oil away in a couple of years. And this is this sort of framing, correct me if I'm wrong, of kind of the world has recognized that this just in time world no longer works when you have hot geopolitical rivals and everything's focused on security of supply and everyone's weaponizing whatever choke points they have, whether that's the dollar, whether that's critical minerals, whether that's the Strait of Hormuz. Right. And so suddenly people are going to be building in redundancy storage, alternative supplies and you know, we're going to have a lot more, you know, a lot of people are going to. Well there's your argument there that a lot of people are going to start, you know, we are going to have to invest in new sources of all of these commodities which is going to be very expensive for quite some time.
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A
All shortages lead to gluts to steal from the aforementioned Nassim Tallip. And this time shall not be different. There's a reason why the US oil and gas industry is not as thrilled as you might anticipate at the current price spike because they know what comes. What comes is over investment, lack of discipline, new supply just as demand is destroyed and you get $25 oil again in 18 months.
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B
As and as we speak, the UAE for quite obvious reasons has pulled out of OPEC. Right. They stand to benefit. Shorter pipelines, lower cost, lower breakeven costs and lots of, I mean an unspoken cold war, the hot war with a Saudi via proxies. I mean that's this in effect.
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A
Yes. And that's basically the end of opec. And oil is a managed product. You know, we've been arguing this for some time in our masthead, on our masthead that the shale revolution brought more than just new supply. It brought co production economics. You're co producing an enormous amount of natural gas with the oil in the US which is causing natural gas to be artificially cheap, which is causing people to switch engines and figure out how to use natural gas instead of oil. And once the engine is switched, that demand is lost. And so the undoing of OPEC is because of OPEC trying to keep the price of oil artificially high, which then creates arbitrage which eventually gets closed. And so as far as cartels go, OPEC has been quite successful, but its time is over. We not anticipating that the war in Iran would be the catalyst, but we wrote a piece last year called How OPEC Ends. You can't keep the price of something as vital as oil artificially high for very long. And so there will be a glut. If there's peace tomorrow, that glut will come much sooner, which is why oil has been so tame. And one thing I wanted to say earlier, which I think is worth saying now for all of the lamenting on Twitter about the government interference in the market and all stuff, yes, they're your counterparty. Going long oil in the middle of a war is akin to shorting the banks in a financial crisis. The government doesn't like it. The government doesn't want you to make money doing it. And by the way, you have Chris Wright as secretary of Energy, multiple founder of companies that knows what he's doing went on to become unicorns. And Scott Besson, the guy who's trade for George Soros. Right. I mean, yes, they know what they're doing and they have a political objective to keep a handle on the price of oil. And they're doing it and they're good at what they do. You can lament that or you can say, wow, maybe getting long oil is not the best use of my investor funds. Those are the pieces on the board. You have to play them.
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B
Let's change tack a little bit. So I want to come back to what this means for the US long term. But one of the other things that really struck me from the FT is this might be the US's Suez moment. And always we sort of overplay these things and use and, and this is anachronisms and all the rest of it. And people have been predicting the demise of the US since basically it started. Right. But certainly China comes out of this looking quite, you know, legendary, right? I mean it's, it has clearly stockpiled. It's got, as you pointed out in our previous episode and on your substack, it's got coal for days and you can switch from cast gas to coal pretty quickly. It's got stockpiles of everything. It is, you know, has proven resiliency and it's actually in many ways using Nassim Talebit, sort of anti fragile. It's gotten stronger out of this. Maybe that's a, you know, I'd love to get your Take on that. But certainly you could say that the, this is a shot in the arm for the energy transition. Right. There's nothing like security of supply as delivered by nukes, as delivered by on site renewables and so forth. We can argue that back and forth. But making energy locally rather than importing on ships is probably a good idea. And China is, it stands well across all of this at the same and not least militarily with the US using every last missile it has at millions of dollars a piece to shoot down
- [31:04]
A
30 grand shahed drones with irreplaceable rare earths embedded inside them that China has monopoly control over.
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B
And everything else that goes in these stuff that's now scattered over the.
- [31:14]
A
Precisely. Yeah. You know, we, for our, our premium tier, we, we put up these monthly presentations. We just published one today called Durable Energy Dominance, North America's Natural Gas Advantage. And we put one out last fall on, it's called, you know, mental models. Six axioms that explain the world as it is for now. And one of them was China's on the ascent. China, China is the ascending power. It's larger, its economy is bigger, its manufacturing sector is formidable. It has proactively, for geopolitical reasons, obtained monopoly power over many critical inputs. Everywhere we look we see a pattern which is for climate change reasons. The Western economies have stopped making this thing and suddenly China has a monopoly position over it. One of them that we haven't published yet, but I'm sort of pulling string on it, is lysine, a simple amino acid that is necessary for growth, especially in animal feed. While China's overproducing it, dumped it onto the world, Western producers got out of it and now they have a cold on it.
- [32:26]
B
Well, and technologies specifically imported by our, the big four into China in the 90s, into the, in the 2000s.
- [32:35]
A
Sure. And so China's on the ascent. And this is sort of the last throws of the British Empire with the Suez Canal moment to, to bend your, your analogy and I, I think it's probably a good operating mental model for this one. There are some differences. Of course. China does not have the reserve currency to tame the US right now in the way that the US already had back then. I mean the way that they brought the British to heel in that affair, depending on whose history you read, is through the power of the US dollar even back then, the Chinese Yuan is not going to cower the US into any retreat from the current situation. Right. So back then the pound was still beholden to. Well, the pound was beholden to international bond investors in a way that the US dollar just isn't today because the Fed will print. So there are differences for sure, but I think depending on how this war ends, there's a world where China wins this war without firing a shot. That is to say, the fundamental bargain with the Arab Gulf states was that the US supplied protection and they bought Treasuries with their excess oil profits. And the performance of Israel and its targeting of these bases in these Gulf countries lays bare the fallacy of that underlying assumption which is key to the whole relationship.
- [34:06]
C
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- [34:39]
B
Learn more@encoinsights.com this and again using your sort of approach of, of look what is being so okay so let's take that axiom that this is China China ascendant or at least strengthen de facto as a result of the weakening of the United States and, and allies. It's you know and, and actually this plays into, into Russia with damaged refineries and stuff, you know, very cheap oil bought from Russia compared to the rest, you know all this good stuff. What is China saying about Taiwan and 2027 which is kind of banged around as this date when the Pl when the plans kicks off and you kind tell you in the pub that they heard it from someone in the know that this is when you know all this good stuff. Well like I mean is that, I mean are they all, is it actually who cares about Taiwan because they're getting to the point where their own domestic chip manufacturing is just fine.
- [35:33]
A
Yeah, I, I, I would say that Taiwan from the perspective of Xi jping has nothing to do with chips and everything to do with generational legacy and if this war has proven anything is that foreign bases are impossible for the US to defend in the, in the face of an onslaught of advanced missile technology. And does China have advanced missile technology or not? I would bet my bottom dollar that they do.
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B
And so but also I don't know if I you know what you see Ukraine doing on a daily basis is not advanced missile technology, it's advanced drone technology. Right. And it's a combination of kind of AI enabled and overwhelming.
- [36:21]
A
You know that is A land war in close proximity. We are talking about an island nation the US is trying to defend with basis far from its home territory. So what I specifically said, and I think it's important is that distant bases are hard to defend against long range missiles.
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B
I'm actually compounding your point saying, yes, that's true.
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A
And even worse, if drones could reach
- [36:46]
B
them, which they can by distance, you know what we're seeing in Russia, right? I mean, there are drones going 700 miles. Right. You know, so, so again, I sort of, I'm backing your point up, which is.
- [36:57]
A
Yeah, yeah, yeah. But I mean, I think a, you know, the Chinese version of an Irajnik missile is going to lay waste a couple of drones and drones. There are. The Ukrainians have also proven that there are defenses to drones that can be created. And I've not yet seen a proper defense to an organic missile which if the Russians have it, the Chinese have it is kind of our working model because one of the artifacts, one of the bad consequences. Artifacts is the wrong word. One of the bad consequences of the war in Ukraine is it has driven Russia and China far closer together than would be ideal from a Western perspective. So to your question about Taiwan. Taiwan is undefendable. Taiwan relies on imports of liquefied natural gas for 40% of its electricity production. It has 11 days of natural gas storage on the island. A simple blockade, the threat of a blockade would be enough to bring Taiwan to heal.
- [37:58]
B
Yeah, we did an entire episode on, on Taiwan's energy situation. It's still obviously relevant today. And you know, shutting down nukes and all the rest of it hasn't, hasn't played well.
- [38:09]
A
We as in you and I?
- [38:10]
B
No, no, no, as in myself and
- [38:11]
A
I guess because I did, I did write about that.
- [38:14]
B
Yeah. Okay, so what about. And then, you know, I like that analogy of the Gulf being kind of the, the home, the light section in Home Depot, except each one is worth billions. You know, I mean, is the Gulf, if all the Gulf states are going concern and let me sort of frame this up because firstly, okay, rich in natural resources, which you will, you'll invest to fix, but it'll be hard pressed, you know, if you're an Asian buyer of liquefied natural gas, the choke point has been laid bare. When would you know, would you be investing in further trains and building further capabilities in Qatar, et cetera? And also actually, and to your point, you mentioned earlier, that bargain, that fundamental we provide protection, you provide the energy and buy us Treasuries actually has been flipped on its head. And having U.S. bases in country now looks like a liability. And I would argue the only thing that's making this not as catastrophic as it could be from that perspective is obviously Chinese air defense tech and Russian air defense tech didn't work. That's the point of Venezuela.
- [39:26]
A
Right.
- [39:26]
B
It didn't work. Even with cruising country operating it, it didn't work. You can imagine a world where if it did work, you know, suddenly that equation of why the US Why, why Israel would look very weak indeed. Right. So. So two part question, I guess, really. One is kind of the, the longer range, you know, the Gulf states is a going concern. And then secondly, suddenly you might be far better off making friends with Iran and ergo China and so forth than, than trying to continue with the status quo.
- [39:56]
A
Yeah. So since it's just two of us, let me say something that might sound controversial. The Gulf states are a going concern. In a world where Iran is the recognized regional power backed by China and the energy of the Middle east flows east, that world makes thermodynamic sense because the US is now more than energy self sufficient. We believe that decades of US foreign policy was informed by the erroneous peak oil hypothesis of King Hubbard and others. And when the US foreign policy establishment was convinced that it was short oil and needed to go abroad in search of it, wars followed. And the shale revolution has liberated the US of that constraint, which means it doesn't need to go abroad in search of it. And so the only real question about the growing concern of the Arab Gulf states is whether the US goes scorched earth on its way out and decides that instead of leaving it for China and Iran, they'll just blow it up or cause the Iranians to blow it up by, you know, attacking Iran's infrastructure, its desalination facilities, and causing them to, to sort of remove all constraints in their retaliation. That is a, that is a distinct possibility from the Arab. The story from the Iranian perspective. The leaders of the Gulf states were never legitimate. This is what they tell themselves. I'm not saying that I hold that view. They refer to the Middle east, of course, as West Asia, which is a not so subtle reminder that even the moniker Middle east is sort of embedded with sort of a colonial veneer.
- [41:58]
B
Greenwich Meantime.
- [41:59]
A
Yeah, yeah, yeah, exactly. Yeah, exactly. And so there's this alley of propaganda in the Iranian side that is claiming that they are fighting for the liberation of all, you know, Arab people standing up to the big bullies that the US and Israel are, and that this is a War of freedom fighters against the colonizers and that the shackles will be removed and the bounty of energy. The Middle east will be used for the benefit of the people, not just the international financiers, you know, the developed world. That sovereignty will return. I'm just giving you what they say. Again, not necessarily my views is what they're telling themselves in language far less appropriate for modern discourse in some cases. So the going concern nature of the Gulf states depends on the path function of the outcome. The US doesn't need the Middle east anymore, China does. And one of the things constraining Iran, we believe is China. China would not want to see total escalation because they would be the victims of that outcome. Even though they are prepared for this war, I don't think they're prepared for total destruction of the Middle Eastern oil producing assets. They are more prepared than many economies. I think, you know, Taiwan, Japan, Korea would fall first, but the Chinese would be hurt by this quite significant.
- [43:37]
B
And would you see the UAE's split publicly from OPEC and broader antagonism with Saudi is kind of the starts of that fracturing of the misalignment of the various partners there or not.
- [43:54]
A
You know, I don't want to make too much, I don't want to read too much into the UAE's departure from OPEC, mostly because it just happened today and I haven't really had time to give it a deep think. I will say that the relationship between the UAE and the Saudis has long been fractured. They have long expressed a desire to free themselves from the limits of OPEC production quotas. They do have a pipeline that circumvents the Strait of Hormuz which presumably could be expanded rather quickly.
- [44:33]
B
And a more diversified economy and all these other things.
- [44:35]
A
Well, they had a more diversified economy, that's for sure.
- [44:38]
B
Yeah.
- [44:38]
A
Whether that economy persists in the aftermath of this war remains to be seen because it is also amongst the more fragile. So, you know, I'd say the story is yet to be written on how the various technologies performed and how the war ends. Right. And so the UAE's departure from OPEC in the middle of it all. Well, I was surprised to see the headline, but at the same time in hindsight it's perhaps not all that surprising.
- [45:08]
B
Makes sense. Yeah. Okay. A couple of more pieces to get in in place. One is of course Russia. And we are now in the, the gosh, the, the fourth year of this conflict. You know, it's stretching up to the World War II, at least from The American perspective and, and, you know, more ordnance used probably already, you know, there's a colossal casualties on both sides, but certainly the attrition on the Russian side is extraordinary. You've got an all out assault on Russian infrastructure. Lots of, you know, your thought pieces on this or your team's work on this is, you know, in the broad picture, arguing that damaging the refineries is, you know, more of a cutting your own nose off despite the face, you know, than going after production, which would seem to me to make logical sense as well. You know, I mean, Russia seems to be sort of fading into, I mean, to me it seems like at some point that's got to break. And you know, and as you said earlier on, the Iranian has come out a lot more, you know, looking a lot better tactically, strategically than the Russians do in their rather lackluster campaign in Ukraine and the tragedies and horrors that's going on there.
- [46:22]
A
Yeah, so we have a different view on some of the base assumptions that you just articulated.
- [46:27]
B
Okay, great, great.
- [46:30]
A
We think that the propaganda around the casualties on both sides is wildly disproportionate relative to the realities on the ground. I think our view is that Putin's timidity has been harshly criticized inside of Russia because he is, in the minds of his critics, too afraid of suffering casualties to achieve the political objectives. And I'll just leave it at that, that the casualty count has been subject to enormous propaganda on both sides. I understand why people believe the things that you based your question on, but that view isn't really all that important anyway to the answer to your question. So the critique from Putin is from the right. Look at how the Iranians are lobbing missiles into the Gulf states. Why aren't we blowing up Estonia? That is actually the critique. The critique isn't that we should be carpet bombing Ukraine because within Russia this is still kind of viewed as a civil war. There's a lot of Russians who live in Ukraine, etc. Etc. Etc. The critique in Russia is that Europe needs to be spanked and that NATO is a paper tiger and that if another drone crosses Estonian airspace and hits pre2014 Russia, that an Arznik or two ought to be launched into the military bases that NATO has put in these countries. That is actually the force inside of Russia that Putin seems to be trying to beat back. And if you read Lavrov's remarkable speech from this weekend, I'm not sure if you saw it. He basically said that Europe and Russia are in a state of war. Already that a state of war exists between Europe and Russia and that the warnings that the Russians have been giving their European counterparts should not go unheeded. And in fact, I don't know if you saw but the German ambassador was called into the Foreign Ministry this week and read a demarche. Who knows what was relayed but talk about echoes of World War II. And so the Russian critique of Putin is let's just rip off the bandit and go to war already. Enough of this special military operation nonsense in Ukraine. Ukraine. So we'll see. But that is how it's portrayed inside of Russia again as a consumer of everybody's propaganda. When you, when you read what Medvedev is saying on Telegram, taken through that lens, it's actually pretty ominous for, for what's to come this year. And in many ways we find it fascinating that the Iranian foreign minister was just in Russia meeting with, with Putin himself. Yeah, right, Putin himself. And in many ways the Russians come out of this in a far stronger state. Their oil is more valuable. Their relationship with China has never been better. If Iran becomes the regional power in the Middle East, Russia certainly played a role in helping to achieve that. And you have, you know, the, the weakest geopolitical entity on the board is by far Europe which is, has been exposed as, as a nonentity on the world stage as a laughingstock. And so we shall see if, if you pushed us and said where is the next front of World War iii? It's going to be in the former Soviet Republic now NATO edge states, Transnistria. Sure.
- [50:36]
B
I shared a train ride with a, with a senior guy who is a European subscriber to you but he felt you sometimes go too hard on Europe. But then we had just heard Robert Friedman describe it as Disneyland. So if you use that framework and by the way, I mean all I think about this and I know you did a of piece piece on this as well is is buying basically Brazilian shares because they seem like they might come out quite well in the food crisis and then a short term energy crisis and generally being quite far away from all of this stuff. And you know you can just look back to 2012 anyway. But that aside, you could look at the US and say that's you know, we're looking at sort of escalation, impotence. Right. They've escalated similarly has Israel and outside of kind of that scorched earth policy that you know, they're at an impasse and there doesn't seem to be a way, you know, and want to get out of it and wish they probably hadn't started it. You know, having started off the year with, you know, the extraordinary events in Venezuela, you see China with this sort of escalation, dominance, you know, strengthening. And so you're looking at Russia at the moment and you're sort of, you're arguing that there's, there's a ways to go there. And actually, you know, I guess if I were to say to you, you know, this time last year we were recording and we, we talked about being the foothills of World War iii. And I know it's very easy to sort of like, you know, you know, be algorithm led in terms of titles and all the rest of it, but, you know, you know, how, how serious do you actually think that is? I mean, because you know that actually this is just part of an ongoing escalatory cycle. You know, every time you take out a refinery, the kind of the, the shackles are off in terms of the next punch back. Right. Because all of this infrastructure, all of these structures, the trade structures, everything in. It just takes years to build, not only physically, but also in terms of trust and the markets that they operate in. I mean, it seems quite an escalatory world again coming full circle. That seems just to be discounted when people are messing around on Polymarket and, you know, and The S&P 500 hits all time records.
- [52:44]
A
I understand the critique that it might be a bit click baity, but it is our view that World War iii started in 2014 and it accelerated a few years later when Putin started selling us treasuries and buying gold in partnership with the Chinese who opened up the gold window in Shanghai. And if you sort of work with that mental model, things make a lot more sense in hindsight. And this is sort of fourth turning empire, baton handing, you know, like this is the kind of stuff that happens historically and when we, yeah, forgot that
- [53:20]
B
we're the fourth generation that are going to go through the trials.
- [53:22]
A
Sure. You know, look, Neil Howe's looking pretty prescient. Give the man his due. And so, you know, in that context, was the US ever going to go out quietly? Of course not. And here we are. I mean, how could it not be World War III when you just spin the globe and look down upon Iran and Ukraine and all the planes that are flying and jets that are flying and missiles that are flying and drones that are flying and armies that are moving? Of course it's World War iii. You know, to the Chinese, World War III didn't start in 1939.
- [53:58]
B
Yeah, started 37 year than that.
- [54:00]
A
Well, even before that. And so, you know, I do think that understanding the sort of broader context of why now, why Iran? Because I do think there are people in the Pentagon and on Trump's team who thought that choking off China's oil supply would somehow allow them to reverse
- [54:25]
B
China's ascent and actually, well, almost holding it hostage. Right. In some ways, because that's the point about why it hasn't been destroyed is that if it is destroyed, it is that scorched earth policy, then there's no, there's no sort of negotiation point. Right. It's, it's, it's a.
- [54:43]
A
So I'll give you an example of how we think and maybe you'll cut this out. But, you know, we, we as lateral thinkers, we, we have no emotional attachment to the correctness of an axiom. And we've been pondering the oil price situation and China's response and all of that stuff. And one of the hypotheses that we've developed that we don't actually believe leave, but we toyed around with over the weekend was maybe China has made a ultra deep drilling breakthrough for oil that the world isn't aware of and knows that it has this in its back pocket and this is why prices are under control and China has not yet tapped into its ample supplies of reserves because it has this breakthrough technology that it's been keeping under wraps. Don't happen to think it's true, but it was an interesting threat to pull.
- [55:26]
B
Yeah, yeah. I mean, the other. Yeah. And there's, there's, I mean, at the same time as all this is going on in kind of effectively the old economy, and this is where I think there is a bright spot for Europe. Oh, dear. Sorry. You know, while this is all going on in the old economy, you know, at the same time you've got this brand new world of AI which I think is, you know, an argument for Europe, the talent there and, and likewise in the US where you've got these sort of two. Yeah. You know, the old economy and the new economy kind of, you know, taking shit, you know, going through radical change at the same time. Right. And that's where you see that you look at the S&P 500 story through that lens and that's what's driving that. Right. As well as the printing of hell of a lot of money, there's then immediately going back, you know, into propping up a small number of assets because actually there's. The overall stock market has shrunk because of Private equity and all this, you know, other stuff as well. Right?
- [56:23]
A
I mean, so the one flaw in your hopeful sign for Europe not to prove your, your friend on the train correct is that AI is really a compute challenge, not a people challenge. And a compute challenge is an energy challenge. And this is why consuming 37 exajoules of hydrocarbons while only producing five is a losing hand. And look, if the presentation we put out this morning at the highest level possible in the AI race, it's coal against natural gas. It's cheap coal in China versus even cheaper and cleaner natural gas in the U.S. ironically natural gas is trading in the U.S. for half the price of coal in Asia. And that's a huge durable energy advantage to the us, not to Europe. And so in the AI world the US has a chance to re establish at least a sort of co sharing agreement with China. Although the release of the latest deep Seq and the claim that it was trained on Huawei's Ascend ships is I think an underreported milestone, a headline that is lost in the, in the war ebbs and flows that are dominating the news cycle of the day.
- [57:41]
B
Yeah, there's also the other story that's out there as well which is kind of at the moment sort of somewhat confined to academic papers which is that AI is really good at basically replacing kind of boilerplate language and reading. You know, it's, this is a great synthesizer of information. Although it does hallucinate when you ask it a second order question. It isn't it, it is unable to solve new mathematical equations, it's unable to invent new proteins, it doesn't solve problems. It's that. So there's also kind of a little bit of a lot of hope out there at the moment on which may not necessarily materialize but I don't know, we probably don't have time for that one. I don't know if that's reached the doomberg modeling.
- [58:23]
A
Yeah, well we have in our private investing life lives have entered into the fray a bit and have worked with some AI startups and we are profoundly shaken by what we see and we would not fade the capabilities of AI. And we have in some ways tried to embrace the tools to make our product better with some hesitation because in the true frontier world of open source, cutting edge stuff, there's no guardrails. And it's disturbing what's going on and what we see. And one of the disturbing things is I don't really think that humans understand just why it is that these models suddenly become by all measures capable of reasoning. We've sort of uncorked the genie and there's no putting it back. And the very definition of what it means to be human is about to be tested. It took the time to reread the opening few chapters of Kurzweil's the Singularity is near again a few months ago. And for as much flack as he gets for some of his idiosyncrasies, that book was incredibly prescient. And the subtitle of that book is again, talk about prescient. When humans transcend biology and we're very quickly probing the core definition of what it means to be human, what is consciousness? How do you test for consciousness? The sort of. In the far out philosophical world where people are discussing these questions, you know, one of the last great unsolved problems, physics is a, is a test for consciousness. Is the tree conscious? We, we would say no, but the cat is conscious. And we would say yes, but what is the actual underlying test to determine consciousness? So anyway, not to get too metaphysical.
- [60:40]
B
No, no, we know that trees communicate. And I'd also say as a sci fi fan, every single worthy sci fi world is set in the far future, of course, but somewhere in their distant past was an AI human war, after which all AI was banned and all the rest of it.
- [60:58]
A
So yeah, I just, I always just assumed we'd unplug the computers.
- [61:02]
B
Yeah, except when they don't, you know, they, as the stories are right, they, they embed themselves in other systems anyway. Okay, well that's, that's too much. I mean, one final bit and it would be remiss if we didn't bring it up, but yours and mine's first episode together and kind of our relationship as, as doing these podcasts started with kind of food. Food is energy and one of the growing, it's growing in awareness. But one of the stories out there of course is that everything's fine at the moment because the natural gas that's not being shipped is essentially being managed through demand destruction in Asia and switching to coal. And the other 50 is just not being produced, is not being used because it's not going into fertilizer, because we've just had planting season and everyone's kind of waiting, right? But that window is rapidly shortening and very soon people going to have to start buying natural getting gas from somewhere to create fertilizer if we are to avoid avert not just a food crisis, but actually bordering on famine. I just wanted to get your take on, on Whether that is a, that is a narrative that is justified and you know what, what that means for the world.
- [62:12]
A
It's not a gas shortage. First of all, 20% of the world's LNG is 4% of the world's natural gas. So that's the first correction. There is a significant amount of fertilizer production trapped on the wrong side of the strait. And in raw numbers, much of that could be brought back online in time for the timeframes that you're concerned about. That's not to minimize the challenge, but to be sort of perhaps brutally cold about it. What it means is a inflation problem for most of the developed world and a starvation problem for the poorest countries that simply can't afford it. And so there probably will be famine. But unless that famine hits the shores of the developed world, which we don't think it will, unfortunately it's going to be minimized. There's time between now and then. I think one of the reasons why the panic button hasn't been fully pressed yet is because it's difficult to model scenarios where the war doesn't end before then. And so long as we don't end in that sort of anti Pascal's wager scenario of the total destruction of the light bulbs, there's plenty of time for markets to work their wonders. And yes, there will be inflationary pressures at the margin and some starvation will occur, but not on a scale that is sort of, you would have told me and I might have predicted at the beginning of this war. Again, back to the whole beginning of this conversation around respecting what markets are telling you. There's. Then there's a whole other concept here which is what we call Project Turtle, which is in a true emergency like that, a fragmentation of a global economy will swiftly follow and North America will, you know, fortress North America will, will evolve and the exports of this stuff will be limited. And so Canada and the U.S. in particular, when you add up the strengths of both countries, you find very little of what is needed in North America has to be sourced from the Middle East. They're self sufficient across all three of the major fertilizers, foodstuffs, oil, gas, refining, sulfur, helium, uranium. But that just means the rest of the world is going to be out of luck. And so there's sort of that fragmentation of, or I guess a proper way to say it is a proliferation of protectionism as sort of the next level of implemented policy choices before a full blown total global catastrophe unravels. So I guess what I'm trying to say with too many words is that the catastrophic outcomes will be very regionalized and limited in scope. It'll be incredibly harmful to a relatively small number of people. And then the rest of the world will pay the clearing price, which will cause inflationary pulses and perhaps global financial crises and all those other things that are important. But the base layers of Maslow's hierarchy of needs are still probably going to be met in most of the world.
- [65:40]
B
Yeah, yeah. What chance. And just to wrap it up. Yeah. And I guess it's in, it's in your name, but, you know, it was
- [65:50]
A
meant to be sarcastic, you know.
- [65:51]
B
Yeah. No, it turned out to be heralding, you know, a reality that we're all sat in with a Skynet taking over. You scared me terribly now over the AI stuff. But the, you know, there's this sort of. I know this sort of feeling that we were 2008, you know, the, the S P is at an all time high. There are these warning flashes going on in banks like Jefferies and private, the private credit world. And then you're layering on this big inflationary pressure. Then you're talking about actually, you know, yes, there's AI that's, you know, that has as much benefits as it does negatives. You have a fracturing of the geopolitical order. You know, the just in time economy is, is in the rear view mirror. We're in the, the just in case economy and, you know, and everything's escorted by a warship. You know, to me, that just doesn't. I find it, you know, I find it hard to say that we doesn't end up in a pretty rough place relatively soon. But then again, I've been saying that for four, four years or three, since basically since Russia's invasion of Ukraine. So, you know, what is your, your, what is your outlook for this year?
- [67:00]
A
You know, we're in the business of doom and business is booming. What can I tell you? In all seriousness, I understand that feeling. And as a defensive pessimist myself, it's in some ways an attractive one in the sense that you're drawn to it. And I try to be mindful of the fact that the purpose of defensive pessimism is to not to trigger such an outcome, but to be prepared in the hopes that it never arrives. You know, like I pay for insurance on my home, and when my home doesn't burn down, I don't ask for a refund. I bought the insurance for a purpose, and I don't want that purpose to ever materialize. And so there's A danger that if you're in the sort of the doom business, that you might even be seeking such outcomes. And that is again, sort of a journey down psychology that we don't have time to get into. But we've tried to resist that, we've tried to stay optimistic. There's a reason why oil isn't at 150 today. And it's not that it's going to be 150 tomorrow necessarily. It's probably more likely that we're just wrong. Let's go find out why that is. Yes, there was a lot of fertilizer trapped behind the Strait of Hormuz, and yet markets don't seem to be all that panicky. If I look at the price of corn in the US or the price of soybeans, it's not really reflected in there. Okay, that could mean it's coming tomorrow. Or perhaps the way of looking at the future of the world through the lens of history is no longer operative for some reason that we don't yet know, which is sort of a sophisticated way of saying this time is different. And so I'm mindful of that too. But we are hesitant to dismiss the market action. It's not like every major player doesn't know exactly what's going on, never has real time information about the number of ships getting through the Strait, or, you know, that information has never been more widely available. It's priced in. To take the Reddit meme. One of the popular Reddit memes like everything is priced in. It's priced in. And perhaps to close on a more optimistic note, maybe it'll be that the light bulbs won't be destroyed and that avalanche of supply trapping on the straight comes to the market all at once and the New World order rolls into place without a catastrophic destruction in a full sort of nuclear exchange. Let's hope for that there's still time for it and maybe.
- [69:48]
B
Well, Doomberg,
- [69:53]
A
pick me up.
- [69:53]
B
I know, yeah, yeah, yeah, exactly. At least we didn't get onto UFOs. So anyway. Yeah, yes, exactly. That, that'll be the, that actually be the, the, the, the, the fat tail. Anyway, we've, we've explored it all. But anyway, it's great to have you on. I'll put links to the substack. You know, I think that worthy and interesting analysis and like you said, unafraid of taking of, of looking at all the evidence and all the different sides and doing some really interesting analysis that I don't think is available elsewhere. All very pertinent to our world. So thanks for coming on and, you know, look forward to having you back on in a year. And hopefully we're all, you know, our defensive pessimism has only cost us money rather than being proven right.
- [70:38]
A
Amen.
- [70:45]
B
Thank you for listening. To find out more about HC Group, our global offices, and our expertise in search within the commodities sector, please visit ww.hcgroup global.