EA Forum podcast with Jeff Currie: China, elections and the Fed

This transcript has been automatically generated and may contain errors or inaccuracies. It is provided for reference only and should not be considered a fully accurate record of the conversation.

Amrita

Hello, everyone. We're back with Jeff. Jeff. Last month I told all our viewers and the podcast we recorded was very well received around the world. Lots of great feedback. Good to hear that you were a guest speaker, and that I was hopeful that you were going to come back for more than just a one off, series, because it wouldn't be a series if it's just one. And I'm super excited to announce that Jeff is now officially joining EA as a board member. So welcome. Welcome to the family.

Jeff

Thank you. I'm looking forward to it.

Amrita

And this is going to be something we're going to do monthly—get together and talk about not just commodity markets, but macro markets as well. And, you know, potentially even doing slightly different things—could be written form, could be just more interactions. So really, really great that Jeff is going to be with us as a contributor to EA!

And so yeah, with that firstly, like I said, welcome. And secondly, let's get started. I mean, this is a strong market, Jeff.

Jeff

Yes.

Amrita

Let's talk with oil. We are almost a dollar back with dated front. Front couple of months really? We've been calling for, you know, fundamentals starting to turn from June. That's been happening. We kind of think maybe Brent ran a little bit ahead last cycle. Maybe it corrects a little bit. But lots of outages out there as well, right? Wildfires, hurricane, hurricane season in June. Can you imagine how early it is? OPEC cutting production as well as exports because there's a heat wave going on. I think there's a lot of unplanned bullish impacts out there. What are your thoughts?

Jeff

Yeah I absolutely agree. The physical tightness in this market is extraordinarily high right now. You point out actually the first two months are $1.75 backwardated on Brent. That's wicked backwardation and tells you this market is tight. If your balance table suggests a 2 million barrels per day drop without even factoring in these disruptions in third quarter, it's huge.

But the fly in the ointment is you can't give oil away. Nobody wants it. At this point right now, whether it's in the futures or the oil equities, they're very much unloved despite a very strong backdrop. I've been doing this nearly three decades. I have never seen Brent outright short before until about two weeks ago.

Amrita

Weeks ago? Yeah.

Jeff

And, to describe why that is so rare—it didn't happen when we went negative. It didn't happen during all the crises of our lifetimes. To demonstrate how difficult that is to get short when we think about the positioning of the market, you have the producers on the short side—call that 50% of the open interest—who are naturally short, and then you have roughly 35% of the market are consumers. Remember, the consumers can't match the producers. They're not as consolidated. That's why we invented the Goldman Sachs Commodity Index to facilitate more producer selling. So the market always has a natural amount of length to it. So when you think about if the investors are outright short, that's a tall order because they actually had to get somebody to get long to offset that producer selling and then sell more.

So it's a really difficult position to get into. And it underscores that people just don't like this space. So what happens if all of a sudden they change their mind and want to get long? We're at $86 and change right now in a market that on a scale of max short is minus ten and max long is ten, it's about a 0.5 length right now. So if this thing runs up to 5 or 6 or even a seven, the upside here is tremendous.

Amrita

But Jeff, tell me this. We've had, you know, our client base—you'll be familiar with a lot of them and a lot of them are generally straight and also energy equity funds. We've heard from quite a few of them that they've struggled with this latest move up because of the signs the energy equities have been sending to them that it wasn't very bullish. And there were lots of kind of gremlins told in the energy equity world, which you'll be a lot closer to. Why is there a disconnect? Do you actually see energy equities catching up to the futures market, or does it just not make sense that they would be that much discounted even versus the underlying futures? Investor fatigue?

Jeff

They're tired of waiting. If you look at the returns in this space going back to 2014, they're abysmal. Over the previous decade, the U.S. shale producers destroyed $0.54 on every dollar. I think I made that quote before, but it's huge. And it worked briefly, call it, 21–22. And from 22 onwards, it's been a long slog for these investors. I think they look elsewhere and go, hey, I can find better returns somewhere else. And by the way, with commodities, you've got to be there the day they move, because they'll move quick and fast and reprice, and those who jump in are going to miss out.

The problem is, in today's world, whether it's equities or commodities, most of these investors don't have the ability to buy and hold. If the market's not trending, they can't be there, which is part of the reason you have the likes of Nvidia trading at what, 100 times revenue or whatever it's trading at—because it trends. Well, lately it hasn't. It started to come off, which is good news by the way. Oil, gold and copper have moved up tremendously in the last couple of weeks off of this potential rate cut. But also that loss in the equity market has benefited this space. That's the revenge of the old economy—it really is a trade-off between new economy and old economy.

These markets are starting to move, but they're moving without any length. Even take copper. It's a four out of ten length. It's still not that long. Again, it's not just oil that's unloved, but the entire old economy and commodities more broadly are unloved right now.

Amrita

I like the old economy versus new economy distinction, because I think at least part of the apathy in the sector—well, there's two things, right? One, I find when talking to people, the government intervention—people are quite sick of it. OPEC, we know what OPEC do. They are very clearly here to ensure their stability in the market. That's fine. But now you've got the US government coming in, stepping in with SPR and just policies—election related policies. So that's kind of what keeps us very rangebound, 80 to 90. And that's, to your point, it's not a trending market. But I'll come back to that.

But old versus new, I think is so important in this because I find a lot of people associate commodities with China, and China isn't operating. China isn't going full guns and therefore, by definition, sell energy, sell commodity like metals. I was there myself and you've got a big China team. They were there just last week. Yes, it's not great—I was surprised as to just how bearish sentiment was in May versus last year when I was there. But the team's come back and said actually things are starting to bottom out a bit. The infrastructure spending has been delayed, but it's finally starting to come through. I think we need to talk about that. I think that's the association—I don't think it's China is of course always going to be very important, but there are other countries that we should look at. Where do you stand with regards to China? Because obviously you look at it very well.

Jeff

I like the word benign. They're not going to let it completely fall apart because the social, civil unrest that would create is, you know, to them, they'll spend their way out of it in any possible way. But I think it's important to keep in mind they've pulled on every string they can pull on. I like to think about China as being three sectors: the property sector, manufacturing (call it green CapEx sector), and then you have the banking sector. All three of these have very weak margins. There's no more. Basically, what have they been doing over the last 18 months is subsidising the property market with the green CapEx, dumping EV solar panels and batteries on the world. The Americans and the Europeans have had enough and pushed back, so they can't use that trick anymore.

And the margins in the manufacturing sector are quite weak.

Amrita

Oh, they're dismal.

Jeff

Dismal. That's the argument for the dumping that the Americans and the Europeans are making. So let's turn to the property market. If manufacturing is dismal, the property market is on the verge of insolvency. There are too many bad loans sitting in the banks and the banks are now beginning to have a problem, which tells you if the banks have a problem, they can't cut interest rates to be able to stimulate any more demand for property.

When you look at the yield curve, it's kind of like the American one. It's inverted—or it's pushing towards inversion. If it gets inverted, the banks start to have a real serious problem. So what are they doing? They're doing the exact opposite. They're selling long-dated treasuries to get the yield curve back into a place that keeps the banks profitable. It tells you how scared they are right now of a crisis in banking. They already have a crisis essentially in their green—well, they don't have it in the green CapEx, but the Americans and Europeans have shut it down. So let's turn to the property market. The consumers potentially in some cases are facing insolvency. So they've got to do something there. They really ran out of their options in late July. The 3rd Plenum is going to meet for the Politburo, and I think all eyes are focused on that and what they can do. But really, what are the options? Interest rate cuts are pretty much out at this point. You can't dump any more manufacturing goods on the world to subsidise it. Which means you're really left with fiscal stimulus, and we'll see what they're going to be willing to do.

Amrita

Yeah. They've been pretty reticent in doing large scale fiscal stimulus. They've done targeted stuff of late. And that's at least our house view—that for the rest of this year, they'll still tinker around. But then that doesn't give the assurance to the investors who are looking to China, right? You need to come and save this.

Jeff

Yeah. So I wouldn't be looking to China as being the saviour here. This is important because the one thing that can really move oil and commodity markets higher is a weaker dollar. But I really struggle to even come up with a remote scenario how the dollar weakens.

Amrita

And you don't think a Fed cut, for instance, over here? I mean, that's the other talking point, right? Maybe two cuts, one cut...

Jeff

You could get a Fed cut that could do it. But remember, a currency is pricing the relative strength around the world. The US is rock solid while China is struggling right now. And if China struggles, that means Europe and Germany are going to struggle. So, I was hoping, as the commodity bull myself, that we would have some type of way to weaken that dollar. It could come off a little bit, sure, but...

Amrita

You don't think it's a trend.

Jeff

Yeah. Bottom line though, the US is in a very physical sick place—or, you know, it's not in a healthy place that would justify the strength of a dollar. So, longer term, the dollar's weakened, yes, and I really am comfortable in that view. But I remember in the late 90s, in the 2000s, we made a call for a weak dollar. It was around the same arguments—the twin deficits and all these other problems that were going on. People started making that call around 97, 98. It didn't work until 2002. And then it worked like a charm in commodities and everything went up together. But it can take a long time in currency markets before they reverse. If you don't have China out there, you're really going to struggle for some strength elsewhere in the world.

Amrita

So I think that's maybe it. Our economists are saying, look, even the US data, to your point, isn't great at all. There's definitely pockets of weakness. Yes, the labour market is strong, but not the rest of it. But again, if China is even weaker, then you just have that relative strength. I think that's partly the problem. But then I guess the other potential factor for the US dollar could be the elections, right? UK elections, probably the least surprising result—everybody knew it was going to be Labour. France is ongoing, but the US is probably the most important one in this, right? Whether it's Trump or Biden. And if it's Trump, I mean, now people are like, oh, that's actually bullish for the equity market and so on. But could that have an impact in terms of what the dollar does or if anything, it might even strengthen it further?

Jeff

Actually, both of them together are fairly inflationary. That's the thing—people go, oh, they're such polarising. Yeah, they may be polarising in their rhetoric, but the reality is what they do are actually very similar. And if anything, the way I like to describe both of them is they're industrial policy guys. One of them likes to try to raise taxes and raise spending. The other one wants to cut taxes but also spend, because neither one can achieve anything in Congress. You're stuck with a deficit. The way I like to think about it: Trump, you're not going to get an increase in taxes to cover the spending. And Biden, you're not going to decrease in spending. You're stuck with the same outcome. Also, you get past the election, I don't think there's the fear of really taking on Iran starts to disappear. You run the higher probability, you lose the Iranian exports. Because eventually they have to get tough on Iran. So, when I look at it going in past the elections, both of them support that more inflationary backdrop.

Trump has his tariffs. But hey, Biden's gotten tough with China as well with some tariffs recently. And also with the IRA and the green spending, I'm not such a quick person to believe that Trump's going to get rid of it. I think I said last time, the likelihood, given that China invests so much in all this green CapEx and he wants to take them on, it doesn't make a lot of sense for them to back off on the IRA and the green spend.

So I really struggle with what the difference is between the two of them when we think about what this means for commodities. In the longer term outlook, I still believe that we go to financial repression where you have inflation running higher than interest rates and with oil and many of the commodities supporting that, because when you look at oil and you look at the spare capacity outside of Saudi Arabia, UAE—and I think these numbers are being wildly exaggerated to the upside—it's not a lot. And by the way, the analogy to 06–07: let's remind everybody in 06–07, OPEC took nearly 2 million barrels per day off the market, very similar. And by the way, nobody believed the supercycle story in 06 or early 07. Very similar dynamic. A slowing US economy, rate cuts—the only difference was China was strong back then. China's not strong. But hey, you have India right now.

Amrita

Yeah. But I think again, sticking to the US, I think the point you make—that's very much our house view as well. If you actually look at the policy, and I'm talking about industrial policy, not any of the other policies, because of course there's very big ideological differences between the two. The way of governing might be different, but the actual material—there is a make in America and/or a MAGA style of thing with Trump. But IRA is very similar. Again, it's kind of focus on America first and industrial manufacturing there. And to your point, if anything, Biden hasn't been easy on China at all. If it's been as bad, at least on intellectual property and so on. I think the only, probably the only difference has been maybe on supplies.

What I was going to say when you mentioned Iran, we've just got the latest numbers and our sources are confirming what we are seeing—a massive increase in smuggling, about 200,000 barrels per day. And that's probably worth mentioning that the strength in the market you're seeing is even with quite high Iranian production seeping into the market. I think it's fair to say the administration has turned a blind eye because they don't want high oil prices. If anything, you could argue from a foreign policy energy market point of view, you might lose more production if Trump came to power. But I think this is something where I struggle with—do we actually think either of them would make a difference to the consumer? I think that's probably something people are asking. We agree on whether it's IRA, whether it's foreign policy. But does the US consumer spend more and do we see more energy demand in the US? Because it's been not great.

Jeff

I think either one of them are going to give you the stimulus. When the oil demand numbers come out, they get revised up every month in the PMS data. And when we think about the stimulus, if Trump comes in—tax cuts, stimulus. Biden comes in—some increase in spending, stimulus. You get the stimulus either direction. That's why the two sides of the same coin. So I'm comfortable that the backdrop is going to be more positive.

Amrita

Positive.

Jeff

Either after the elections because both of them are going to stimulate.

Amrita

Yeah. And I also think after the elections there'll be massively reduced threat of SPR being used to cap the price. I agree with that. Do you think the French elections matter at all for commodity markets?

Jeff

Absolutely. It's on the verge of a Truss moment. You can see it by looking at the French spreads and the bond markets. The bottom line, whether it's the right or the left, both of them are not experts at the economy. There's unfunded spending on both sides, which is what's going to freak the market out—particularly, you know, it's a Sunday when we get the election results. If Le Pen gets a sweep there, then it starts to look a little concerning. I think she's less concerning than the left, but the key message there that the markets are trying to send you is, hey, you've got some novice people coming in here who have big spending ideas that are not covered, kind of like the US.

Amrita

Yeah. I mean, they're all—everybody's going the same direction. They're going into that support your own local domestic production, at all costs.

Jeff

Protectionist. Yeah. Yeah.

Amrita

And I think that's partly where China's struggles are going to come, because the whole point of China's ascendancy was globalisation. Now we are going towards much more protectionism, which basically means, oh, where does China come in? But at the same time, that doesn't mean it's bearish for commodities because every country requires the commodity to build. Particularly I would say metals. I know you were talking about copper in that space as well. But I'm sure you're following so much talk on the whole AI data centre and copper as well. I think maybe even in the Middle East, some of the strains on the power sector you see, especially during the summertime, they are doing some big investments there as well.

So, where do you stand on copper? I know you were very bullish last time as well. We went to record highs. I've heard some people talk about 15,000. What do you reckon happens there?

Jeff

I am incredibly bullish. But the one thing—my caveat to that rally up to 11,000 was it was accompanied with a weak dollar. The minute copper tries to poke its head over 11,000, the dollar strengthens and it's like a whac-a-mole and pops it back down. All these commodities are going to struggle. In the 30 years I've been doing this, I've never seen the strength in the dollar and this strength in commodities. By the way, we estimate that had the euro been trading 1.2 against the dollar right now, you'd be well over $100 a barrel on oil and you'd be somewhere around 14,000 on copper.

Amrita

But do you see a scenario where we could get to that?

Jeff

With the dollar where it is right now? It's hard because it puts pressure on India and the rest of the world. Their ability and their appetite to go out and buy oil and commodities—it's a monster. You look at oil prices in Japan, they're at unprecedentedly high levels. You're trading near 1.6 on the yen. That's why I'm super bullish fundamentals. The fundamental story—the bull fundamental story—has played out. What hasn't played out is prices.

Amrita

Yes, a flat price. And again, because there are other factors like you say. And the currencies are hugely important there.

Jeff

I'm on the board of Board Drilling. If you're looking for an undervalued company, that's one there. Just the interest is not there. Yet the fundamentals in the story played out exactly as expected—all but the share price because investors are hesitant. The key reason they're all hesitant is the lack of a trend. They're unwilling to buy and hold. We need to see all of these markets begin to trend to be able to get the investor back. You saw it briefly with copper, but the minute it came off they all got out.

Amrita

Right. And I think in some ways for oil, you probably need to get out of this year. With elections, there's just too many things that are keeping us rangebound. We almost need to get to either direction, right? Either down or up. And then you get the investor appetite back. Because, to your point, the medium-term story of the lack of investment and just demand growth is still there. The other thing we keep hearing about for next year is non-OPEC supply growth—it's high, it's strong. But this year, non-OPEC supply was also supposed to be high and strong. It has again, it's been disappointing. So we just need to break out of this. It just feels like everything is a headwind rather than a tailwind right now—be it China, be it the US SPR story. But going back to copper, so you think the cap is around that 11,000 and above that you get the dollar being the bigger driver?

Jeff

Yeah. When you get up into those levels, people... But to understand, particularly in metals, the dollar is critical here. When you think about oil, it's mostly upfront CapEx, fixed costs, very little variable costs. Metals are all variable costs with very little fixed costs. Why is that important? Because local variable costs are denominated in local currency and the fixed costs are denominated in dollar. So when you're paying your labourers, your truck drivers and everything in a copper mine, it's all going to be in local currencies. So when the dollar begins to devalue, it dramatically raises the cost instantaneously for these producers. They have to pass it on to the consumers immediately. But they're in a better place to take it on because the dollar's weaker. That's why those linkages are so direct and so powerful. What's been happening—these copper mines, as the dollar gets stronger, their cost bases go down. So it's like you're fighting an uphill battle. Eventually, I don't know if the dollar can get much stronger. Maybe the Fed cuts act as a way to take some of that pressure off.

Amrita

Yeah. But again, that needs to happen first before we can talk about higher prices. That makes sense. We're talking about the global economy and China and so on. Obviously you are speaking—you're one of the headline speakers at our conference, which is on the 30th September, 1st of October, in London. You are actually going to be with Fred Smith, who is the founder of FedEx. He's coming and he joins you on the panel. His view of the world—of course, FedEx sees exactly what's going on. They move goods around, but they feel the pain in China. But they are also seeing things like other pockets of strength, be it in India like you mentioned. But also they're seeing improvement in Latin America. Africa is a big focus for them. Are investors just too myopically focused on China, you reckon? And I think we'll talk about it at the conference anyway.

Jeff

Yeah. They're far too myopically focused on it. They're not seeing the bigger picture, but the fundamentals bear out as well as the economic growth in places like India. You look at overall oil demand growth—it's tracking 1.1 million barrels per day right now. That's trend demand growth historically. So it shows you that even in this weak China backdrop you can still hit the trend numbers.

Amrita

What else are you looking at? I think we've covered the world with regards to China, elections, Fed cuts—only small topics! But what else are you—I mean, obviously you were talking about energy equities and that's undervalued. We've obviously been hearing that quite a lot. Other sectors you're looking at? Anything in ags or anything even within equities that you're looking at that's interesting out there?

Jeff

By the way, the whole spectrum in commodities is fairly supportive. The grains have been the weak link, but we've seen some strength. The other big space is the softs—those are tree commodities. When you have weather that damages them, it takes a long time to replace them—coffee and cocoa in particular. They all grow in the equatorial belt, and so they've been hit pretty hard by climate change. At the same time, demand has ripped up coming out of Covid for both cocoa and coffee. The reason why demand got hit so bad for cocoa, and part of the reason why supplies have come off, is most of chocolate is sold in airports. When those airports shut down for nearly two years, it really killed off the demand. As a result, underinvestment, weather shock on supply ravaged it. You see it in the prices of both coffee and cocoa. They aren't in an upward trend—it's super volatile in these markets. They spike up, rebalance the market and come crashing back down. Again, I think investors don't like it. But what it illustrates is the fundamental situations will play out. With markets like cocoa, you just had to get to that tipping point.

Amrita

And we've seen that from our team that does the quantitative analysis. They're just looking at positioning data, which has been super valuable for us. It really helps to make our price calls better, because you can see these movements of investors. What is amazing, to circle back where we started, is the lack of length in oil versus metals. This team also covers metals and even though, on a fundamental side, we don't, you can see that higher open interest in both of these sectors. But my challenge is that oil is by far the most liquid futures. If you take even a little bit of money and put it into coffee and cocoa, which are tiny markets, you are going to, by definition, get a lot more volatility—copper to an extent as well. I think that's a new trend in this overall commodity space. Oil vol has been killed in day and I shouldn't say bad from a consumer point of view—it's great news, right? It's been stable. It provides stability to an extent that OPEC want as well. But from a trading point of view, it's been bad. It's just not been there.

Jeff

It's not just oil. The biggest trade out there from the macro community right now is selling vol.

Amrita

And across the board.

Jeff

Across the board on everything. The reason being is they go, okay, if we get one of them wrong, it's going to hurt. But if we get 90% of them right, it's going to be a profitable trade and it doesn't matter what the asset class is—they're selling vol across the board on everything.

Amrita

So even with the expectations of rate cuts, it doesn't matter. That in theory should allow some volatility. No, they're just going to...

Jeff

Sell vol, yeah. The reason being they feel like they can just collect that premium over and over and over. But something like oil and the commodities—I think they're underestimating the upside potential there. By the way, with oil, when it goes and how short it is, the upside here, I think, could easily get us into the high 90s or even over 100 before the end of the summer.

Amrita

We've seen that. We are expecting prices in the 90s. For me it's more the overall backdrop—or rather the macro backdrop—just isn't there for it. But again, to your point, this is just a price. Can we get there and come back down? Yeah, I'll base case that we get to 90s and then we'll probably pull back with the election and so on. What I find fascinating in this conversation is that we're talking about still a pretty tight range. I mean, we're at 86. Let's say we go to 95. It's not really a market—you're not talking about 120, 130 anymore. And that's exactly what I think investors are looking for, and that's been fascinating.

In the interest of time, I think we should wrap up, but what is going to be—you're obviously in a position in Carlyle where you're investing, you're looking at different facets of this market. What is attractive for you out there right now? You've clearly said energy equities are undervalued. But what kind of horizon do you need to hold that for to really get the returns? Because I also find people are getting very short term.

Jeff

Yep. Exactly. When you think about this commodity story, this is a decade-long story and the old pros that I see in these markets, they're buying and holding out, particularly copper. Just sit on it, buy, sit on it. But very few investors can do that these days. By the way, part of the reason I'm in private equity is because it's one of the few places you can buy and hold.

Amrita

Yeah.

Jeff

Yeah. Because ultimately, you're not going to have time to come in when these things reprice. I challenge everybody to go back and look at the price of copper in 2006 and 2007, when it repriced—went from 4,000 to 8,000, literally in like a week. Then it got up there and repriced and it's never come back.

Amrita

Yeah.

Jeff

So you just had to be there those few days when it repriced.

Amrita

Otherwise you missed it, right? I'll put up my hand and say this. Our price forecast annual average for this year is $85 Brent. We've had that for almost a year. It's boring. You could argue it's higher than most people have had, but it's boring. I'll happily stand up and say, look, I think with all these events that are going on, if you get a big chunk of supply losses—and we both know OPEC is always reactive, not proactive—we can get a run in oil prices and we'll be wrong. No problems with that. But I don't think the market's remotely priced that in.

Jeff

No, not at all. The one thing that I picked up on my nearly three decades at Goldman, with all these commodities on the wings—whether it's to the upside or the downside—other than I think it was 2011 and 12, I think it was 12, we traded right around like $110 a barrel. We started the year 110, 128 and finished the year like 102.5. Other than that time period, this is the other time period where I've seen this market just not do anything.

Amrita

But, you know, it's not going to last, right? It's just about positioning or having the appetite to position for that.

Jeff

I remember it was, you know, I did it in 12 and 13 and then 14. It went to what, $40 exactly. So yeah, I think it's not sustainable at these levels. It's pretty rare. But I think the main thing that's causing it is the investors keep selling it because you're sitting at the same price we were at when we last met. The difference is all the investors left. So the fundamentals offset the loss of investors.

Amrita

Yeah. And I think that's what needs to change. But look, as always, super fascinating to talk to you. And like I said, super excited that now you are a part of EA. So we'll do a lot more interactions and, again, request to clients as well—reach out to Jeff. We can have conversations and there'll be a lot more on this. We'll speak again next month. I'm sure there'll be a lot more to talk about. We'll have the results of the French election by then. We can start off with that. And, yeah, hopefully everybody has a very good summer.

Jeff

Excellent. Thank you for having me.