Jeff Currie podcast covering election risks, passive investors, and avoiding data pollution

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

Jeff. Welcome back. I think it's not been that long, but it feels long because the market is... and a lot has happened. A lot has happened. You were at a conference, which I know we talked quite a bit about—kind of investing in oil and why oil is and higher and so on and so forth.

But obviously, you know, we're recording this before we know who's going to win at the US elections. But I think we need to start kind of there. Do you think a lot of people are just waiting on the sidelines to figure out who wins and then deploy risk? Because we think the hedge fund community is very bearish, even if Trump wins. And we disagree with that because we do think he could actually change what happens in Iran, or at least Iranian barrels, doesn't change any extra or doesn't bring in any additional barrels from Russia. But yeah, I mean, seems like there's a shift in who's participating in oil or not participating in oil. I mean, what are you hearing?

Jeff

I think that that conditionality expands, extends far beyond just the investor community. Let's take China. You're Xi Jinping. You've been holding back on what your policy stimulus is going to look like. You can't make a solid decision on what that stimulus is going to look like until you know the results of the US election. And even then, once you know the results of the US election, you got to see how they're going to respond before you're going to respond.

And what do I mean by that? I was in Washington recently and people were throwing out the idea: what if Trump comes after he gets a victory and goes, "I was the one who put on the tariffs to begin with. I'm the one who can take them off." Xi Jinping is in a precarious situation right now. Does he go over to China and try to cut a deal? What kind of deal could he cut? Let the Chinese come into the US and produce manufactured goods. Bring their capital, but not their people. That would be a Trump type of outcome. He's kind of even pointed that that's what they did with Japan back in the 80s.

As long as the Americans get to go there and bring their capital in, in their production, it's a very different outcome.

Amrita

His friend Elon Musk might not allow that.

Jeff

Yeah. Well, why wouldn't his friend Elon? Because then Elon gets access to the Chinese...

Amrita

Market share.

Jeff

Bigger. But my point I'm trying to illustrate here is we don't know. We don't know. And if I'm Xi Jinping, looking at this, I don't know what to do. And then let's go to Iran and Israel. Now I'm Israel. And your point, you just said, if Trump comes into power, what is the probability of him getting shut? I'm getting shut down pretty high. You know that when you act this weekend and there's news that it potentially they could act. So I think it's not just investors deploying risk. Let's go to Zelenskyy, Russia. The list just goes on. And, you know, like that point is, you know, everybody was saying the geopolitical risk was gone last weekend and the market sold off four bucks. And I'm like, no, you haven't seen anything. We ain't seen nothing yet. It's going to come. And I think that, you know, the point we are making is the real geopolitical risk is the shockwaves from the US election. I mean, there is a non-trivial probability you're going into next Tuesday with a war raging in the Middle East.

And you have an undecided election. The US doesn't have leadership because they can't make up their mind. And you got a, you know, a hung decision there. And then, you know, you got a situation in the Middle East and then the situation in Russia flares up. Who knows what the Chinese do. The amount of geopolitical risk for next weekend, I think, is unprecedented.

And the market trying to sell it off on Monday over, you know, saying, hey, we're over. We're done. Move on. I think was a little premature.

Amrita

Yeah. And I think what you say is so important because we also think during the lame duck period is probably the most risk of GOP kind of flaring up, right? Because nobody is in and nobody's in charge. You kind of know Biden's on his way out, regardless of who wins. And yeah, it's been amazing to see the markets being so short sighted.

But isn't that, or isn't that a function of just a change in the market participants?

Jeff

Yes. And I think that that's really the key point here. And that change in market participants is not only impacting oil markets, it's having an impact on all the markets. And so what do I mean by that? Let's just start with the passive participation. When you look at the US equity market, 60%, roughly 60% of the US equity market is owned by passives.

That means the passives are the majority shareholders of the United States. It's huge. In fact, I was going through Exxon the other day going, you know, who's, you know, the passives own upwards of 30% of Exxon. And so while oil's been flat, we look at all the other oil companies. They've been flat to down. Exxon is up 20 plus percent this year. Why? It's big and it's American. And what are these ETFs like? They like big and bigger and they like American.

Let's go over each one of these. Let's start with the point about being American. We look at trading volumes in Europe versus the US. US is 14 times Europe. You look at what are they doing in Europe. They're delisting in Europe and relisting in the US because the only place you can attract capital is in the United States. Then we look at big: you take the top five companies in the US, there's 30% of the S&P, and they're going even bigger.

When we look at the top 15 companies, I like to point out there's two names in those top 15 companies that were there 100 plus years ago, and that's JP Morgan and Exxon—Standard Oil and the House of Morgan. They're still there. So it's not just the big tech guys that are there, it includes some of the other larger companies.

Let's go ask why we're in a unique environment where big grows faster than small. In the old days, small companies used to grow faster than big ones. Today, it's the other way around. Then their access to capital becomes easier through these passive investments. In fact, there's an article in The Economist this week talking about how the passives have taken over banking.

Because of the passive exemption, they become majority shareholders of everything. So you got to ask yourself, how did we get into this trap? Oh, here's another one. Exxon is bigger than the oil market.

Amrita

Yes, I did see that.

Jeff

Yeah. With oil, you know, and so when you look at the passives, they have no choice. They can't buy the oil market. So we take the oil market, you take out the corporate hedgers, maybe you have the $450 billion in the oil market, maybe a $50 billion market cap that is for investors. Most of them are relative value investors. That's nothing. That's nothing to play with. When you look at Exxon at $538 billion. So their ability to hold on to that, you know, are these bigger names is going to be there. And it's going to choke off the capital, the smaller ones. We're seeing it in the oil market. You see it in small caps, mid-caps. I sit on the boards of some of these small caps and they struggle to attract capital, even though the EBITDA and the growth, they're paying dividends, they're growing, they struggle to cut their... And by the way, it doesn't matter if it's in the oil business or in the financial business. They are all struggling from the same problem attracting capital against these passive flows. So is it a problem that is likely to go away? No. If we see a shift in the out of this election where the FTC becomes more accommodative to M&A activity, the question is how fast do we move to that point where it's just utter domination by these? And then what is the US becomes the equity market to the world? Anyway, I'm going long on your question, but I think it's really central. Another one that's just throw out how dominant they are: gold. They're the third largest central bank in the world. So they're getting big and bigger. I think the big shift here, bigger companies are growing faster than smaller companies, which really changes the global dynamic.

One last point. The ETFs are the financial expression of big tech. Big tech are passive monopolies and the ETFs are the passive expression on them, which I think the point out of The Economist's article this week was really that passive exemption really needs to be questioned.

Amrita

Yeah. Couldn't agree more. And I think the point you make about big getting bigger and growing faster is super important for everybody to appreciate, right? When you're investing in allocating capital, because people have always gone in for small mid-size capital companies, because it can grow faster. But then how does oil or energy as a whole attract passive money? Because that's gone away—used to be very small anyways, but at least it used to be there. This year, between OPEC and US government policy, oil has been rangebound. Everyone is bearish. I was joking in the US when I was there till last week saying yeah, even the New York cab driver knows that oil is bearish for 2025. I don't even have to go to a specialist these days. So if—how does that change? Do you see there's any catalysts to bring the passive money in?

Jeff

I think let's go to the equity market. Now I'm going to pitch my new role in Carlyle: a lot of the active investor is going to move to the private space in the delisting or go public to private. I talk to many of these private companies or public companies and go, take me out of my misery. I don't want to be public anymore. You've heard it over and over. I think what's going to happen is you're going to see public—the private space is going to be where the active investors are, because ultimately that's what they do. So are we going to see a bifurcation where the private space becomes the active one and the public space becomes the passive one? I think there's a lot of opportunity. We're going to see it happening much more in the private space. You and I, we're both research people in banks. That's where that space was focused as fundamental analysis was for the public space. Now fundamental analysis is more for the private space.

So the question is what does that mean for oil? I'll turn into more of a, you know, if a private type market was—is more of the trade houses dominating the trade and it's more of a physical market than it is an investor market. We could be heading that direction. I think the one thing that makes oil different than the equity market is it's long, short. So there will be an opportunity for speculators to come in there. I want to go back to and I would just make this point here about why speculators are really important to these markets. I spent more time thinking about this from the 2000s than most people. Why? Because during the 2000s, during that commodity supercycle—and you were there too—the US government and the Europeans were coming after us, going, you guys can't trade commodities because you're making the price go up.

Eventually it was Christine Lagarde when she was finance minister of France, shut down investing in agriculture. Then finally they just made position limits and everything because the fear was bringing investors in was going to create spikes in prices and create bad results. The point we made and we had this picture and it showed onion futures, going back to Gerald Ford. In the 60s when he was in the House of Representatives in Michigan, he banned investors in onion futures. Price went down almost immediately. They couldn't respond. People knew there's a problem out there, but they didn't have the capability to respond. Then all of a sudden, what happens? The problem in onions finally happened. Onion prices explode much more than the ones that were traded with speculators.

Amrita

Because there's no price to actually go and cultivate this.

Jeff

Right. So to bring it back to the current environment, I think you're setting yourself up for the—teeing yourself up just like onion futures. We don't have speculators in there to pre-position anything, to trade the future fundamentals. By the way, I don't know if they're short right now. There's not really that much short or that much long. So there's a lot of talk about this oil supply glut, but there's not any people really positioning for it. They talk, talk, talk. When we look at that oil supply glut story, it's slowly deteriorating. It was all based upon things that were expectations for next year. One of the big ones was what was going on with the non-OPEC supply, and one of the things—been chopped in half in the last, what, six weeks? It's going to get chop, chop, chop more. The US is not performing and the rest of the world. So, I go ahead. Well, we look at the longer term story beyond into that, it starts to look pretty bullish. But you don't have anybody pre-positioning, which means—the way we described it back in the 2000s was you rolled over the top of the pothole and the thing just goes straight up.

In fact, the picture we had to make this argument about why you are the speculators in oil, oil pre-position going into 08, there was no speculators in Newcastle coal. The picture showed oil pre-position went up. You saw the investment, it created shale. Then it went slowly down. Newcastle coal hit the pothole in 08 and just went straight up. That's what we're creating for ourselves right now. So anyway, long story short, we need speculators in these markets. I think they're important part. But we need to create an environment that brings them back.

Amrita

Yeah. I think the point on the privates—and maybe they do become, right, like to your point, they do become the new players. We had that at the conference. I mean, Harold Hamm, he took Continental private. Scott Sheffield was saying, I mean, his son runs one of the biggest family offices now and tons of money coming into the oil space through assets. I think that's definitely a trend we are seeing. But kind of picking up what you were saying at the end, this kind of bearish sentiment. So I was in the US for the last, what, two and a half weeks now, between East Coast and Midwest. So the whole gamut of kind of people there. And it was amazing just how bearish the community is. And this is, by the way, not just the commodity guys. It's energy equities. It's macro funds. It's multi-strat. Everything is predicated on this supply glut right now in...

Jeff

China auto China.

Amrita

And yeah. So I almost felt what was amazing—I was okay, we're going to get a lot of questions on China. We've got a big team, five people covering China. It was almost like, oh, China's given, China's peaked. Let's not even talk about that. Let's talk about supply, how OPEC is going to fall apart. And I'm like, okay. We've been writing, as you know, for the last couple of weeks about non-OPEC supply, the risks to the US, to Brazil. I was like, we started this year, we had 1.1 million barrels per day of supply growth. We're now tracking 300,000, although people had more than us, 1.5, 1.6. We're all down to 300. So why can't this happen again? I think that's been the fascinating thing. But everything kind of boils down to, oh, but that's fine. But there's too much OPEC spare capacity. So whichever way you look, it's too much supplies and people just can't get their head out of it. And these were some of the hardest meetings I've done because the pushback is like, oh, it almost doesn't matter what the price is, even at these prices, we're going to keep growing. And that's why prices can't go up. There's genuinely a belief in that, it seems like.

Jeff

Why? I'm not trying to be a conspiracy theorist here, but when you look at what AI is doing, it's garbage in, garbage out. It's so easy to manipulate what the thesis is that's going to be dominated. I'm going to give you an example that I experienced in the last six weeks. In September, I had James Guttman, who's working on me—some of you guys remember him—I asked him, go figure out what the spare capacity is in Chinese EV production. We all know it's relatively large. He came up with some numbers, twice what the global demand is. Goldman then put out a highly publicised report, maybe a few weeks later, showing it was like 70% of global demand, the excess capacity, whatever—big numbers. Then I had him go back and look again and ask ChatGPT about what it said. No, no spare capacity. We dug a little bit deeper into it. They have been pushing stories out in the South China Morning Post. There's no spare capacity. The ability to create—which actually when I think about data, data is like oil. You put the oil into the refinery, Google's the refinery, and then you have upstream, downstream and marketing. Let's say Netflix or the world are marketing the data. The problem, what we have—we need companies that are going to produce data that goes into this thing that is in. It's got to be ringfenced because, you know, the reality is you can create a bot that can go out there and create any stories you want. They get into it, the algos trade that stuff. By the way, when we think about the percent, if they're 60% of the market and you're an active, you have to be in the wake of those 60% of these passives. So the algos dominate along with the quants that are trading momentum, and then they're all in the process. Now I create a bot that now takes the information about this, that goes, okay, we know we can fuel a bearish story. Then why wouldn't you be doing that?

Amrita

I genuinely felt that there was—not exactly to your point, and it's a real pet peeve of mine—there was no real data backing any of their arguments. I was being told US production is up a million barrels, but I said where? How? Which? Like this year is barely up 200 a day. There was just a belief that, no, no, it must be that. People don't appreciate this: US administration has been keeping Iranian flows there just to keep prices down. Sometimes people don't see that and they're like, oh, you must be missing something. But the data point you make is so important because it has been—so many sea tanker, trucking companies and stuff, you can see after a few days the whole balance shifts, but people are just trading on that. Oh, storage data—don't even get me started on, like, just basically satellite data, all this cloud cover. Guess what? You didn't get a satellite storage data or—it's because everything is full and the whole market trades off that. You have to put context around that data, but it's gone. But I think the positioning, it goes back to what you're saying on passives because as you know, Nike leads one quant team and the work they do is phenomenal because it has literally shown over the course of this year there's hardly any participation. The biggest short right now in crude is actually the commercial spec book. So that's trading houses or the derivatives. They are very, very short. And all to do with the bearish 25 balances. The rest of the world is basically, to your point, talking the game, some little bit short, definitely not long. But the others are just like, look, this is just too much. I'm just not going to trade this. I think there's a huge lack of participation in oil, which even some of the pension funds and stuff are telling us that they are all now trading metals. But that has huge repercussions there because metals is actually a much smaller market. Completely. And I'm sure you've seen that right in metals and gold as well, in terms of the volatility there.

Jeff

Yeah. Oh, by the way, but it's just—it's anything. I mean, but yeah, you've seen the uptick in metals. But it's still so small relatively to oil. But if you just take—whether it's oil, small caps, mid-caps, Amazon—put everything in there. Anything small, there's just no interest because you're going to get ran over by a freight train if you get in there. The capital flows are far more critical than the fundamental stories. I've always been saying that and, you know, I learned that lesson nearly 20 years ago. It's not about the supply and demand of the barrels of oil. It's about the supply and demand of the capital used to produce those barrels of oil. That supply and demand of that capital can run you over despite your views on the fundamentals. That's what I think is happening right now. But I think what's really different is, do not underestimate the power of AI. These things are all trained and they're going in there, which goes back to the point, why are these people telling you these stories? I even caught myself yesterday going and telling this story and sending it around. Then somebody goes, that's not true. And I go, yeah, I know it's not true. I just did it wrong. But you end up believing this stuff. Actually, you know, somebody was saying—there's these psychology people that, when they have these people—it was a study that was done where the professors would bring in a sweatshirt and they would have everybody in the classroom go, what do you—it came out of the student store and they go, what do you think the price of it is? They all have to do a survey of it. They would come up and it was an even distribution around what it was. They had some clue. Then they go, we want you to write down your last four digits of your Social Security number at the top. Now let's bring the sweatshirts around and let's find out what your estimates are. There was a high correlation to how big that number was on your Social Security number and how big your number was on your sweatshirt, meaning they're always going to take the bias of what they had before, which I think was a point—I even caught myself going, I know better, but I'm sitting here reading all this stuff that were some bot-generated story and I fell into it. I think that's part of the reason what's going on here, which really begs the question is, how is this stuff all going to end? Going back to this Economist article this week talking about the passive exemption on banks—because the problem banks get them, so what? So Blackrock, Vanguard and State Street are going to own the US banks and control global finance.

Amrita

That's a scary...

Jeff

Scary questions. So I bet they go back—if these guys can control Exxon... Oh, let's just talk about Exxon's power—is that, you know, having a $550 billion market cap, they can buy BP. They can do anything they want to do now. It's accretive. They can buy BP and only add 15% to their market cap.

Amrita

When you put it that way, right. It's a small investment.

Jeff

It's a small investment and the Americans are going to get bigger and bigger.

Amrita

No, I think that's very, very valid. It does worry me a lot because either you're going to—I mean, hopefully regulators kind of see this and they don't allow it to happen. But you never know, especially depending on what happens with the US elections, like you said. But yeah, it worries me because I don't think—even just not just oil markets, generally people are not reacting or acting on actual information. You can literally feed any information. Nobody's checking sources anymore. One of the reasons why we launched EA Live was around clients were constantly saying to us, there's Bloomberg, just headline after headline. Nobody knows what the source is or it's Twitter, right? It's all over the place. So at least we are there kind of providing, okay, these are the important headlines that you should react to, kind of doing that work. But it just is—it's quite scary in terms of the trading world. I think this is also something OPEC does need to understand, because it is no longer the fundamental oil market that used to be. It is just a very different market.

Jeff

I think going back to your point about the information flow and, you know, ABEX, you know, the commodity exchange that I'm on the board. Josh Karam, I think he gets this at a very, very deep level. He's created a sinkhole, you know, plus where we got to take this information and block it off from the AI. You have to know that it's clean. It goes back to my point: the real future here—and I think this is what EA is doing and, you know, what advocates are doing—is you've got to create a source of information and then chain it off so it's not accessed by AI. So, you know, it's clean. Then you can feed it into your AI machines. Just go back to, you know, actually I always said in commodity space, what do I want to own? I just want to own the oil. I want to own the copper that comes out of the ground and the gold that comes out of the ground. The rest of it, I could leave it. I think it's the same thing when we look at data. I could point out, you know, the most wealthiest human beings on the planet Earth, the people that have the stuff that come out of the ground and the tech guys. So which are the tech that you want to own? You own that clean data. If you don't have that clean data, everything else in that whole tech supply chain is useless. I think we're getting to that point that it is so polluted at this point that we gotta focus on, you know, where do we find that clean data?

Amrita

Last question. Do you have—I know you have views, so I'm not going to say, do you have a view on this, because I know your views on everything. A lot of stuff going on around long tech, short oil and I'm a bit like they are not even remotely correlated. But oil's been literally—it's the most hated thing out there. I've met people who are long treasury, short oil. Definitely long Nvidia, short oil. Do you think that's true? And do you think that unravels at some point? I mean, we've seen some of the tech stocks come off yesterday.

Jeff

But I would have the other side of that trade on. But actually, does this go—why is Exxon in that group? So Exxon is the one that's the exception to the rule. The market's paying for cash flow right now. That's all it's paying for. What do Apple and Google—actually it's Apple, Microsoft and Exxon. I think they're the three biggest cash flows in the world. That's what the market's paying for: short duration cash flow. So you've got oil up there. So the question is, when does the market quit paying for that short duration cash flow? Now let's go back to the question about the election. We've got to get to that election before we have a clean read on what that willingness of the market to pay for that is. But, you know, longer term, I would—and let's think about what came out yesterday—is China, you know, the iPhone sales were off. We look at China. How bad really is China?

Amrita

You said this during OPEC. Remember, you're like, there's more people applying for Uber drivers. I remember you calling me and saying that, you're like, this is bad. But that's also why Xi has to do something. And he did.

Jeff

Yeah. I think he is going to do something. But let's go back to that, you know, the spare capacity in the EVs and everything. Let's not dismiss the fact that they get it into the auto industry is difficult. That's sophisticated, developed nation type of investments. The only thing more sophisticated is getting into the production of airlines—Airbus and Boeing. Boeing's obviously having some difficulties in the US right now. But it's telling you the Chinese are able to produce this and produce a lot of them. Which begs the question, when we think about China and we think about the US, if China is cutting off sales in the biggest market in the world—man. If I were Elon, I would want to have access to that market. What seems like, you know, Apple's not having access to it. We've got to start questioning, you know, this thesis, just go, go, go, go buy big, big, big, big, you know, American. And Apple and Goldman put out a—David Kostin put out a piece, it was last week or this week, talking about, you know, the returns in the S&P may not be as phenomenal as you think. So where are the returns probably going to be? I think it's going to be in our space.

Amrita

That's going to be—okay, so we know what we're going to talk about next month because we should hopefully by then really know who is in charge in the US. I think obviously it's a very contentious election, and especially even if you kind of figure out the White House, there's the Senate and the House. It's going to completely reshape global flows, global policy, energy markets, even just economic activity. So, definitely going to be the topic of our conversation next time around.

Jeff

Absolutely. Looking forward to it.

Amrita

Thank you. Thanks, Jeff. Thanks for coming over. Every time, always a pleasure.

Jeff

Thanks for having me.