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This morning, AI meekes the physical world.
Memory is one of the main areas of constraint right now because there's not enough physical cleanroom space to put the tools in place to build all the memory we need for AI.
Months ago, the big concern.
Was that we wouldn't have enough demand. Now if we're getting to a point where we don't have enough supply, what that means is there's more duration to the good news. We can't be in a bubble if we don't have enough capacity to supply all of demand right now.
So here's the laces. This morning, the CEO Dave mostly issuing a warning for the AI buildout, mostly telling a JP Morgan conference that building new factories would take too long. The comments wank on memory and hardware makers after plunging in Monday session, Jeff Curry of Abak's Markets writing capital has chased the AI trade while ignoring the physical assets it requires to run assets that have quietly become the best forming asset class of the decade. Jeff joins us
now for more. Jeff, welcome to the program. Be excited to catch up with you. Seth then we need to take a giant step back and think about the mining bust post China boom. We need to think about the shale bust of a decade ago and why that's set the stage for this period of what you call capex starvation. Just where around we and why?
Well, when you look at history, going back to the entire posts where our era, there's two sectors that lead the equity market. One is energy, the other's tech. If you can't turn on the lights, nothing happens. If you can't innovate, you never progress, and that's what you see.
So we go back.
Tech was a leadership in the nineties all the way up to two thousand and two, then we transitioned into energy two thousand and two to twenty fourteen.
Fourteen to now has been technology.
And the way you think about it is in those periods when energy lead and commodities lead, you build over capacity that lowers the overall price. Inflation gets low and stable interest rates drop and investors chase duration, which is growth stories tech.
And the rest of it.
But eventually you run out out of energy, run out of commodity capacity, and that's where we are today with this geopolitical event, it just pulled forward. Now, you know, Jonathan, we've been on here talking about the revenge of the old economy over and over and over, this rotation out of tech into hard assets that was already underway before this happened.
What this did is just accelerated.
As you know, Jeff, discipline is really hardened some of these C suites. What will it actually take to break out of this CAPEX starvation phase that we're currently in and do you see us breaking out of it anytime soon?
Higher prices, higher returns. But the ultimately you ask what creates that huge upward trend in prices that you saw in the seventies and you saw on the two thousands. It's once investors take capital out of tech, dump it into commodities, they begin to spend and then you get cost inflation. The PPI it came out last week at five point one percent, is telling you you're already seeing signs of it, combined with a huge supply shock that
you're seeing in the Middle East. So in you know, in terms of thinking about you know where we are on that we are just in the i'd say the bottom of the first inning of the supercycle. Despite the fact, commodities are the best before I mean asset class this decade, so you're already six years into it in terms of pricing, and when we think about the forward you've probably got another decade to twelve years left.
Just looking at.
History, Jeff is impletant. Let's just compare what's happening with tank then. So I imagine you think as capital intensity picks up, compacts intensity picks up of the tech plans, we get a rerating, and then you get the rotation into the more energy sensitive parts of the market, the mining sector, the energy sector. We're not seeing that equal and opposite. Moved on fact, Jeff, those particular parts of
the market have lengthd so far. That's interesting to me that the energy names haven't done much at the moment.
What gives I think there right now there is no concern about the supply of energy in commodities, even with the largest supply shock the world has ever seen, two x what we saw in the nineteen seventies. And I think there's three reasons why they're not concerned. One, we're in the middle of the shoulder months.
This is the.
Weakest demand that goes down and then back up. We're in that weakest demand part of the entire year right now, so there's no stress on the system. The second reason is, right now, we're in a deficit, meaning that demands up here supplies down here, we're drawing inventories. Once you exhaust inventories, boom, you have to push demand down in line with supply. That's when the shortage hits. That's when the pain hits,
and that's when prices go nonlinear. The third point I want to talk about is that every policy maker, macro forecaster, central banker, tech promoter is telling you right now there is no problem. Every commodity ceo, commodity trader, anybody who gets there dirty is telling you you have a problem. You have seen this movie before, back in twenty twenty, twenty twenty one, when remember infletion is transitory, and then you know a few months later, boom, you hit the wall.
And you know, we went to double digit inflation. And I think you're seeing the same dynamic here, you know. I you know one last point though, Carter in nineteen seventy seven made a fatal mistake.
It was the sweater speech.
It was, you know, February nineteen seventy seventy is a sweater kind of like this went out was Burgher and told everybody turn your thermosats down, and then prices of commodities explode. And I think every policy maker has learned from that. You know, you don't want to create fear. My job is you know, if I was advising the president telling him to do the exact same thing, keep everybody calm.
But my job is telling you how to make money.
And you know, at this point, right now, this is really serious.
Yeah.
Trump definitely doesn't want to come out, especially with the ninety five degree weather, saying don't put your air conditioners on. But Jeff, you say that at this moment, supply is ever more strain. Yet bread can barely hold on to one ten.
You have that seasonal weakness right now. You're not in a shortage. But another really important point here is because nobody is buying the energy companies in the back end of that forward curve is anchored to the cost of capital of those companies.
It is too low.
And you know, I call this the biggest asymmetric trade in modern finance and historical terms.
Why when you look.
At the free cash flow yield of the oil companies, they're fifteen point five percent.
The hyperscalers are zero.
Let me say that again, fifteen point five percent, you know, free cash flow yield for the oil companies, zero percent for the hyperscalers. We call those oil companies the munificent seven. What does munificent mean? Giving you lavish gifts? And at fifteen point five percent free cash flow yield, I'd call that a lavish gift.
And that when it comes to supply and demand. You mentioned this, it's going to get rough when inventories are drawn down. When will we hit tank bottoms?
In your analysis, it depends on where you are in the world and what products. Some products you're you're already there, like motor oil in the US. And by the way, motor oil in the US is critical because you couldn't even turn on your car without motor oil. Even if you had gasoline items like sulfuric acid, you're out.
What does that cause? That's why copper hit an all time.
High last week, because you need the sulfuric acid to produce copper. But when we think about diesel, jet fuel, gasoline, those parts.
Of the world, jet fuel, you're there.
We would expect to see here in Europe diesel and jet fuel run into very serious problems by the end of this month, the United States gasoline by July. And at that point is when you start to get to that nonlinear part and see prices go higher. But I want to emphasize when we look at the spread between spot prices.
In the back end, this spread is never been higher.
And everybody goes, oh, we had you know, prices were at one twenty two in the Russian invasion. By the way, the back end of the curve was ten dollars lower. And then everybody goes, you know, we saw one forty seven in two thousand and eight. By the way, the back end was like one forty one forty seven. For what is miss priced here right now is the back end of the oil sitting somewhere around seventy seventy five. This is a long term problem. The cost structure is
going to go up. There is no spare capacity left. It's going to take a long time to re establish it. We need to reprice that market. That's going to reprice the munificent seven. That's why I tend to think the trade here, you know, just looking at pure economics has the most upside to actually own these oil companies.
Jeff Carry. Find up Jeff when you're next in ten you need to co host the program with us. Yes, looking forward to that. Jeff Carry that of Abex Commodity Exchange over in London,