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In the latest “Week Ahead” discussion, three experts delve into three crucial topics: synchronized global risks, the spending patterns of the US consumer, and the copper gap in the energy transition.
Keith Dicker of IceCap Asset Management and Loonie Hour Podcast takes the lead on synchronized global risks, highlighting how a banking crisis in Silicon Valley has led to crises at other regional banks in the US and abroad. He also discusses the potential risks of the Hong Kong dollar breaking its peg and its impact on the Canadian dollar.
Albert Marko shares his insights on the spending patterns of US consumers, presenting surprising findings on mainstream companies like Carnival Cruise Lines and McCormick, which have been able to raise prices despite the economic recession. These findings challenge the notion of the Federal Reserve’s ability to pivot or pause.
Tracy Shuchart from Hilltower Resource Advisors warns about the copper gap in the energy transition, which is emerging just as the energy transition gains speed. She provides insights into what this means for copper prices in 2023 and how it will impact the energy transition.
The episode concludes with the experts’ predictions for the week ahead.
Key themes:
1. Synchronized global risks
2. The US consumer isn’t slowing down
3. Copper gap & energy transition
This is the 59th episode of The Week Ahead, where experts talk about the week that just happened and what will most likely happen in the coming week.
Follow The Week Ahead panel on Twitter:
Tony: https://twitter.com/TonyNashNerd
Keith: https://twitter.com/IceCapGlobal
Albert: https://twitter.com/amlivemon
Tracy: https://twitter.com/chigrl
Transcript
Tony
Hi, everyone, and welcome to the Week Ahead. I’m Tony Nash, and today we’re joined by Keith Dicker. You’ll know Keith on Twitter as @IceCapGlobal. He’s with Ice Cap Asset Management. He also hosts the Looney Hour Podcast, which is one of the most popular business podcasts in Canada. So we’re really lucky to have them today. We’ve also got Tracy Shuchart from Hilltower Resource Advisors and Sam Rines from Corbu. Sam Rines will be joining us a little bit later.
Tony
So let’s get started, guys. We’ve got a few key themes this week. First is synchronized global risks. And we saw that recently with the banking issues, and we’ll get that into a little bit into that a little bit deeper with Keith. With Sam, we’ll talk about the US consumer and how it really isn’t slowing down. And we’ll go into some detail on company annual reports and quarterly reports on that. And then with Tracy, we’ll talk about the copper gap and the energy transition and a message that she’s been talking about for maybe about a year, but is really kind of coming to the forefront now. So, guys, welcome. And Keith, thanks again for joining us for the first time. We really appreciate it.
Keith
Yeah, thank you for having me here. And I think with Tracy, I consider you like half Canadian, sort of with the Quebec ties, but still like one and a half Canadian against one guy from Texas. We’re still not winning, are we?
Tony
Yeah, you’re welcome here anytime.
Keith
So I’ll just talk a little bit about how we do things. We manage money for individuals and family offices, basically across Canada, as well as some European clients, in the US, and Asia. And so we’ve had a lot of success with our strategy and just a couple of things to get the view started, which I think is important. We’re Canadian. I founded Ice Cap back in 2010-2011ish around then, but prior to that, I was offshore in Bermuda for over a decade. And then before that, I was with one of the big bad Canadian banks. But I like to share this Bermuda story because I think it’s really important today because I think a lot of people today get so focused on the day-to-day and short-term factors, what’s happening. And the other challenge a lot of investors have, we tend to see the world through the eyes and minds of where you live and where you’re from. And our view, the financial world does revolve around the US. That’s just the way it’s put together. But being offshore, you don’t really belong to any country. You’re living in between the seams.
Keith
So you get to see and feel and live the world from the perspective of all these other ex-pats you hang out with and so forth. So I just share that with you because, like up here in Canada, if you know the Canadian environment or not, Tony, you should head up when it’s a bit warmer. Maybe for you, I know, but Canadians have this very insular view of our banking system and our housing market. Everyone around the world should behave and act and walk the way Canadians do and so forth. As we all know, that’s not the case at all. It’s a very bigger world out there. With just that in mind, just before I go into the immediate view that we have with the world, it’s our view that long-term interest rates, looking at the ten or 30 years, really did peak in 1982. That’s when it peaked. Back then, rates were called 20%. So from the early 80s right up to eight nine, they went to 0%. And everybody makes money when that’s happening, especially the bond managers. And when that hit zero in 809, policymakers should have let the world reset.
Keith
But we know, of course, that wasn’t permitted, and some jurisdictions did a better and worse job than others that trying to protect that. But effectively, what happened then, for the next decade-plus, we’ve been living in this world with zero rates, negative rates, unbelievable re-escalation of borrowing at both the sovereign debt level households and companies, and so forth. And the other part I like to add to it a bit of a joking way, but it’s also factual. We now have basically two generations of university kids coming out for their entire university academic careers. And now ten years of working in, say, the investment world has been in this period that just doesn’t exist. It’s zero rates. Nothing exists, because as we know, Tony, you put a zero in your denominator for any number. You’re calculating what happens. It doesn’t work. Right. So what we see now today in response to all the policies we have with the Pandemic and COVID, for better or worse, all of the economies and central banks in the world, now they’ve all synchronized. So risk has been synchronized in the US. Canada, Australia, Asia, Europe, you name it.
Keith
And now we’ve gone from this period with zero negative rates. Short term rates are now they exploded higher, and it’s created this moment where increasingly we’re starting to see these risk just come out of the blue.
Tony
Just to clarify something, and I want to make sure that I understand correctly, when you have a zero or negative interest rate, the cost of risk is only the nominal cost of the money that you put at stake. But with an actual interest rate, you have a multiplier on that risk. It may be just a small portion of the multiplier, but there is an accelerator on that risk, right? And so I think this is what it’s been really hard for people well, really easy for people to fall in love with, with zero risk, I think, is that if I risk $100 and I lose it, the value of it is only $100. But if I’ve got a 10% interest rate, then I’m not just losing $100, I’m losing $110. Right. So as we transition back into a positive interest rate environment, the financial planning and the investment planning for people, as you mentioned, say, two generations of people coming out of school, this is an environment people have never had to deal with before. Right. And at the same time, we have BOJ, ECB, and the Fed, who to varying degrees, have had zero or nerp environments where nobody’s had to deal with that.
Tony
And it’s crazy. So I know that is just some basic, basic stuff compared to the advanced calculus you’re talking about, but I think we really kind of need to highlight that that there is an actual cost to risk now that we have real interest rates.
Keith
Yeah. And it’s something we haven’t experienced for a long time. So people tend to forget that. In school, and these CFA studies that we all went through, we call that the risk free rate of return. And it’s been zero for a long time, and it’s been reset. I think this is the greatest global macro setup that we’ll ever see in our lifetime. I mean, if you’re a money manager and you’re not enjoying this right now, then I think you should get a different career, move along somewhere else. But if you think about, for example, over the last five or six months, the Brits had their crisis in their pension fund and guilt market. Of course, then we had Silicon Valley Bank just recently, and then right behind that, Credit Suisse was there. So one good result about that, policymakers, which is mostly the Fed Reserve, of course, were able to react very quickly to prevent contagion. And so they should be complemented for that. I know it’s not nice to compliment or it’s not cool to compliment Central Bank. Yeah, definitely not cool. But that’s something that is a result that did happen. However, it’s also telling us here at Ice Cap that if you went back six months ago and I said, hey, I want you to list ten things that could blow up over the next six months, you wouldn’t have had those three events on your bingo card.
Keith
Maybe the Credit Suisse story, maybe, but the other two were pretty hard to find. So that tells us that, hey, there’s other events that are out there lurking around. And because they’re out there, it doesn’t mean they have to occur. It just means that the probability of them occurring, in our opinion, it’s a lot higher than it normally would. It normally would be your normal distribution chart or graph. So we have that happening, and it seems like every day there’s increasingly more data coming out. We just say, wow, I can’t believe that’s still going down that path. But these are the things that we look at. And again, we find it’s incredibly interesting. It means it does create a lot of opportunities coming up for people managing the portfolios. But you have to be aware of these fattail events that are out there because they could happen and maybe the next one is central banks are not able to save us.
Tony
So let me ask you on the, on the kind of synchronized risk part, seems to me that developed markets are highly calibrated to these risks. A small issue causes a huge reaction in developed markets. I spent a lot of my life in emerging markets, China, Sri Lanka, India, Southeast Asia, Eastern Europe, all over the place. And so it seems to me that emerging markets can bounce around a lot and the perception of risk is a bit lower. I know that there’s a perception that if the US or if developing markets have problems they’re going to be felt even more in emerging markets. But is that true when you talk about these synchronized risks? Do they necessarily feel worse in emerging markets?
Keith
I think in a normal cycle that is the case. You just go with it because from a fundamental perspective, emerging markets look awesome. You know, they have lower debt, faster growth rates, younger, you know, younger demographics and, and things like that. However, again because we’re in this world again I call it synchronized risk. And a quick example is housing markets, real estate markets like Canada and Australia as an example. Again it’s our view that if risk does re escalate, so it happens rapidly. Then because the world.. It operates on the US dollar, that’s just a fact. That’s the way it works. All of a sudden liquidity dries up and liquidity comes out of those markets. So then it doesn’t matter how strong or weak the fundamentals are. If you don’t have dollars to operate, you have US dollar tax revenues coming in or economic gross domestic product revenues, all that stuff, then it’s going to push someone off sides. I think back prior to the 809 housing crisis it would have been hey yeah, just ride it out and you’ll be fine. But these days for example, we’re avoiding these markets. We’re not in the EM markets at all.
Keith
And sometimes that’s great, other times it’s oh wow, you missed one there Ice Cap. The main goal with investment management that we look at is if you avoid the large drawdowns for your primary portfolios then the return side will take care of itself. But if you get these big chops in value and I mean we know the numbers, if you’re down 50% you need a 100% return to get back to where you started. Again it’s being cognizant of these risks that are out there and we keep going back to this US dollar wheel that’s greasing the world.
Tony
Yeah. Speaking of currencies, Keith, you had posted this tweet earlier this week responding to a message from Kyle Bass about the Hong Kong dollar breaking and you said if the Hong Kong dollar breaks, the CAD also breaks. Can you talk us through that a little bit?
Keith
Yeah, because obviously we’re Canadian up here and the challenge that most Canadian investors have is that they don’t appreciate that the Canadian dollar and the Canadian economy and the yield curve up here in Canada, it can be significantly influenced by an external factor and that’s lost on most investors up here. So if you’re reading, like, big bank research, like, they’ll never. Sorry, they’ll rarely talk about these outside events. It could be something within the eurozone, for example, like the Italians or something. We know China is struggling quite a bit, but I will frequently talk and write and chat about these events and that if they happen, it is going to affect Canada. So the comment this week sort of stems back to… So we know the Fed opened their USD swap lines with all their friendly central banks that are set up for it and everyone drew on it. Everyone immediately. “Hey, yeah, we need the dollars.” But they also have this other repo line set up. It’s FIMA. I think it’s Foreign International Monetary Authorities. I think it is that stands for. So basically it’s a repo facility for central banks that are not attached to the swap line option.
Keith
That’s my understanding of it. And at some point, it was one week ago Friday, someone out there borrowed 60 billion USD for that. And if I think of people if you’re not aware how the repo facility works, Tracy, if I’m giving you $60 billion, you have to exchange with me at least 60 billion plus in US Treasuries to act as collateral for it. Even though you have Treasuries, you don’t have US dollars. We like to joke about if you go to a restaurant, you get your bill at the end of the night. You can’t pay it with a T bill. They’ll laugh at you. You need US dollars for it. So someone needed US dollars last week. And because of the size, and because they’re not one of the USD swap line friendly nations, you’re looking around who has that much in Treasuries that they can use for a repo? It really looks like it was or is China. And Hong Kong is the conduit for capital flows coming out of China. And it happened on a Friday afternoon. And as you know, if anyone here is running a bank, your goal is to last Friday afternoon and then you try to sort it out to get through to the weekend.
Keith
And then with that then 60 billion, it went to the Chinese, supposedly. And then every day this week we’ve had the Hong Kong dollar peg. It’s been up against its upper range, so it’s been sitting at 785, basically. And when it did open on Sunday evening, it actually broke through the range. So for this brief moment in time, it was up there. And so when I referenced that tweet, I’m more or less just pointing out to Canadians that, hey, if this peg was going to break, it is definitely going to affect world capital flows. Money will flow into the dollar, which means it’s coming out of the Canadian dollar. I like to poke Canadians sometimes with these things because they know we all feel we’re the best in the world at a lot of things, but that was the message with that.
Tony
Okay, so just staying on the Canadian dollar for a second, do you think the sensitivity with CAD, where outflows from CAD is as sensitive as, say, Hong Kong dollar could be? Especially given that CAD is so resource driven, do you think that would have an impact on it?
Keith
Yeah. So just be clear, if the Hong Kong dollar peg broke, this would be a once in two lifetime financial economic event. It will reverberate around the world several times over. If it doesn’t, and we’re just having a normal economic cycle, Canadian dollar is just going to ebb and flow with the demand for commodities and something else. But up here in Canada right now, we have a very tightly wound housing market. Everyone is familiar with that. There’s lots of reasons to support why it is strong. Our population growth has been unbelievable. We’ve had a million immigrants come in. In Californians, too. I don’t think they would last with the weather.
Tony
Albert’s got the New Yorkers. Albert and Tracy have the New Yorkers. We have the Californians.
Keith
So Albert and I met a few years back. I’ll give you guys one guess where we met in a location.
Tony
I don’t know if we can talk about that publicly.
Albert
It was actually Orlando. It was actually Orlando. I do like the Canadian dollar short term, anyways. But speaking about the population, I mean, the demographics for Canada is excellent. Probably the best they’ve had in a generation. The housing market is interesting, though, because I saw a statistic where in 2003, the average income for Canada was $60,000, yet the average home was 213. Now it’s $64,000 and $612,000 for a home. So the housing market is quite an anomaly in Canada. It’s over my head, but it’s something that I definitely should pay attention to.
Tony
I don’t mean this to sound stupid, but do you have the generational loans like they did in Japan back in the day? Do you guys do that up there?
Keith
What do you mean? No, our mortgage is…
Tony
One generation to nother to pay off a house.
Keith
No, we have 25 year amortization periods. The banks now have to do a few funny things to keep these loans from being impaired. So they’re extending to amortization period. But just a couple of quick things with Canada to be aware of right now. We have basically five major banks up here, and their loan portfolios are homogenous. They will tell you, no, we’re a little bit different than the next guy, but they’re all the same. So if we were to experience some kind of crisis in our economy or in the housing market, it will affect all banks at the same time. So we also have our term deposit insurance up here. It’s $100,000 canadian. It’s highly likely they’re going to need to increase that, but they’re not able to increase it to any level. That would actually be helpful if we were to experience a crisis because if one bank ran into trouble and they had to go to the CDIC to make a claim, all the banks are going at the same time. That’s just a function of what it is. But we are in this sort of precarious moment right now. We just had a budget came out yesterday, or the day before, I think it was.
Keith
And again, it’s like deficits forever, debt is going to grow forever, there will never be a recession. All these perfect scenarios are lining up. Again, we just like to highlight that we are in this global world and some kind of event can happen outside of your country. It doesn’t matter if it’s Canadian or Australian or British, something can happen that will trigger most likely would be a shift in your yield curve in some way where the credit spreads are hit or the long end of the curve gets hit, or banks have to take actual losses and things like that. And that’s when things get a bit funny out there. But that’s the story on what we see. Again, we think it’s incredibly interesting. There are great opportunities coming up, especially in the commodity world. We’ve been adding that space over the last three to four weeks. And the path that we like to talk about, not journey. The path, and it seems to be going where we’re expecting this year.
Tony
Perfect. We’ll talk about Canadians or commodities with Tracy in a little bit. But first, how is the Canadian consumer doing? We’re going to talk about the US consumer in a second with Albert, but how is the Canadian consumer doing?
Keith
You look everywhere, everyone is over levered. So you have that happening. Employment growth is fine, but if you look under the hood, it’s really in the service sector. One person might have they’re running three jobs, they’re an Uber driver, they’re running Uber food or DoorDash, whatever they call it, and maybe something else at the same time, because it’s kind of interesting in that we’re all expecting a recession to hit up here, but the data is still not showing that it’s going to happen. And the most important contributor, the positive contributor again, is population growth. So again, we’ve taken in over a million immigrants this year and I think that works out to about two and a half percent population. So our GDP per capita is actually declining, right? So if you take out the population growth, then we are struggling a bit. But Canadians right now, and banks are tightening their standards on lending. There’s increasing evidence that if we do start to see job losses, then it could be a bit rough. A lot of Canadians have bought houses over the last three years. They went with variable overnight mortgages, and all of a sudden, they’ve been resetting lock and step with the Bank of Canada.
Keith
So the good news is the Bank of Canada is done. They ain’t hiking anymore. Yeah, maybe we’ll get some relief with that. But the Canadian story, if something bad happened in Canada, it’s not going to affect the rest of the world. If something outside of the rest of the world happened, it will affect Canada. So we have this bit of a challenge here.
Tony
Okay, great. Keith has been it’s been really helpful to I mean, for people outside of the US and Canada. We’re different. The US and Canada are different. And Americans, I’m sorry to say, don’t really pay a whole lot of attention to what happens in Canada. So this really is helpful for us to understand this stuff. It is America’s largest trading partner, but we are a little bit selfish. And I’m sorry to say it, but it’s true. So it’s helpful for us to learn this stuff.
Tony
So let’s move on to the US consumer and little programming note. Sam Rines does not look like Albert. This is actually Albert. And so Sam Rines is ill. So Albert has so very graciously jumped in to this spot. And so, Albert, thank you so much. So I want to ask about the health of the US consumer. And Sam had done this newsletter earlier this week, and this is very much in line with things that you have been saying about inflation, Albert. And so let me just bring up a couple of things. And Sam brought up Carnival Cruise Lines earnings. And the highlighted part of this thing on screen says the company experienced the highest booking volumes for any quarter in its history, breaking booking records for both North America and Australia and Europe segments.
Tony
Okay, so Carnival Cruise Lines is not exactly a high end cruise line. This is a middle America cruise line. And they’re seeing bookings that are far beyond what they’ve ever seen. And next, Sam looked at the earnings for McCormick, a spices company, and McCormick talked about 11% growth from their pricing actions while they saw a 3% decline in volumes.
So this goes along with this concept that Sam has been talking about for about nine months called price over volume, where companies have been passing on their costs through their prices to their consumers while accepting a small volume decline. And so we’re definitely seeing the broad basis of prices continuing to rise in the US. And Keith mentioned this, that there is some broad expectation that we’re going to see a recession in the US. But Albert, we still see hiring relatively strong. We still see service wages strong. We still see price rises coming. What’s happening? How are we going to see a recession? First of all, what is your view of the US consumer. And second of all, how are we going to have a US recession while all this stuff is happening?
Albert
Well, the US consumer has been surging. It’s been relentless. I mean, wage inflation is at the core of it. I mean, people are finally the public is getting a 20-30% jump in their wages after 40 years of stagnation basically. It’s become such a problem for the Fed that they’re resorting to bank crises now to stop lending and credit from the banks. It’s just the reality of what’s happened. I don’t see it lighten up. They want the market up. That’s providing liquidity. Consumers are getting liquidity from all over the place. Certain states still have stimulus. It’s just relentless. And it’s really problematic for the Fed.
Tony
Wait, certain states still have stimulus?
Albert
Yeah, they still have stimulus programs. California has inflation checks and certain unemployment benefits are still rolled on. I think it’s 16 or 22 states still have some sort of stimulus programs kicked in for unemployment.
Tony
Okay, so one of the things that I’ve said today actually on Twitter about trying to pull back on the consumer is that we’re going to have to see some change in the housing market in order for the consumer to stop spending in the US. Because the perception of wealth in the US. Comes more from the perceived value of your house than it does from equity markets. There is this belief that as equity markets rally, there’s this broad basis of spending that comes from consumers. And while that’s certainly true for a portion of them, the value of someone’s house is so much more a part of their spending habits in practice. So does that make sense to you?
Albert
It does, but it creates another problem politically. Washington wants housing more affordable for their constituents. But on the flip end, the boomers don’t want to give up their increased prices of their homes. And on top of that, people are taking out Helocs and buying secondary and third homes for rental income. So this problem is just simply not going to end in the near term. And on top of that, thinking about jobs, when you talk about layoffs, it’s only tech. There’s not any construction jobs that are being laid off. I don’t know one company in the housing or construction field that’s dropped workers, the significant amount of workers, zero.
Tony
Right. Well, because there’s supposedly an undersupply of housing. That’s what we keep hearing. But when we hear about people taking home equity loans to buy a second house to rent out, how real is that housing shortage? I just don’t know. I mean, you can see all kinds of different data showing that there’s a shortage or not a shortage. But when we have a synthetically low interest rate and we have the Fed holding a lot of mortgage backed securities, we do have an interest rate that’s lower than it naturally would be.
Albert
Of course, there is. But when it comes to the housing shortages or oversupply or whatnot, you can’t even look at it at a national level. You have to take it state by state or even city by city. I mean, Florida and Texas are absolutely booming, but the same can’t be said for Pennsylvania. So I think we have to look at it from that aspect. It’s really hard to look at the housing.
Tony
We’re still seeing wages surge in the middle of the country, although they may not be surging on the coast. We’re still seeing prices rise and price and margins expand. With a lot of these consumer companies and services companies. We’re seeing patchy housing values rise or stagnate. What does the Fed do? Will we see a pause this year? Will we see a pivot this year?
Albert
I don’t think pivots even in the cards at the moment. A pause certainly is in the cards. The problem that the Fed faces is super core inflation. It’s just services like, even in Canada, like Keith was saying, is just sky high, rocketing up. It’s just not stopping. This is the biggest roadblock that the Fed has for combating inflation at the moment.
Tony
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Tony
Right, so we expect to see, I think you said before, at least a couple more 25.
Albert
I think two more before a pause hits.
Tony
Is it possible they could take some action on QT for MBS to hit the housing sector a little bit?
Albert
They could, but again, they’re facing headwinds from the boomers that are up there with Hank Paulson and Larry Summers and their crews. They certainly don’t want to hear from them that the housing market is crashing and their wealth being erased slowly. So that’s just again, there’s two dynamics. You have the middle class voters that can’t afford houses, and then you have the boomers that don’t want to lose their value and their wealth. So that’s what we’re stuck between.
Tony
I suspect that at some point that might be one of the only levers they have to pull to slow things down.
Albert
It’s a dangerous level to pull.
Tony
It is, but I don’t know.
Albert
I don’t even know if the banking sector can absorb too much of that kind of pain. I don’t know. I haven’t really analyzed that in any way. But theoretically, you start dropping housing prices 20, 30%, and I don’t even know what. That does to loans for people and the banks.
Tony
Keith, what do you think about that?
Keith
Just to add to that, back to the Fed comment, Albert. If you have the Fed hiking another 50 basis points and everyone else has effectively stopped, I think the ECB has stopped or they’re pretty well close to that. You could have this environment where maybe the economy does slow somewhat in the US. Yet the dollar is surging. Like it’s continually gets stronger and you just get this vicious cycle going back and forth with it. But it’s funny because everyone has been watching the Fed now since Jackson Hole back in August, expecting that they’re going to pivot. They’re going to pivot. And in my mind, I think the Powell has been very clear with which direction they want to go. And somehow they dodged that there at their last meeting, they had every opportunity to pause if they wanted to because of the banking crisis, and they just plowed straight through. So I agree with Albert. They want to continue hiking until they’re told they’re not able to do it anymore. And if they can get through several banks basically going under within a few days of each other and to continue hiking, then maybe there’s a world to get more than 50.
Keith
And again, if that happens, it’s going to push someone off sides out there. But that goes back to the whole global macro view.
Tony
Right? Well, we used to talk about how the Fed is going to push until something breaks. And so we saw some banks break and they’re continuing to push. So something else has to break. Right.
Albert
Something bigger.
Tony
What’s that?
Albert
Something bigger has to break. Something with more gusto to limit to help out the Fed right now. I mean, they unwound six months or nine months of QT in a week. Exactly. We’re back to square one now.
Tony
Right. And so banks failed, didn’t break enough. They want something else to break.
Albert
Joke. This bank failure thing is an entire joke.
Tony
Of course it is.
Albert
It’s a pre planned event. I mean, when First Republic loses 90% or 60% of their deposits and the founder is pushing back on the FDIC about a plan for salvaging the bank, it’s a joke. It really is.
Tony
Okay, so, Keith, you mentioned Fed continues to rise, stronger dollar. That seems to me to put pressure on downward pressure on commodity prices. Not necessarily everything, but it seems to put some serious pressure on commodity prices if we have a rising dollar, is that fair?
Keith
Yeah. I mean, our expected path this year with commodities prices that we go lower Q1 into Q2, and that’s exactly where we are. We start to see slower economic data coming out, Q2, Q3. They should bottom before any recession actually hits. So in that world, unless there’s a major supply disruption or discovery or something like that, we’re using this as an opportunity to start building small positions in that space, but you keep going back to like, is it a normal cycle or is there something else that may happen here at this point.
Keith
I think everyone’s been calling out for a recession. Say, hey, if you go from zero to five with overnight rates and the yield curve gets inverted so much, no matter which way you want to look at it, the recession is here and people have been looking for this back in Q4. Here we are, like five months into it and still no sign of it coming. Again, something is a bit odd out there. Maybe it’s just delaying the inevitable or maybe it’s as, you know, a bubble. You keep blowing into a bubble. I don’t mean that the economy is in a bubble or anything like that.
Keith
It just means that, again, everything has been synchronized around the world that it is giving the opportunity for something to go off sides. And when that happens, because everyone has so much risk on the table, people can start running around. And again, that doesn’t mean that you go all into cash or whatever your favorite overnight holding is. It just means you had to be aware of it and be positioned for it. And then when it does happen, it’s funny how nobody buys low and sells high anymore and most people do the opposite. So I think, though, maybe you can be a bit traditional, that opportunity will come up.
Tony
A recession is whatever we call it. So we had two quarters negative growth last year with strong employment. Right. So will we see the opposite of that this year with employment weakening but continuing GDP growth and maybe call that a recession? I have no idea.
Keith
Yeah, I think one of the main contributors to recession coming up is when banks stop providing credit to the economy or they slow the growth of credit. That’s the main thing to look for. And just using the Canadian economy as an example, that is happening. It’s now more difficult to get a mortgage. If you need credit, you’re using credit cards or stuff like that. I know the boomers are doing well. We always have access.
Tony
Boomers have always done well. It’s been good for boomers since they were 18 years old. They’re never going to suffer until they die.
Albert
That’s exactly what Keith is saying, is until the banks stop lending out, this is just going to continue. And this is most likely why this bank crisis was preempted, to stop the banks from lending.
Tony
Okay, so, Tracy, we started going down the path of commodities and with Albert and Keith, Albert thinks we’re going to see at least two more rate rises. If that strengthens the dollar. What’s your view on that in terms of general commodity prices? Does that push commodity prices down or do we start to see growth toward the end of the year pick back up and that helps commodity prices?
Tony
Sorry, you’re muted.
Tracy
Sorry. I think that it’s really going to depend on multitude of factors. The thing is that if you’re looking at some of these base metals, battery metals and things of that nature between energy transition and in Europe and North America have committed to this at all costs, even asking central banks to look past inflation in these areas. And so I think that demand particularly, and if we see pickup in China, which is also one of the largest EV makers in the world, I think that we’re going to have a problem where we’re going to have these metals go higher even in conjunction with a higher dollar. I think it’s very possible.
Tony
Okay, so let’s look at a comment you put out on Twitter earlier this week about copper.
Copper is critical to the clean energy transition. Europe and North America have committed to the transition. After 2023, incremental copper supply decelerates into 2030. And then you actually sent out a chart in November of ’22 showing kind of the copper supply gap. So can you talk us through why is there a copper supply gap? It looks like the supply just kind of flattens after growing. Why is the supply flattening out as demand is rising?
Tracy
Because we don’t have, because nobody’s mining it, really. We have about 1.1 million tons being added this year to supply as far as supply growth is concerned, and new supply coming online from new mining. But after that it levels off. And I actually sent you those charts so that you can show everybody, but you can see where supply growth literally goes from 1.1 million tons to literally nothing from here to out to 2030.
And then you have this incremental supply growth. When you’re looking at just take for example, an EV, right, it requires four and a half times the amount of copper as an ice vehicle. And when you start talking about buses, that’s twelve times as much. This doesn’t even include solar, wind, charging infrastructure and stationary energy storage that also require huge amount of copper.
And you have the green plan in the United States, and you have Europe’s rendition of a green plan, right? And so they’re planning to build all this out, and we just don’t have the supply available, and we’re just not going to have it. And if you add into this, for the past seven years, the mining industry suffered from the same problem that the oil industry has. Lack of capex.
Tracy
So you’re coming from already seven years of no cap, barely any capex, declining capex. So you’re not having supply really come haven’t had supply really come on in any notable amounts in the last seven years. And then moving forward to 2030, we’re not seeing that increase at all either.
Tony
Do you know that Simpsons meme, where they’re like barts in class and they say, say the line, say the line.
Tony
We’re going to think about that there when I say why has there been a lack of capex in mining?
Tracy
Because it’s dirty.
Tracy
Right? Is the reason.
Tracy
And nobody wants mining. Same with the oil sector. Nobody wants oil to drill for oil either. It’s dirty. Right? ESG these things are dirty, but yeah, we need them. So here’s our conundrum, and it’s not going to I think that not get any better. Regardless if we’re in a recession and regardless if we see the dollar spike. I mean, we’re already seeing copper prices are still holding up very well through this banking crisis, where we have seen oil wobble a little bit and the dollar has been over 100 and we’re still seeing these metals. We did see a pullback from the summer high when we had the electricity crisis or the natural gas crisis, right. So we did see those metals pull back from 2022 highs, but we’re starting to see them all spike again because again, we have these green programs that are coming to light now, particularly in the United States, and then again with Europe having their own kind of rendition of the IRA plan.
Tony
What will win? If you look five years out? Okay. And we have these ESG constraints on upstream development and mining and other things, and it almost seems like we’re going to have to continue to have some sort of subsidy for energy in places or some of that ESG regulation or legislation can change what will happen? Will ESG loosen or will we just continue to subsidize these things until we’ve kind of finished the transition, whatever that means?
Tracy
I don’t think just to reach 2035 goals right now, we need $35 trillion, right?
Tony
Because we’re just making money up now, right? So what is that $35 trillion spent on?
Tracy
And that’s just to get us to where the countries have their 2035 goals. So really, that’s not going to happen. You know, that’s not going to… Europe is not going to cough that up. United States is going to cough that. Canada is not going to cough that up.
Tony
Remember the Kyoto Protocol from the UN talking about green goals? It was done in 1992 or whatever. And I think the only country that did it was I think there were only two countries that did it, maybe three, like Canada, the US, and Iceland or something like that, right? So everyone signed this deal. These were all aspirational the goals were far enough advanced that nobody who signed the treaty was going to be in office when the accountability was made.
Tracy
Exactly. And that’s where it gets me to. My next thing is that they’re going to have to push these goals out. You know that, right. Because everybody decided these 2035 goals, whoever’s in office, we have the UK, and all these people are going to be gone, right?
Tony
Whoever is the chancellor in Germany will still be there because they keep those guys.
Tracy
That’s true. So my opinion is we’re not going to have enough money. You still aren’t getting these mining companies excited enough to you can’t get oil companies excited enough to drill right now. Right. They’re all focused on investor returns, paying down debts, capital discipline. It’s no different in the mining industry. Right. So we’re going to have a problem. So you’re going to have to pull just by pure logistics. You’re going to have to push those out. I mean, it’s just logistically impossible. We just don’t have enough metals, period. And you can’t just wish that into existence.
Tony
I don’t necessarily need to get into company names. And Keith, I know you want to comment. I just come to you in just a second. But I’ve been trying to think of how do you play this ultimately, because all of these green things plug into a grid. So is the ultimate play for the energy transition power companies or the companies that provide hardware for the power grids? What is the real play here?
Tracy
I think that it’s infrastructure to build all this stuff out. Right. So I like things like heavy machinery, steel, things that make infrastructure to actually build this out or to mine, right. Not necessarily the actual metals themselves because those tend to be very volatile. So I would look at what goes into making these metals, what goes into making these grids. That’s where you’re playing. Utility companies are, I think, going for the utility companies, they always get screwed in the end. That wouldn’t be my go to for an investment longer term, looking at this sector. So I was more into kind of the infrastructure again.
Tony
Good. Okay, Keith, you had a couple of things you wanted to say.
Keith
Yeah, I just love this conversation. And maybe one thing for us to think about is that maybe the current path we’re on, it changes. So we get the pendulum swinging to the other side where it’s no longer whether it’s socially or politically, you don’t have that huge push towards green technology and so forth. It doesn’t mean that people don’t want it, but it’s not going to be pushed by the public sector. Instead, it’s going to be into the private sector. And that could change a lot of things. I do think that a lot of countries are going to be prohibited from doing a lot of these investments because they just won’t be able to raise the capital in their bond markets. And there’s also going to be other needs coming up. Again, I go back to here in Canada right now with their budget that just came out. 10% of our at the federal level of our tax revenues are now going to interest expense on the federal debt. Again, I suspect everyone is in that kind of position. So what worth goes. I love the concept of stranded assets in the energy and commodity space.
Keith
I’m incredibly bullish on this space and maybe the dirtier that the commodity is is probably the better opportunity for return. And again we’re just in this world now, we’re even having this conversation. It’s not acceptable by some sides but I think we have to be realistic that we live in a period of extremes and I think if we’re using linear thinking that that’s going to be wrong. Like something will swing back to the other side.
Tony
Extrapolate today until forever.
Tracy
I actually tweeted out a German survey today. So only 10% of Germans believe that renewable energies will be able to meet energy needs for the foreseeable future. Even among the Green voters, that figures only 18%. Instead citizens want natural gas 59% and nuclear power 57%. And that’s across all parties in Germany. So the citizens wants, needs, likes are not necessarily coinciding with our government overlords. Right.
Tony
Because they’ve lived over the past year. Right. They’ve seen how this stuff can’t meet their needs.
Tracy
Swinging.
Albert
Well, the wall of reality is starting to hit these governments. Like what do you do here? You got a budget, you have to increase your defense. Specifically for the Europeans, you have to increase your defense budget. You still have to maintain your social programs. You still want to push these subsidies for renewables. There’s no money for that.
Tony
It also comes at a time where you have a lot of baby boomers retiring so you don’t have the income taxes on those guys going into your budgets. Right. So you’ve got a gap of say ten years until millennials hit that income level. And so there is a revenue issue and a spending issue and yeah, I think there are so many things in this calculation that it’s just a very.
Albert
These renewable programs are nothing more than tax schemes by the government. They see their budgets dwindling so they know that they can tax and spend a little bit more by throwing out these beautiful narratives like the Paris Accords where nobody but the United States had haired to.
Tony
So whatever we’ll go from there just a little fact and I’m sure I’m not going to become anybody’s friend from this, but I actually co authored a couple of papers with my friend David who was the person who pulled the US out of the Paris Accords in 2017 on behalf of the Trump administration.
Albert
Good. Exactly what they should have done. If people are going to make up their own numbers and have no mechanism for enforcement, then what do we do?
Tony
Exactly. So that’s where I sit in that anyway. Okay guys, really quickly to wrap up. Keith, your first. If we look at the week ahead, what are you looking for in the week ahead? I’m not looking for companies or anything here, but what are you looking for in terms of issues whether in Canada or globally or the US or something? What do you see in the week ahead?
Keith
I mean for one week ignoring any economic data points coming up, we’re finishing quarter end today it’s been risk on for the last ten days. I suspect on Monday morning we might see a bit of a shift in that stance, but that’s it. We continue on this. I keep going back to this path and where’s the next kind of crisis going to escalate from.
Tony
Good call. Great. Tracy, what are you looking for?
Tracy
Well, OPEC meetings this week. I expect no change, so nothing really to get that excited about in the oil sector.
Tony
Even with crude prices continuing to wait.
Tracy
No, I think they’ll stay the course right now because I still think that we did have Russia come out and say they’re cutting 500,000 barrels per day. It was just supposed to be just for March. They pushed that out to June. So I think that OPEC will kind of look at that and want to see how that is factoring into everything as it is.
Tony
Very good. Albert?
Albert
Specifically grains. I’m very curious to see how grains are in the commodities market, and whether food inflation starts to go up because wheat starts going up also. The Ukrainians said that they’re 10% lower on their crop yields. The Russians have been starting to make noise about Cargill. So I’m going to be very curious to see if we can catch a bid and drive itself up into the 800s.
Tony
Okay, very good, guys. Thank you so much. Thank you so much for your time. Have a great weekend, and have a great week ahead.
