Rick Rule: The Energy and Commodities Angle ft. Tracy Shuchart

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0:25Welcome back to week two of Crash or Boom, where Real Vision investigates what's happening and what may be an inflection point in markets with some of the biggest names in finance. I'm Ash Bennington. Today, Rick Rule interviews Tracy Shukart. Let me set up the context for you today. As I said, this is week two of Crash or Boom. This has been an incredible journey for us. I had a conversation yesterday, you've probably already seen it, with Harris Kupperman and Louis Goff, where we talked about volatility in markets returning, a secular energy crunch, secular growth in EMs ex-China, and some cyclical bull markets.

1:01Also, the risks of de-dollarization, in the guest's view, with attendant risks to U.S. treasury markets, and the potential buoying of hard asset prices, all of which fits perfectly, perfectly with our next conversation about macro energy and industrial material. With that said, I'm going to turn this one over to Rick Burrell so we can kick off the interview with Chasey Shukar. Two quick notes. I'm going to be hanging out in the background and I'll be back with some of your questions at the conclusion of this final production note. We're having some minor technical difficulties with the live chat on today's stream.

1:33So please drop your questions for Tracy and Rick into the comments so we can get them to them as soon as possible. With all that said, Rick, over to you. Thank you. Ladies and gentlemen, welcome. I'm delighted to participate in this interview with Tracy Shukart. We're going to try and do a couple of things today. We are going to talk about natural resource markets and precious metals markets, too, in the context of the economic circumstance that we face and in the context of these series. So the first part of the interview will be sort of general, talking about geopolitics and economics and markets in general.

2:12That will be followed up by a discussion of minerals, both precious metals and industrial materials, and finally, a discussion of energy, energy hopefully in all forms. That's a lot to get done in 40 minutes. So, Tracy, let's get to it. There's been a lot in the news lately, and I've received a lot of inbound communication from people I communicate with about what many people continue, pardon me, what many people suggest are surprisingly strong inflation numbers. I myself am questioned, I question the CPI as a valid cost of living statistic, but that doesn't matter. It's what other people use.

2:53So talk to us in the context of resource markets and markets in general about stronger than infected inflation and any impact that you see that having in public or private markets. Yeah, I mean, I think that I think, to be honest, the Fed's two percent stated goal is probably not going to happen. And at some point they're going to have to accept three or four percent. Now, obviously, the Fed looks at core inflation, which doesn't include anything you actually need, right? So like energy and food. So but when we, you know, look at those markets and we think we're looking at higher for longer and that's just the way it is.

3:41We are kind of out of this 40-year period of abundance and hitting an era of scarcity with higher rates right now. And that's going to affect every sector, specifically natural resources, right? And if you just look at energy alone, really, you can't do anything without energy. You can't grow food. You can't live. You can't move anything. So I think that you they're going to be again in this period where we're going to have higher inflation and the Fed's either going to raise rates to ridiculous heights and break something in the economy or they're going to have to, again, look at accepting higher, higher inflation rates.

4:36Well, let's go into the inflation rates a little bit. I'm no economist, by the way. I'm a credit analyst, so I always ask questions about inflation. Two things that occur to me. This reminds me a bit of the period of time in the middle 70s where you had had price inflation, but you hadn't had wage inflation. and I remember very well, I'm enough older than you that I remember it firsthand as opposed to from books, what happened when there was a round of wage settlements in the middle part of the decade of the 70s? We look now, as an example, at the impasse around the auto workers union. Are you anticipating wage inflation as a consequence of the price inflation that we've seen in the last three years?

5:19Oh, I think that's ultimately what's going to happen. Again, I'm not an economist either, but I think that is what is going to happen. We're going to see that because you know what we really had, we're looking at, especially in the era after COVID, we had a large portion of the population, the boomers, right, leave the workforce and they never came back. Right. And so this is why we're also seeing, you know, lower and lower unemployment rates and you have, you know, what, two to one or three to one job openings per person to be hired. And I think, you know, to capture these workers, we're just going to have to pay people more.

6:06And within that, it's just a giant spiral, right? Where the cost of living is, the more, you know, unions are going to ask for more money. And so, and that just feeds off of each other. Tracy, in light of that, I think you're saying that you expect inflation to be higher for longer than many commentators do. Do you think that the policy response to that, and I'm asking this question both in terms of U.S. markets but also international markets, do you think the consequence of higher inflation or one consequence of higher inflation will be higher official sector interest rates? Do you think in particular that our Fed and other Feds will allow or will force rates higher to deal with inflation?

6:50Well, you know, that's what Powell said he's going to do, right? And it's all about his legacy at this point. And I think, you know, the market keeps expecting some sort of rate cuts. You know, first people thought we were going to have some rate cuts at the Q4 of this year. Now they're looking at, you know, next year into 2024. Yet this whole time, Powell has been extremely hawkish, even when he has paused. But again, you know, and I think in my personal opinion, I think they've raised too fast, too much too fast. And that really hasn't filtered down to the real economy yet. And so like the Fed that tends to be reactionary, I think, you know, what will happen is they'll probably raise rates till something breaks and then they'll have to, you know, flip the train.

7:51And getting away from the Fed and the rest of the world, do you expect central banks in other countries to either have to or get to raise rates in response perhaps to a stronger U.S. dollar or in reaction to their own inflation? Do you see this high inflation, high interest rate environment being a global circumstance? Yeah, I think that that is going to happen, especially with a stronger dollar. And we are seeing that in emerging markets. If you look at, well, Argentina or Turkey, for example, where their interest rates are skyrocketing just to try and control their currency, right? Right. And so stronger of the dollar, you know, we're the stronger dollar.

8:43By that fact, you know, I think Yellen's allowing a stronger dollar to sort of mitigate higher inflation rates in the United States. Right. And so by that, we're kind of exporting inflation elsewhere. So the circumstance that you describe feels distressingly like the circumstance of the 70s, described then as stagflation, where high inflation forced higher interest rates and higher interest rates forced economic stagnation. the trillion dollar question i guess around natural resources is will the consequence of a slowing economy and higher interest rates and inflation lead to a recession a u.s recession you said yourself that they'll raise interest rates until they break something does breaking something to you mean that we face a recession and if there's a recession will it be a global recession.

9:41And I realize that you have no crystal ball, but assuming some forecasting skill, how deep and how enduring would you suggest a recession might be if we have one? Well, you know, I do think that we'll probably have a recession. I mean, we have an inverted yield curve, which is generally indicative of a recession. So the market's telling us we're going to have a recession. Now, everybody's divided on, you know, is that going to be a no landing, a soft landing or a hard landing? Right. So either no recession, kind of a recession or a really bad recession. And I think that all depends. I mean, I don't really have a crystal ball, but I think that that's coming.

10:23And the problem here is going to be where you have energy prices are going to remain high, even though we're in a recession. And that's where you get your stagnationary environment. Did that in the 70s. I remember it. Let's move on to more bad news just for fun. We'll make people sick before we make them well. I have noticed, and maybe you have, but I'd like you to comment on it, that as you said at the beginning of the interview, we've come out of a period, a very benign 40-year period. I would suggest the most benign market conditions probably in human history. And that had a lot to do with declining interest rates, But it also had to do with the liberalization of global trade.

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12:20Absolutely. I mean, we're already starting to see this, particularly in the agriculture sector right now. You just had India restrict imports of rice. You've seen this from several African nations. So we're already seeing that kind of happening with food and a little bit in some of some of the minerals. And so I think that this is, I think this era of globalization is coming to an end. I think we're obviously seeing a lot of geopolitical issues come up as far as, you know, a lot of wars, uncertainty around geopolitics right now. And so I think that, you know, when you have this era of scarcity, particularly for natural resources that have been severely underfunded for, you know, the last at least seven years, that you're going to see more nationalism and you're going to see more countries focusing on energy security and, you know, supply security.

13:37Great. And let's do one more general thing around resources before we get into resources in particular. There's been a lot of discussion of a quote, BRICS currency. The idea that the allegedly non-aligned countries in the world, I think it's difficult to call Russia and China non-aligned, but that's a different story. the allegedly non-aligned economies in the world forming a trade block outside the G7 or the G20, and perhaps having either a currency or a settlement system that's non-US dollar-based. Do you have any comments on the evolution of the BRICS currency, either as a currency or as a settlement mechanism, and what impact that might have on Western economies and also commodity prices?

14:24Well, I think certainly we're probably not going to see that in the next three to five years, perhaps towards the end of the decade. That could happen, you know, where we see more trade in local currencies. But then you kind of have to look at what they're invoiced in. So right now, 90 percent of the world natural resources are invoiced in U.S. dollar, even if they are paid in other currencies. And so that's what kind of really matters at this point. So again, I think that, and again, I don't have a crystal ball, and I know that there are a lot of death to the dollar people out there. but just realistically, I don't, I don't at least see this happening for another three to five years where it would actually make a difference and really want to watch kind of that invoicing.

15:16But certainly it makes sense for countries to kind of want to move away from the dollar. The problem is the logistics of actually doing that, right? Because it's really about the Euro dollar system and that's trillions and trillions of dollars that, you know, kind of off the books that are traded in dollars globally. And so as much as I know that a lot of people would like to see de-dollarization, I just don't think it's realistic, at least in the near future. I'm not saying that can't change over time, but I wouldn't expect that to happen. Yeah. So I think we've got the assumptions part done.

16:04we understand a bit about your worldview which will make the specific questions about various commodities it'll give them context let's move to energy and i want to start the discussion uh with a factoid uh which is to say that there's a lot of discussion about the electrification of the world the moving away from fossil fuels and all that stuff and i'm not personally going to express an opinion as to whether that's a good thing or a bad thing i will note for the conversation Tracy, that the world has now invested almost$5 trillion in alternative energies in 40 years. And as a consequence of growing markets, we have reduced the market share of fossil fuels from a high of 82 % all the way down to 81%.

16:50So I think we need to frame the energy discussion in that context. Let's start with conventional energy, oil and gas. The big thinkers of of the world, the Angela Merkels, the Joe Bidens, the Justin Trudeaus, that noted energy physicist, what's her name, Greta Thornburg, have told us we will experience the peak oil demand in 2030 or 2032, and that the terminal value of oil assets after that will decline very rapidly. Do you share that point of view? Do you see us experiencing peak oil in the near term or not? And what are, from your point of view, the investment consequences of that around oil and gas?

17:34Well, A, not even close. Peak demand is not going to happen by 2030. Not even in the least bit. Because if you look at it specifically, it was EIA that just came out and said this in their report. You have to realize they're a little bit compromised because of the alliances that they've had after the Paris Accord and with the WEF in 2016. So their reports have changed and they are pushing a narrative, but it's not realistic. So this last EIA report, basically what they said is we expect oil demand growth to be around 3 million barrels a day out to 2030. And then that's it. We're declining after that.

18:25But that's of the assumption. If you look at the last, you know, 40 years, oil demand has been growing, especially lately, of 6 million barrels a year. And so to automatically assume, to automatically cut that in half, it's just not even realistic when you're looking at what the historical norm has been for oiled man growth. You know, and it's, we may see some decline in the West, right? But that's like a billion people, about the other 7 billion people on the planet, right? You have a lot of emerging markets that are just coming up that can't leapfrog technology, right? You want to push them from coal, for instance, to natural gas.

19:17They're not just going to go from coal to wind unless you're Germany and then you do that, go from nuclear to coal. But that's another subject. But so I think that realistically, that's not going to happen. You know, we have a lot of people in poverty. We have 600 million people in Africa alone don't have electricity at all. And so, you know, that's a lot of fossil fuel demand that's going to be needed. And then, and forget just emerging markets. If the West wants all these new green technologies, those require a lot of fossil fuels. Mining is very energy intensive. It requires a lot of fossil fuels.

20:04Electricity. How are you going to get electricity? Right. Well, mostly natural gas, fossil fuels again. So I think that if you want to dig all these materials up to build all these, you know, windmills again and, you know, putting these windmills together takes a lot of energy. And so it's just not realistic to think at any stretch of the imagination. Are we going to see a 2030 peak oil demand at all? A supporting statistic, you've got most of it, right. 600 million people in Africa with access to primary electricity, but almost a billion people worldwide. And 2 billion people worldwide with access only to intermittent or unaffordable electrical energy.

20:54A different statistic that I want you to talk about. Wood McKenzie, Hart Publications, and others have suggested that the global oil and gas industry is under-investing in sustaining capital and new project investment to the extent of about a billion dollars a day,$360,$365 billion a year. What do you see as a consequence of this lack of sustaining capital investment in terms of the oil industry's ability to maintain current production two years out or three years out? Do you see enough reinvestment to maintain supplies, enough new project investment to maintain supplies, or are you seeing a supply shortfall in the out years?

21:37Obviously, I think we're seeing a supply shortfall. You know, I mean, if you look at oil and gas producers, you know, particularly for the United States, for example, now who wants to invest? You know, you have Biden saying drill, drill, drill, but we want to phase you out by 2030. Now, who wants to invest capital in these projects? Right. If the government's also telling you, we don't want you around in five, eight years. So that's making it really difficult. Uh, and so I think that if you look around at, you know, spare capacity anywhere, really the only place you really have spare capacity is Saudi Arabia right now.

22:18And that's just not enough. that's just not enough in an on and up growth even though you know they do plan to build out uh their capacity to i think 12 million or 13 million uh by 2027 you know whether that's doable or not we can is is a different story we'll have to see how that flows but there's just really not enough capacity in the world and so what we're going to be faced with again is higher for longer the era of scarcity. A couple comments there. In North America, the investment community, perhaps as a consequence of bad spending decisions in the past, perhaps not, is favoring oil and gas companies that are increasing returns to shareholders, meaning diverting capital, frankly, from reinvestment and growth to current yield.

23:11putting on your investor hat as opposed to your commentator hat, would you be investing in companies that were investing themselves in hopes of increasing production two or three years out, or would you be investing in companies that were maintaining higher current yields, either via buybacks, dividends, or both? I think you wouldn't look for those higher yields because we all know what happened in the shale industry before. We had two busts in the shale industry in the past, right? Where it was just drill, baby, drill, baby, drill. These companies went into debt. And obviously there were no shareholder returns at that point.

23:51They went through VCs. They went through private equity. They went through banks. They went through, you know, everybody tried to invest through them. And so I think that era is, I think that era is over. I think, you know, they have kind of, these companies have learned their lesson, if you can call it that. and with the pressure of governments telling they don't want them around, you know, they want to keep their investors right now. I mean, we went from energy being almost, what, like 20 % of the S &P 500 waiting to 2%, right? I think we're around 4 % right now. And so I think those companies want to keep investors.

24:32And so they're going to, you know, and investors want to see them pay down those debts. They want to see dividends. They want to see stock buybacks. They want to see capital discipline. And so, you know, as an investor, that's what I would be looking for in these companies. We're going to take another quick break and be right back with more of the day's top analysis on the Real Vision Daily Briefing. The next question goes to North American natural gas. We probably need to draw a line along the 49th barrel, or maybe not. It would seem that the United States, as a consequence of byproduct gas around the shale place, has at least a temporary surplus in terms of production.

25:15It would seem that the surplus in Canada is more political, which is to say that Mr. Trudeau's suggestion that there's no business case for exporting Canadian LNG. If you were allocating capital yourself now in the conventional energy space in North America, would you be more oil-centric or more gas-centric in light of the current overproduction of gas? Well, I think, you know, and we do have projects going on in the Gulf Coast, right? So we can, as far as LNG is concerned, because we can export it now. And certainly if I was Canada, I would be investing in pipelines to the West Coast to move it out of Canada instead of having it landlocked.

26:04So I think if I were an investment company, you know, I would be looking in production and export facilities for something like LNG. Because in light of the sanctions against Russian Europe in particular, trying to move away from Russian gas and us telling the rest of the world that they should also move away from Russian gas. You know, we're going to need other sources for that. So am I correct then? And please correct me if I'm not right. Are you suggesting that the current low prices in the face of increasing infrastructure for natural gas liquids export heralds a revival of the North American natural gas industry?

26:54I think perhaps. I mean, we'll have to see. Again, I don't have a crystal ball, but looking at, you know, I think we are going to see, you know, we've seen prices at this$250 level for months. And that's pretty much been, you know, the range it's been trading in aside from, you know, a couple of price spikes that we've had in the past. But that's because it's mostly been landlocked. And so, you know, and we've even seen Waha go negative several times. natural gas because it's landlocked. They're paying you to take it. So I think that if we focus on exports, I think that's a good thing for the natural gas industry.

27:37And I think there's opportunity there. Let's move on a little bit. As a contrarian, I like things that are out of favor and I love things that are hated. There's very little in the energy business that's as unloved as coal. Some coal producers are trading a three times EBIT with 30 years, 35 years reserves and resources. And the record year globally for coal demand was, drum roll, 2022. Can you talk about your own outlook for coal and whether or not the very cheap multiples on the big coal producers are justified in the context of their carbon generation or unjustified relative to all the people worldwide that would like primary access to electricity?

28:24Well, yeah, absolutely. I think that what we're seeing, and if you look at emerging markets, China in particular, it's, you know, has been over the last 40 years, you know, straight up and from the left up to the right hand corner, right? And so, and we're seeing increased coal use in say PAC Asia. We're seeing increased coal use in India. We're seeing increased coal use in Germany of all places. Again, I love to bring up Germany because it's an enigma. But so I think that, you know, I don't think that, you know, I don't think it's going away anytime soon either. so I you know I don't I'm kind of agnostic on it although you know I do own some false stocks uh but I don't think it's going away anytime soon I you know obviously as much as people want to get away from it they're not going to get away from it and people want access and it's a cheap hole right particularly you know I think Pakistan um because they're having problems getting natural gas because their credit is awful.

29:40So they would love cheap bull. So, you know, I think with all the emerging markets, it's certainly not a resource that's going away anytime soon, even than the West would like to think that it is. And let's move over from a sort of hated commodity to a really hated commodity. Ironically, maybe the only natural resource bull market that's ongoing, which is to say uranium. We've seen the uranium price now, the spot price, escalate by almost 30 % this year. Do you see uranium utilization continuing to increase? And if so, do you think that the current production deficit in uranium will lead to an increase in uranium prices?

30:29And if so, when? Yes and yes, in the short answer. But yes, if we really want to make this energy transition, particularly in the West, I know that the West has shied away from, especially particularly after Fukushima. We've seen Europe really, in particular Germany, kind of shy away from nuclear. I mean, Schultz just said no more nuclear. Nuclear said there's no base case for nuclear. But if you really want clean energy, if you want this, you know, zero carbon energy, you're going to have to look at nuclear power. And so I think that, you know, we're seeing a lot of projects, particularly in Asia right now that are in the pipeline that are being completed.