The End Of The Carry Trade Era And The Biggest Generational Wealth Shift Coming

Summary

• Anti-Carry Shift: The guest argues a transition from a carry-trade regime toward an anti-carry environment, with inflation and monetary regime change likely forcing volatility higher.
• Gold’s Role: Gold is framed as a monetary debasement signal and systemic-risk hedge, but the guest expects energy to outperform gold over the next few years given fundamentals.
• Energy Undersupply: Years of underinvestment, shale rollover, and limited spare capacity set up oil and especially natural gas for tighter markets and higher prices.
• Offshore and Oil Sands: Specific opportunities highlighted include offshore drilling contractors (asset replacement value gaps) and long-life Canadian oil sands producers for leverage to rising oil.
• Gas Demand Drivers: AI data centers and LNG exports create a three-way tug-of-war for US gas (consumers, data centers, export markets), threatening the US’s historic price discount.
• Macro Risks: Central bank limits amid inflation, large derivative exposures, and trade/monetary shifts (tariffs, BRICS initiatives) elevate volatility and support real assets.
• Market Perspective: The guest favors a rotation from financialized assets to real assets, prioritizing energy over precious metals near term; no specific stock tickers were pitched.

Transcript

Nothing in this program should be considered investment advice. It is for educational purposes only. Please hit pause and read this disclaimer in full. This is not, you know, a mean reverting system. This is uh, you know, they say that, you know, no tree grows to the sky in this environment in a carry trade. Trees can grow to the sky for a while. Hello everyone and welcome to this FinanceU episode. Very excited to have today's guest back because I happen to think that in terms of the macro theory that helps us understand what's going on, these people have probably the most comprehensive outlook. It's one that I really I just think it's fantastic. I it's an unbelievable quarterly commentary that we go through once a quarter with Adam Rosenwag of Garing and Rosenwag. Adam, welcome back to the program. >> Thanks for having me back. Happy to be here. >> We're we're all scrambling to try and figure out what's going on. Gold, Japan, all this and that. Here's the here's the view the your most recent piece, the quarterly commentary that came out fourth quarter last year, I believe. Uh anti-air trade. We'll explain what that means. This is what it looks like today. Uh everybody, we're going to talk about this anti-air trade. It's really it's an important frame. You know, agree with it, disagree with it, challenge it. That's all great. But then we have to talk about gold. obviously gold versus oil and also oil itself and natural gas because I think we're at a major turning point here. So, um, Adam, thanks very much for for putting this together and sharing it with the world. >> Oh, my absolute pleasure. And I should just point out that, you know, our research uh timeline has has slipped and slipped as our letters have gotten longer and longer. So, you are right. We did release that I think in December. uh but it was for the third quarter and so if people look at that and say oh wait what are they talking about but it was written in December uh and it kind of covers the market up until that point but strictly speaking uh was our third quarter letter not to confuse people our fourth quarter letter should be out in a couple weeks. >> Fantastic. So let's start here. Um we talked about the carry trade before but if you could just very quickly get everybody on the same page. What is a carry trade? And then um once we have that I I want to talk about this unbelievable statistic here where you say despite despite this is from the third quarter update despite their persistence carry regimes are not the natural state of financial markets whereas financial assets have historically averaged around 75% of GDP during carry bubbles they can climb to well over 200% of GDP much as we see today. And this is indeed what we see today. In fact, um the actual total amount is on the lefth hand scale and it's over 200%. That's that's equities and bonds. That's an astonishing statistic. So, let's start. What is a carry trade and what does all this mean? >> Sure. So I think where most people would have been introduced to the term of a carry trade uh which is very topical actually today you know here we are it's Tuesday January 27th and just over the weekend you know much uh commentary was written about how Japanese government bond yields have been pushing up through 4% and how this could be impacting the carry trade. So without putting the cart before the horse what is a carry trade and what do we think it is? So, a carry trade, we've all been taught, we've been, we've been given a little bit of misinformation. We've been given an example of a carry trade without really explaining what it is. So, the quintessential carry trade is when investors borrow in Japan and invest in higher yielding assets. And and the textbook example would have been Australia, particularly 10 or 15 years ago. You invest in a high yield Australian asset and you fund it with cheap Japanese debt. And so long as the FX doesn't really blow up in your face, you can generate, you know, almost a risk-free arbitrage. And in fact, what's strange about those carry trades, there will be periods where you could even hedge the FX. And that way, you've really guaranteed yourself, you know, a um risk-free arbitrage, which which shouldn't exist in finance. you shouldn't have these risk-free arbitragees, but but we have and they've persisted for periods of years, in fact. And we read a book called The Rise of Carry uh by three authors, Lee, Lee, and Cold Iron. And what it actually says is something a little bit different. It says, look, that's just but one of a whole family of trades. And what all these trades have in common and what defines a carry trade is it is a levered short volatility trade. Now that might sound um a little bit you know complicated and convoluted but what does it mean levered? It relies on debt. You need to be able to raise a lot of debt in order to uh leverage the trade and expand upon what can be sometimes a very small difference in yields. And the second is that it's short volatility meaning it will work so long as tomorrow resembles yesterday. uh we sort of added that last little bit but you know the idea that as long as the state of affairs remains similar and in the case of Japan and Australia it means so long as you know there's not a big crazy capital repatriation back to Japan as long as there's not an FX rate that blows out unexpectedly uh so long as uh you're basically guaranteed to make that that spread. So, it's a lever short volatility trade. And what those authors show very nicely uh is that there's a lot of trades that begin to exhibit carry trade features and they name a whole bunch, but obviously all these kind of currency carry trades like I've discussed. The other would be, you know, private equity would be a classic carry trade because you're borrowing cheap bank debt. And yes, every private equity fund, you know, has their own kind of spin and vantage. But if you take the private equity industry as a whole, right, that whole industry is basically just buying the S&P. It's buying the market in aggregate, but it's doing it with cheaper costing nonreourse bank debt, uh, and you know, non-all loans and stuff like that and bonds and it's buying the broad market. And so it's an it's taking a cheap source of funding and it's buying a cash yielding asset. And again, so long as tomorrow resembles yesterday, so long as you don't have 2008 or some kind of a massive multiple correction, if you just kind of get in at your entry multiple, get out at your exit multiple, do a few things along the way and delever, you're going to make excess returns for your equity investors, right? That's a carry trade. Um, hedge funds are a little bit of a carry trade as well, although they take a different approach. It's not so much a carry trade because of the way I talked about it. Yes, they do use leverage. And it pays to kind of make a short vault trade for most hedge funds because quite frankly, most days tomorrow does resemble yesterday. The sun does rise in the east and set in the west. And it's their compensation structure that really makes them lean into these carry trades because, you know, if heads they win and tails they don't pay the losses back, right? They take 20% of the profits. Uh and if it if it goes the other way, they won't make profits anymore and they might have to earn those back over time with a high watermark, but they don't pay it back. So, it incentivizes them to take on really short volatility tendencies across the board. And when you really dig down into a lot of hedge fund strategies, they all tend to be selling volatility. Um the S&P 500 a little bit has become one giant carry trade. Uh either stock buybacks, right, which effectively use leverage to buy in the float. Nothing has to change. You're going to make money doing it. And then of course momentum, the idea that what worked yesterday keeps working tomorrow. uh it starts to um embed carry characteristics throughout the market as a whole and that's exactly what we've seen uh over the last 10 years. >> So fascinating because um if I could um let's define this real quick. So financialization is what we're talking about here. And to me I define this very simply as it's when you're making money with money. Okay, it's fine. Um, and and it it's good business and I'm not faulting it. But when it crowds out everything else, this is going to get to the substance of today's talk. When it crowds out everything else, it's the thing you do. Tomorrow's going to look like yesterday. I'm going to make a lot of risk-free money if I hedge appropriately. It It feels easy. It's much easier than sticking a hole in the ground and maybe hitting um, you know, asphaltines when you didn't intend to or something. Uh, you're not you don't have to take any risk. You don't have to hire people. You know, it's making money with money. And so we've done that for such a long time that it looks like this. This is astonishing. So this is beginning in 1980ish. Something changed. And we see here that this is about 50% from 1950 to 1980. It was about a 50% you know um total world portfolio to GDP. And then it and then it ran up. It had a little spike here in 2000. Obviously that fell back um came back. But here, this has just been one giant printing press adventure by the Fed. This was the whole time I was just critical of the Fed, this region in here because, you know, 2008, okay, emergency. Well, then 2011 turned into an emergency. So, 2013, there was something they also had to print more in 15. Then they had to do it again in 17 and then also in 19 with the repo on and on, right? So, I feel like they've just sort of been bailing everybody out the whole time and people got quite used to that. And so I guess the one of the first things we should ask is why why wouldn't they just keep doing that if it's worked so well for them and their major clients? >> Sure. No, listen, I think it's a great great question and you know the the the I saved it for last because it almost deserves a special place on the on the uh pyramid here. But the number one agent of carry far and away really the enabler of the entire carry trade to function is the central banks because they get into effectively right you know the central banks let's talk about the fed the fed was established in the uh following the panic of 1907 and you know its role was controversial and has gone through different iterations the idea of single mandates dual mandates and now we have you know trillemma and three mandates and stuff like that, but very clearly never in its mandate even to this day uh is the need to suppress volatility. And yet that's exactly what the Fed has taken on a role of doing. uh you basically when you get major market dislocations because asset prices are so now integral to the whole functioning economy and financial system either because it forms the asset that's backing a loan uh or because you know you get the tail wagging the dog where the value of the stock market effectively is the economy not the other way around. You get this a little bit of like a Soros reflexivity thing going. Uh and so the Fed feels the need to step in and suppress major asset price dislocations and they've done that obviously as you mentioned fairly consistently since the GFC. I mean they did it to a certain extent also beginning with the Greenspan put but then they really dialed it up through the GFC and on to today. So if you're sitting there as an investor or a trader and I come to you and I, you know, peel back all of the fancy marketing jargon and I say this is my new private equity fund. and it's called Cary Trade uh LLC. And all we're going to do is avail ourselves of the differential between uh yields on income producing assets and cheap debt. And I'm going to give you the some multiple of the S&P. Um and then I'll skim cream off the top. The first thing you'd say to me is like, well, that seems risky, right? I mean, what happens if tomorrow doesn't look like today? You know, presumably there's this positive expected return that persists because we all know we're taking a risk. And I say, "No, that's the best part of this trade. If the risk comes, the government's going to take care of that for you." So it cleaves off the lefthand side of the tail, the tail risk. You keep your right hand side of the tail risk. We've seen that year after year of, you know, plus 20% returns and hyper financialization, but it takes off the left tail. And in that environment, I mean, it stands to reason that you should all put on a big levered short vault trade because Vault can't only upside vault can persist. you can't have downside vault and that's the world that we've lived in and so what it does is obviously it attracts a huge amount of money in uh it attracts it into a very specific kind of security that I think does well in a short volatility world which means you know stocks that look out 20 30 years and are going to change the world you know companies that you can sell a story for this long long long runway of major uh you know disruptive change you're willing to do that in a low volatility world because it sounds possible. If you had a crazy volatility world like in the summer of 2008 try to go to sell someone on a hyperscaler capex buildout, no one's going to want to do that, right? Because the world seems very uncertain. Uh but when you want to look out 20 and 30 years, when you want to discount those future cash flows back at low rates of interest because that's what's needed to get this carry bubble going is cheap debt. Um then yeah, why not? You don't want to be in anything that's going to benefit from volatility. You want to be in things that are going to keep working uh so long as the current place current systems in place. And what that means is that the big stocks get bigger. Uh it means that growth outperforms value for sure, right? I mean why who would want to own value? Value at its core is an anti-air trade investment because it relies on tomorrow looking different than yesterday. Yesterday it was a value and someday tomorrow the value will be realized. The price will close. Something has to change. Growth investing is momentum investing. It relies on short volatility. It reminds it relies on saying what's worked for the last 5 years will only work even more going forward. Right? extrapolating growth, extrapolating trends, not mean reversion, uh not picking small cap winners amongst, you know, large universes, but rather betting on the things that have already won to keep winning. That's the essence of the carry trade. And so, we see these anomalies that don't take place most of the time. We all know from our CFA or god forbid business school studies that um you know the famine and French model is that value and small cap are the only reliable indicators of excess return over time. Well, those don't work during carry trades. That's not true in the market that we're in today. And everyone's ringing their hands about it, saying, "Well, does this mean value is no longer a relevant factor?" It's not in a carry trade but this is not the normal state of nature. This is not you know a mean reverting system. This is uh you know they say that you know no tree grows to the sky in this environment in a carry trade trees can grow to the sky for a while. That is so well said. And um there's one other effect that I like to point out here because I think it's contributing to well my my children's outlook on the world but also maybe some social tensions which is that from 2020 what we see here is that what the Federal Reserve has done in in printing all of this and doing its financialization the top.1% added 11 trillion of wealth while the bottom 6 I mean 675,545,000 households added two. um it has uh it's very clearly been um uh not a fair system of of rewards that that go during these financialization periods and and that creates a bit of tensions out there. Um that's an extraordinary development right there. I mean it took all of history till 2015 for the top.1% to get their first 11 trillion and they slapped that on since 2020. That that's a byproduct of this, isn't it? >> Oh, I think it absolutely is. And I think if you look back through history following past carry bubbles, we've seen similar levels of unrest. You know, a carry bubble happened in the 1920s uh and it led to um FDR and and all of his policies and New Deal policies going forward from there. Uh you had a carry bubble uh in the 1960s that led to a huge amount of uh upheaval and social uh friction through the 1970s. Um and you're going through another one right now. So I suspect that's absolutely true. Uh I'm by no means uh a bleeding heart liberal. I don't think anyone's ever accused me of that. Uh but we certainly are acrewing uh wealth in a different way than in the past. And people talk about the K-shaped recovery. And I think that this is exactly what it is that they're talking about. And actually if you want to get into that I I have a fairly interesting I don't know if you want to talk more on this and we can come back and circle back but you know if you think about gold as a lens to really really really uh show you I think an elegant example of how this market has or how this economy has sort of broken apart um is just to look at the price of gold and to determine whether you think gold's expensive or not. And uh so I don't know if you want to get into that now or not. I I do want to get into that, but um let's let's let's ease into it um with this. Um so you you wrote in this period, this uh most recent update um that we're coming out of this carry trade, the anti-arry trade might be here. Um but during the carry trade, you said, quote, "During these periods, real assets tend to hold very little appeal for most investors." I mean, why bother with a finite delineated resource when volatility is low? Interest rates are benign. The market offers a hyperscaler that promises to remake the world. As a result, natural resource equities typically struggle in major carry regimes. Looking back, we found that every major commodity bare market coincided with a carry bubble. It's a great insight. Uh, in that sense, this cycle is no exception. Um, and this is going to carry on, you say, as long as conditions allow. when it breaks. Let's talk about that because I want to get there and I think that leads into gold eventually. But first, this insight that um that real assets just just always get um a little bit they they don't they don't do well in in carry trade regimes. >> No, I think that's exactly right. And there tends to be I think sort of a couple of reasons for that. So, you know, first of all, as I mentioned, right, when you have a low interest rate, low uh suppressed volatility regime, you can take wild shots on that. You know, you can start to really kind of crank them out, right? Because you're in a very benign environment to do that and the market supports it and once you get ahead of momentum on it, it begins to work really well. So, I think that in general, the market kind of turns its head away from like I said, finite delineated uh resource deposits. If you say, "Oh, I have this great 10-year copper mine and it's going to generate X, Y, and Z." You say, "Okay, fine. I'll think about it." But what you're really intrigued by are these other uh hyperscaler style investments. And in an environment of a carry bubble with suppressed volatility and benign interest rates, you're you're willing to take those wilder shots. That's number one. The second thing, maybe put a bit more technically, I do find that resource stocks in general, first of all, they exhibit long volatility behavior. When volatility does well, they tend to do well. They and they are volatile in and of themselves. Uh and and so in this environment, you want to be shorting volatility. You want to be taking volatility off your book by going shortvall, not going long. And if you think about it, you know, an oil like a long lived oil field or a long lived copper asset or something like that, right? It has some optionality built into it. If you get a super spike in prices at some point, you're going to just make a mint because they have fixed costs and everything that rises in the commodity price falls right to the bottom line. They have earnings leverage and they do extremely extremely well. So that benefits from a volatile environment. If it if it has optionality to it and that's what you're buying or part of what you're buying, then we all know that in a more volatile environment, an option is worth more. In a very low volatile envir volatility environment, the option is not worth very much. So people just steer clear of it. They don't want to commit lots of capital to these capital heavy option long uh type business models. They want to go into, you know, I I always say they had radio taxi dispatchers for a long time, but you always wanted to own the medallion. You didn't want to own the dispatcher. Now you want to own Uber, which is the dispatcher, and push the asset onto the gig worker person. It's because you're in this carry trade bubble where you want to own that financialized asset, not the heavy asset underlying it. Um, and then things, you know, eventually uh, as momentum builds in the rest of the market, in the worst case, and this isn't quite as systematic, but it does happen a lot. You know, if you're sitting at one of these pod shops, right, and you need to be dollar neutral on your book and you want to go long a whole bunch of stuff that's working, what do you go short? You go short the stuff that's not working, right? So it's been a funding source actually uh as people have steered clear first steered clear of the real assets and then actively you know tried to bet on their price falling just to hedge out some of their books that's not quite as systematic that's pockets but the dollars that they move can be very real and the flows can be very real and so we we see this time and again it's just not the favorite asset class and it sits out of this entire uh swing of capital and I I find maybe I'm you know have myopic and just look at my own slice place of the world too much. But I find that you really see this pendulum swing away from real assets and towards uh certainly these hyper financialized assets. And we've seen that four times in the last 150 years. >> Today's markets are more volatile than ever with ongoing economic and geopolitical uncertainty. Navigating such environments requires thoughtful, adaptive strategies, not a one-sizefits-all approach. At Peak Financial Investing, our registered investment advisory firm connects clients with experienced wealth managers who focus on active portfolio management. These professionals use evidence-based strategies designed to respond to changing conditions, not outdated formulas, but customized approaches grounded in research, discipline, and risk awareness. We believe in open, informed conversations, including discussing tools like precious metals and diversification as part of a broader financial strategy. Every investor's situation is unique, and our advisers tailor their guidance accordingly. Visit peakfinancialinvesting.com today to schedule your free consultation and explore how proactive management can support your financial goals. I'm Dr. Chris Martinson, proud to work with Peak Financial Investing and my support reflects my professional views. I encourage you to take control of your financial future by making informed decisions. All right, so we've seen Japan Takiichi said we're going to just cut taxes and boost spending. So they're kind of thinking they're going to throw the yen under the bus. There was a recent agreement where the dollar really just dropped against the yen, but that was, you know, bank-on bank action. the Fed and the BOJ coming together. But I'm noticing that, you know, the story was that, you know, Trump was going to come in and for a while there was Doge and there was this that. So we have our first three months of the fiscal year, $62 billion. In three months, Adam, this is normally a full year's worth. Like I'm an old guy, so like I this is big numbers to me and now it's been normalized, you know? So it's, you know, two trillion. We're thankful it's not three trillion. I don't know. Right. And then let me skip up here. So, you wrote in here, for a carry trade to unwind, central banks must either be unable or unwilling to operate as they normally do. And then I have this um view, this overlay that what if inflation returns? Like we're just going to rhyme with the 70s again. We've discussed this before, but it really feels likely to me, especially because of the way we measure inflation, especially because if the carry trade starts unwind, by definition, the things we measure as inflationary, oil prices, gas prices, things like that are going to contribute to this. So, it I to me this feels like one of the more likely ways the Fed's hands are going to get tied potentially. What are your thoughts? >> I completely agree. So, you know, we'll move from the very very abstract, you know, to the very very concrete. Uh, if a carry trade, if it exists, you have to believe that what I'm saying is is somewhat true and that I'm not completely out to lunch. If a carry trade exists, uh, and it is fed by low volatility or suppressed volatility, meaning tomorrow looks like yesterday, and the Fed is able to suppress volatility, then that seems like it'll be a feedback loop that continues. And it has. The question then becomes when does it stop? And the really dumb philosophers answer is it stops when tomorrow doesn't look like yesterday anymore. Well, that's a funny way of saying where there's a change. There's a major policy change. There's a major monetary regime change. Now, then the question is, okay, well, why on earth would uh the Federal Reserve or the government or whomever uh kill the goose that's laying the golden eggs, right? as long as you could do it, it seems to be working. So, what are some of the, you know, things that are becoming a little bit pulling apart at the seams? You know, I guess one thing that people don't talk about, and I don't actually think is is the most likely, but civil discord, right? It is leading to this K-shaped recovery, and people seem to be getting angrier and angrier. That could one day go too far. Uh, but the thing that I think is most likely, the path of least resistance would be a major bout of inflation. and Leel Lee and Cold Iron talk about that too is is the switch from carry to anti-arry. The most plausible is uh a big unexpected return of inflationary psychology because what that does simply now we're going to the really concrete. It means that when you get the left tail event, when you get the market shock that's leading to the V that you're trying to suppress, you can't print money to stuff it in that wound anymore because now if you do that it's whack-a-ole and your inflation comes up even more, right? So when you're in that type of an environment, you could conceivably begin to see the Fed's hands getting tied and then it becomes trickier to see how you can continue to suppress volatility because it it it as the asset sizees grow and as more money on a levered basis is chasing the same trade in an unwind event, right? even a controlled unwind event where people are taking leverage off and taking exposures off, it's going to take more and more exponentially more and more dollars to step in and hold that otherwise it accelerates and it sort of uh unwinds itself. Um and so it works until it can't anymore. And when it can't is typically, you know, it doesn't tend to be a about face of the Fed saying we're just going to, you know, everyone take their medicine. it's the system coming apart because they're desperate to hold it together and it just can't hold together anymore. So that's what we've been calling a monetary regime change. Uh one thing that I will note is that every monetary regime change which is effectively a change in how we send money around the world, right? We don't send money around the world for nothing. We send it as the other side of a general ledger entry, right? You need two book entries in a general ledger. The other side is goods and services. So you can't have a change in the monetary system, I don't think, without a change in the trade system. And indeed, every other monetary system change, regime change we've seen has come along with major impacts on trade. Everyone's talking about Smoot Holly, the big trade tariff package passed in the early 30s. That happened as we left the gold standard. Those two things were exactly coincident. Uh in the 1960s, late60s, we got rid of Brenttonwoods. We also repealed all the Smoot Holly trade tariffs. So it's not tariffs or no tariffs, it's just change in the system that really is the precipitator. And then in the late 1990s, we had the Asian currency crisis which led to the current system we're in now where effectively the global south takes all of our runs huge surpluses and recycles that back into treasuries. Uh and China rising to the WTO and the WTO kind of becoming what it is today, you know. So big changes, right? And so I think this time we're seeing the trade come before the monetary change. 2025's trade tariffs are likely a precursor to 2026's so-called Marilago Accords, I would suspect. Uh and so yeah, I think it keeps working until it can't. And the signs that it can't are major changes in the monetary system of which I think we're now in the midst of all around the world. the United States, what they're talking about is really really radical. I this is not normative. I'm not saying good or bad, but what Besson and Mirren have sort of put forward on the monetary side is quite different than what we've had in the past. Uh what Trump has done on the trade side is obviously very different than what we've had in the past. And what the BRICS countries are trying to cobble together, although they seem to have lost a little bit of steam in the last year or so of mounting an alternative currency quasi backed by gold is radically different. You probably have 70% of world GDP explicitly undergoing a monetary regime change that they've announced and yet we still kind of sit here and and you know pontificate on whether it's happening. I think it is happening and I think gold's telling you it's happening. Perfect segue into the gold. Uh because it's I'm starting to get annoyed where I read the CNBC headline, gold is the debasement trade. It's it's not it it's something much more profound than that. I think I think that that minimizes what it actually is. But let's take a look. Um as of you know, I think I took this screenshot yesterday. Um so a dollar is now worth 15,000th of an ounce of gold. Um, this is clearly something very, very big is happening here. I think it minimizes it to say it's part of the debasement trade. It's been going on for a number of years. It's catching headlines now, but honestly, it was that breakout in late 2022 where it finally, you know, digested the weaponization of the Swift system. Maybe that was it or it's just something more than that. But this really, this is, you know, when people say, "Oh, you know, Chris, the dollar's at 97 or something today." It's not that it's not really that weak. It's not really that strong. Well, that's measuring it against other currencies. Measuring it against actual true money, it's doing terribly, right? >> And I I How do you look at this? Is this a debasement trade or is this potentially talking I see this, Adam, and I see people worried about risk, counterparty risk, maybe institutional level risk, right? Maybe sovereign risk or maybe even something far more damaging than that, systemic risk. this gives you a way of sort of hedging all all three of those possible outcomes. What are your thoughts? >> Yeah, I think that that's all very very valid. I guess the only point that I would disagree with you on is that I think a debasement trade and maybe this is semantic. I think that's pretty important. You know, I think that the debasement trade could be all of those things that you've talked about wrapped into one because the debasement trade is the catalyst. It's the monetary regime catalyst for the end uh for a switch from carry to anti- carry. And this carry trade has gone on, you can debate it, but it's either gone on from 2008 to today or it's gone on from 1980 to today. And it's probably represented the most massive uh misallocation of capital we've ever known. Uh it's resulted in, you know, these crazy crazy things. And I could paddle off one after the other after the other, right? But you know you know at this point you know hyperscaler uh data center spend will now exceed the entire capex will exceed the entire energy industry uh this year despite the fact for instance that the number one thing that goes into a data center is energy uh you're now spending more on the data centers than you're spending on the energy without any clear indication that there will be a dollar for forget whether it'll change the world I suspect that AI will have a huge impact. And when we look back 20 years from now, we'll all be using AI in ways every day all throughout the day. But from an economic impact, it's really not clear that you're going to get a dollar of return back on this. Imagine if the entire energy sector, people laugh about the energy sector and say you're just throwing money away, but you're not actually. You're producing a lot of highly efficient energy sources, right? this might be just literally throwing economic value out the door, you know, and and I don't think we can understand the size and scope of what a true reversal of carry to anti-arry would be. And I think it all is precipitated or or is signaled the start the starting gun is monetary debasement. So I agree that gold is telling you about all those systemic risks and things of that nature and shifting global orders and blah blah blah. Uh not but to say it's not just monetary debasement. I think monetary debasement is one and the same as all of those. >> Okay. I can >> and one thing that I will say and you kind of brought this up where you say, "Oh, 97's not so bad for the dollar." I'm not entirely sure that monetary debasement is US dollar debasement, right? In fact, after every major monetary shift, which it would have seemed as though it was lights out for the US dollar, particularly when we built an entire postWorld War II order based around Bretton Woods and then decided, "Nah, we're not going to do that." You would have been within your rights to say, "Well, that's probably it for the dollar." And yet, the dollar roared to supremacy in the years following unlike anything it ever saw before. So I have no idea fiat currency on fiat currency what this means and I am not willing to say it's the a dollar debasement trade. I think it is a monetary debasement trade which is something entirely different with much bigger ramifications. >> I I like that. I I like that. So you said something really important before. This gets a little bit wonky. I'm hoping you can shed some light. I know nothing about this space whatsoever. um which is that what you said was well look the Fed's really afraid of letting this thing get started because it might just unwind in terrible ways or something. So they're just working like crazy to hold the system together. And a big part of the carry trade of course you mentioned is FX hedging, foreign exchange hedging or other forms of hedging. So can I just ask you real quick? I don't all I know about derivatives are they're very complicated contracts. They're mostly they're just pieces of paper that have words on them. But the BIS just noted that OTC derivatives rose to 846 trillion. Sounds like a big number. Probably is. That's notional value, which just means that's outstanding. But gross value, gross market value rose 5 trillion, 29% year-on-year. 21.8 trillion. That seems like a big number to me. So that means that there's 21.8 trillion of what we'll call risk hedging standing out there. And most of this stuff is swaps. Most of it's interest rate. A lot of it's foreign exchange stuff like that, right? Okay. The daily volume of turnover according to the Bank of England after they poured through the BIS report is trillions of dollars per day over here on the left. What do we have? 4,000 billion. So that's four trillion over here. So in England, UK, they're turning over on a daily basis in 2025 more than 4 trillion dollars of derivatives. Back and forth, back and forth. You want them, I want them, everybody wants them. couple trillion in the United States, lesser amounts across the rest of the western countries there. Okay. It feels important to me, Adam, that that that these there's multi there's I don't even know how to use these words. Many many trillions of dollars of people thinking they have insurance on something, an interest rate swap, a credit swap, or something. Um and and so they have that insurance. And here's what I know about insurance. It works great if two houses burn down, but if the entire town of Palisades, California, burns down, insurance is no longer a viable concept. Isn't this kind of what the Fed is is this part of your thinking of what the Fed's desperately trying to keep stitched together? Because what would happen if it unraveled? >> Oh, I suspect that that's entirely true. Now, look, I should point out that I'm not a derivatives expert either, and it's made even uh trickier by the fact that the uh images that you put up are a little bit blurry on my screen. So, I'm I'm uncharted waters, and I can't really see my map. But, no, of course, I mean, this is when, you know, Buffett talks about derivatives being, you know, financial weapons of mass destruction. Uh there's obviously huge amounts of leverage that's embedded into that system. And in general, you know, it should be somewhat it's somewhat like you said, not as scary as it at first seems, right? Because a lot of them are offsetting and things like that. However, uh very clearly you can get offside even just a little bit and wipe out huge amounts of capital uh very very very quickly. And again, you know, I think that um selling insurance in general uh is a form of being short volatility. you know that that in fact in that book they talk about how the insurance industry is a quintessential carry trade and it's actually kind of one of the few carry trades that we actually all kind of need right it's not such a bad thing you know insurance in general is mutualizes risk and things of that nature and to some degree it helps spur investments if you know that you can hedge some of these tail risks and go short that volatility um so it's not bad on its own but certainly when it gets to you talk about these multi-t trillion dollar numbers yeah it becomes uh the potential for systemic risk. Uh, and we've seen periods in the past where, you know, it seems as though that would begin to kick in and have big ramifications and we always seem to dodge the bullet. And will we dodge that bullet? Um, it's possible. You know, maybe it's likely. I don't know. Again, I'm not the derivatives expert, but I think it does speak to this hyper financialization of the world because, you know, we were able to operate the economy without many trillions of dollars of derivative notes uh changing hands every day for most of human history. You know, we don't need any of this stuff. It's just embedded now in the system. And if you do end up in a period, if that is a function of carry and you have to work some of that out, uh I think that there could be some speed bumps to say the least along the road for sure. Well, as we all know, like writing deeply out of the money puts and calls is like just ringing the cash register. As long as we're in this shortall, you know, environment where where things don't really happen, tail risks don't occur. But when the tail risks do occur, it can turn into a rather expensive mistake really quickly um for in that case. Uh so let me turn now to um okay, all of this here's the leadup. So what we've been discussing is that there's been this carry trade. It's had this volatility suppression regime very much enabled by the central banks and it's kind of grown and grown and grown and it's really large and now how do we unwind this thing and or can it be unwound? We don't know. Uh but this has happened before and so I want to turn now to how this sort of impacts your core thesis which is as the pendulum swings away from financialization it tends to find real things again which we'll call commodities um potentially. So you you have the case here where you say in this section from the quarterly report a familiar familiar easy for me to say turning gold leads oil follows in the early 2000s long before commodities became fashionable dinner table conversation a similar baton pass occurred. Gold led the resource market from 99 to 2003. Then abruptly and emphatically oil took over from 2004 through 2008. Crude became the market's leader and investors who increased their energy exposure were rewarded many multiples over and the conditions that produced that handoff were not widely understood at the time. This gets this is where all the rest of this is going to lead today. Few noticed the subtle but decisive slowing in nonopc production. Fewer still appreciated how concentrated the world's marginal supply had become. By the time the market caught on, oil prices were well into their ascent. And if you can't see this, this is from 99 to 2004 showing um gold stocks leading decisively over both equities and energy more narrowly. And then here's the chart that goes from 04 through08. And guess what? XLE is taking the lead. Huey didn't do that bad. Um but both are leading the S&P 500. >> Yeah. So I think that you know if you look back on some of these commodity bull markets uh they have shared similar traits and one of them has been this idea of gold leading energy in the middle gold at the end. Now because it's happened three times does it have to happen again? Absolutely not. But I do think that there's a little bit of an explanation as to why a framework. Yeah. And that's how we like to operate because we're we're deep contrarians and we try to be very different and contrarian. And so when you're out there alone, you know, you don't have any kind of models to use. I mean build models, but you don't have any kind of big macro models to use. And so you have to build something your own to understand where we are and what's happening. So if you think about it from this carry anti-arry trade, you keep going with a carry bubble until you can't anymore and a monetary regime change is imminent. Now, in that period, what you're doing is you're starving real assets, let's call it oil, for capital, and that brings on depletion because you're not bringing on enough new fields to offset the declines of the old. Where you see it manifest itself first though, where the foundation cracks first tends to be in gold and his function as a monetary asset. starting to figure out that the old monetary regime system in place, guns and butter in the 70s, the money printing of the late 20s when Benjamin Strong tried to debase the dollar, right? It puts pressure on gold different ways, different methods in different times, right? In in 1929 and in 1970, you had a gold standard of one shape or another. And so it was actually gold leaving the United States, right? Where particularly in ' 69, the French were looking to repatriate all their gold. And so the French were looking at what we were doing in the States and saying, "This isn't working." And they started to pull their gold out until the monetary regime happened. Change happened where Nixon, first Johnson, then Nixon said, "We're not going to exchange into gold anymore. We're done." Right? So gold is tends to be the canary in the coal mine that tells you that something's wrong with the monetary side of things. That was true in 99 as well. Again, central banks sold and sold and sold. We ran profitate spending and had the green span put through the late 1990s until finally the gold market couldn't take it anymore. And it was like, you know what? We're better off our next incremental dollar is better off in gold than in this whole dollar system that we've put in place. And so you you you got the turn and it it showed up first in gold. That's happening again now. That's exactly what's happening today. Then after a certain moment all the capital fundamentals starving oil for capital which has been taking place for 15 years begins to take hold. Right? So it's not that anything bad happens to gold. It's that all of a sudden the fundamentals that gold were telling you, oh my god, this carry trade's gone too far. We've neglected this other part of the market. Now that starts the fundamental side of it starts to take hold and all of a sudden you start to have these Malthusian scares of running out of stuff and again we saw that in the 70s we saw that certainly in the middle 2000s with the rise of China and it was really then peak oil the idea that we were running out of everything it became very Malthusian um and and I think that's the next step that we're going to hit today where right now no one's worried about anything as I said you're spending $600 billion on AI data centers and if you ask them where are you going to get the power from you know here's what's amazing to me okay this is a carry mentality to the extent that anyone first of all no one thought about the power at all now people are beginning to realize there's not enough power so what are they fixated on they're fixated on building power generation which can be financialized which can be securitized you're going to have a trunch you're going to have a bond on a preferred equity. It's going to be crossc collateralized, right? Brookfield's going to do it all for you. That's what they think the solution is. Ask them then where are you going to get the gas to feed the turbine? And nobody has an answer for you yet. So even when they now thinking in terms of power, I'll give everyone that. It's a little bit more grounded in physics than before. But you know, the turbines need to be spun by something and no one has given thought to that. Seriously, nobody like if you ask them, they'll say, "Well, uranium and nuclear power, but that's a 2030 story, right? We're bullish on uranium, but not because of the huge demand. I think the demand surge for uranium really happens next decade." Uh, in the meantime, it's going to have to come from gas. And nobody, but I mean nobody, uh, cares. Nobody's willing to buy upstream. People want to buy the LG export terminal or the pipeline, the financial assets in the in the stream, not the optionality assets, right? That's what's going to change. So then that begins to work itself into the system. Prices move up. That of course, like you said, breeds inflation. inflationary expectations work themselves into the system and and then eventually gold has this gasp at the end where it starts to now it's kind of like it comes full circle and the tail wags the dog a bit right where the beginning gold does well because it's telling you you underinvested then the impacts of the underinvestment take hold then gold does well because it says oh my god you underinvested and now prices are high and inflation's back and that was that was the quintessential framework of the 70s and I suspect that's where we are today. Uh so the question is when does gold seed its leadership to energy? And um I think we're closer to that moment than not. Whether gold goes down from here or just moves sideways is a super open question. Uh but I do think certainly within the next 3 years, you'll have been happier being an incremental dollar today will have been better served being invested in energy than in precious metals from these levels. It doesn't mean you sell all your gold. It doesn't mean you get out of the gold market. It does mean uh you either if you have extra dollars to spend, I would spend them in energy. If you have a fixed portfolio and you reallocated some from gold to energy, I would not think that would be a bad idea at all. >> Indeed. Um so so many things to to re react to off of that, but this is um gold to oil ratio as of this morning when I pulled it up, 77.8 barrels per ounce of gold. And if you can't see this, Adam, we have a chart here which is showing um that the normal ratio, there's a dotted line here. It's about somewhere between 10 and and 30 um would be one standard deviation. Um and on each side, we are now at 9.8 standard deviations off of off of a trend that goes back to the 70s. Um meaning that it just the gold buys a whole lot of oil. And that's a very unusual circumstance. And I want I just wanted to put that in context because this isn't just slightly unusual. This is unprecedented on a closing monthly basis how how how stretched this is. So we don't really have a I don't have a period of history to say, "Oh, here's how that resolved in 1978." You know, I don't have anything like that to work with right now. >> And it it never did. And you know, you you said that that's a ratio that goes back to 1970. I'll I'll split hairs a little bit. Both gold and oil existed before 1970. And I have taken that chart going back a lot farther than that. And it didn't happen uh then either, you know. And what's actually quite interesting is and this is true of a lot of charts with gold. I don't want to digress too much. I would always think that if you priced something in gold, which is essentially what you're doing there, that you would get and and gold was money for a long time and then stopped being money, that you would be able to see the moment on the chart where it stopped being money. It would be like a huge like dislocation. And in most of these charts, you simply don't, which to me tells me that gold really never stopped being money. Uh that that it sort of continued. We've become much more capable in our minds of projecting like even a kid can project 3% compound inflation over 30 years, right? When they're grandfather tells them that a can of Coke used to cost 10 cents, they intuitively get that that 10 cents wasn't the same as this, right? But but which is astonishing to me because that's fairly complex math. Uh but the idea that that in gold terms it's actually been relatively consistent moving in bands but consistent bands is remarkable. So, no, it's it's never been this. Since Colonel Drake drilled the first oil well, we've never had the gold to oil ratio where it is today. I think during CO on a daily basis, it obviously got worse than that. Uh, and on the monthly basis, I think I think we're basically tied or getting close to being tied with the CO. I'm not sure if we've broken that level yet. Uh, but you know, a very fast evolving situation, but it's awfully expensive. It's awfully expensive. And what does it tell you? Well, every time that the gold to oil ratio is exceeded, I think it's about 30. So, now you're at 80, uh, it's paid to buy oil. Uh, does does it pay to buy oil more the more that it exceeds 30? Yes. If you bought all oil and oil related securities in the summer of 2020, you did very well. We did that. We did very well. Um, and so I suspect that that it's telling you and it's been a big motivator for us that that uh you want to be going back uh into energy. you want to be certainly considering it. And you know, the gold to oil ratio, I think, is so important. It's so telling, but it might be abstract for some people in the sense that, okay, it's a ratio, whatever. To me, this really drives it home. Uh, today it costs just under 3/10 of 1 g of gold to buy a barrel of oil. 3/10en of one gram of gold is 16 uh 16 grains of rice. Okay. I don't know what that means. I don't know if that should mean something, but it seems like an awfully little amount of anything to buy a huge barrel of oil with I can't remember 42 or 48 gallons in it. But, you know, if you take the energy content of that oil, now people are going to split hairs with me and say, you know, it's not just all gasoline. There's gasoline, diesel, jet fuel, and all kinds of residuals and stuff, but whatever. Just take the whole energy content of that barrel and and convert it into gasoline, which I know you can't do. That gasoline could power your car in a family of four and take them 3,000 kilometers on 16 uh grains of gold, race grains of gold. Um, is that a lot or a little? That takes you an awfully long way. Normally, it should take you, you know, like you said, it should take you when gold, if you're at 10 times, you actually got down to nine times in the lows in 1990, gold's lows in 1990. It would take you 300 km. Now, it's taking you 3,000 km. That's a long way. Uh, you know, and and I think that we're going to see a massive the oil companies can't make money at these prices. We've underinvested in this for so long. The reason that oil's so cheap, we talked about why gold's expensive. The reason why oil is so cheap is because the IEA is out there telling us all that the sky is falling and that we have the worst glut that humanity's ever seen in the oil markets. We don't even have the worst glut in the last 5 years in the oil markets right now. Um, you know, it was much worse in CO. Inventories were swelling all over the place, uh, threatening to, you know, breach the tops and stuff like that. And it makes damn good sense because during CO we shut down a good percentage of the world's mobility and OPEC picked a market share war and increased production into that. So I mean that was a bad time. Today what's remarkable you take everyone's headline numbers and you say we have a terrible glut. Where's the oil? It's not turning up. It's not showing up in the inventory figures. We're absorbing it. OPEC brought on all of its spare capacity and it was basically absorbed. Maybe we're a little bit in surplus, but very, very minor. For the most part, we've absorbed all of this. And that leaves us with no buffer going into 2026. That leaves us with an industry that has been chronically underinvested in for 20 years, better part of 20 years now. And that's as cheap as it's ever been in any dollar terms with no prospect for, you know, profits for any of these companies. That's ironically, that's when you want to be doubling down. That's when you want to get in. And the same was true in 2020 and it made for wonderful investments. >> Markets are facing heightened uncertainty and thoughtful portfolio management has never been more important. If your current strategy relies solely on passive investing or diversification without active oversight, it may be time to consider a different approach. At Peak Financial Investing, we connect you with experienced wealth managers who actively manage portfolios using disciplined, research-driven strategies designed to adapt to evolving market conditions. Our focus is on helping clients navigate volatility with clarity and confidence. While no investment strategy can guarantee results or eliminate risk, we believe that preparation and active management can make a meaningful difference over time. Visit peakfinaniallinvesting.com to schedule a complimentary consultation and explore whether our approach aligns with your goals. I'm Dr. Chris Martinson and I am proud to support Peak Financial Investing. This is not a guarantee of future performance, but a call to take your financial planning seriously. Again, that's peak financial.com. Investing, of course, involves risk, including the potential loss of principle. Past performance is not indicative of future results. Please consult with a qualified adviser before making investment decisions. I'm I'm a contrarian investor, always have been. And and by the way, the excitement gold and silver has my contrarian um nerves jangling at the moment. Um I I like being in things everybody hates uh for reasons. It's always worked out for me, but I have to be patient. Um and I've I've been very patient. But you mentioned the data centers in the LG. if I could. So, this is from the short-term energy outlook in January, just came out, you know, and the EIA is basically saying as they look forward into 2026, 2027, if you can barely see it, they're saying production is just barely rising, you know, and uh we know we have billions of cubic feet per day of demand for all these LG terminals that are coming online, plus an unknowable amount for all the data centers that are going to slap in their own power production, All right. So, we have that. Let me back up a bit because you had it in your report, which was this um which is looking at dry gas production from 2023 through 2025, that's December to August. And noting that the Marcelus, well, that's that's negative actually. They're down. Hannesville down, Udica down a little bit, just down Eagleford Bach. In fact, all of these are negative except for um rest of shalees at48 and the perian managed to hold the whole thing. We're down to one play. We're I mean that's it like the whole story. But even that I identified without breaking a sweat 12 to 15 extra BCF of demand that's coming online in the next couple years. Where is that going to come from? >> No, I think I think that's precisely it. Look, I don't blame anyone for being ambivalent or maybe I blame them for being bearish, but ambivalent fine on gas because it's been a market in over supply for an awfully long time. And I get that. You know, we've been going down what we've been saying is this nice edge for a long time where demand has been very strong. We shut down all the coal, we built all this petrochemical, now we're doing LG then data centers. So, we've been trying to take advantage of it, but supply has always been there to meet it. In fact, we've had more supply than we've needed even with all those big changes. And because of that, US gas is always dislocated from world prices. And so, I don't blame anyone, I suppose, for not seeing the turn coming, right? But, but that's the myopic view that people have is that it's going to continue on as the same. And I understand why they feel that way because it has for an awfully long time. But to your point, what I do disagree with and I find it sort of silly are these views like one is put forward by Doomberg that we sort of have this limitless amount of gas because conventional gas in the US rolled really badly. You know, it was a crisis twice in the United States. The first time was in the 1970s when um when um uh the president got when Carter got on the TV and told everyone to put on their sweater and turn down the thermostat cuz we didn't have enough gas and they wanted to prioritize hospitals and schools. You know, that's sort of the equivalent of Trump and Bessant telling girls to not buy Barbie dolls for Christmas, right? They would get one instead of three. I mean, that's not how America was supposed to work. We were supposed to have heat and we're supposed to have Barbie dolls, damn it, if we want them. Um and and so you know we ran out of gas. We were running out then. Then we found other sources, right? And so then we had another wave of gas production and then we were running out of conventional gas again in the early 2000s to the extent that we built all this billions of dollars worth of LG import uh infrastructure with the idea that we were going to import gas to make up our shortfalls. Then we found the shales. So gas rolls over certainly does. Shale gas rolls over like you saw in that chart. every field is rolled over except for one. So I don't really understand this idea of kind of we have unlimited gas. It's easy to feel like you have unlimited anything when it's growing I think is the thing. But it was only 2 or 3 years ago that people argued we had unlimited shale oil reserves and we said no I think 2025 will be the year it rolls over and it was again exactly the same play actually. It was like you got fewer and fewer fields. One fell off, one fell off, one fell off until you had the perian, then the perian kind of struggled and then it rolled over and it's rolled over now for the last 15 months on oil. And the same thing is going to happen on gas. Notably, I think we understand very well why perian gas is continuing to grow. And it has to do with the idea that the perian out of the same well will produce both oil and gas. And as that well gets older, it will become gassier. So now that the perian as a field has rolled over on oil and now that the field is getting older, the wells are getting gassier. So the whole thing's falling off, but one segment of it is is the it's a growing share of a shrinking pie. All right? And because of that, you can actually have absolute growth for a little while. And that's what you're seeing now. But we we actually built some models, pretty simple, rudimentary models to try to explain what's happening. and it picked it up really really well and it predicts that we should get growth out of that perian for maybe another year maybe a year and a half not much growth by the way less than we've been accustomed to before it too rolls over and then like to your point you know where are you going to meet all this new demand from both data centers and that's what actually gets a little bit scary is that you're going to have a three-way tugofwar I don't know what that's called if that exists but a three-way tugofwar where you're going to have the US consumer consumer, you're going to have the hyperscaler data centers and the export market, mainly Europe. And that's going to be tough because right now, not this week, where gas prices have actually natural gas prices have moved up a lot because of the cold weather, but in general, the US enjoys a discount of about 70% on its natural gas price compared to the world's price. And we don't realize that. And that's what scares me a little bit. We don't realize that. So on an energy equivalent basis, BTUs, we consume nearly as much natural gas as we do crude oil. We're very sensitive as a population to the price at the pump. Very, very sensitive. When Trump thinks about his midterm elections, he's worried about the price of the pump for the consumer. We don't quite see the gas burden. Go to Europe and they see the gas burden. They all know what the price of natural gas is doing. None of us have any idea. None of us have any idea that on half of our BTU consumption, we are getting normally a 70% subsidy compared to the rest of the world >> because we produce it domestically and that could >> huge huge number. And of course, we we just heard um Europe very excitedly signed a thing that's going to forbid them from taking Russian gas. So they've committed themselves to to us and I our sources because I think the US is one of the larger LG suppliers to Europe and and I I just wish that Europe would look at our production figures and before they made a multi-deade commitment to a a course of action. They they might have to rethink that. Um but in this short-term energy outlook from January, it's they just continue the trend, right, which is oh 2026 there's going to be a little less coming out of the ground. 2027 a little less than that. Um, that's the shale oil roll over. That's uh a new peak in oil production. If they continued that uh series out, Adam, to 2050, those arrows just go down and down and down. Do do you um agree with that? And do you think are are they are they are they on target or bullish or bearish? What do you think? >> I I I sort of commend them. Maybe that's too strong. You know, they a year ago they thought that this was going to grow and grow and grow and grow, you know. So the fact that it's rolling over, I think realistically is the most important distinction. Are you going to grow versus are you going to shrink? Those are wildly different. It might be the difference between 100,000 barrels on paper, but it's a hugely different calculus. Hugely different because uh when you start to shrink, you need to make up those barrels elsewhere. And it's unclear where you make them up from. So, as far as the numbers go, uh, you know, it's tricky to say because one thing that I will give the oil industry credit for, and this is actually something we've discussed a lot when if you take the models for how production should ramp up, peak, plateau, and roll over. Okay, you have often seen a deviation in the in the decline phase where it hasn't been as bad as the models might suggest. And that really reflects engineers and human ingenuity going in and throwing a ton of remediation on these wells. Okay? And we do water floods and CO2 floods. It's not clear that's going to work in the shells, but there there's always been lots of things that people get after to try to arrest that decline. But what is crucial is that no amount of remediation has ever resulted in a new peak. You've never been able to get growth again. So all it does is it arrests the declines. So, I'm much better at predicting the top and the rollover than I I admit my my shortcomings at at seeing exactly how this is going to decline and saying whether that number is conservative or not for 2026 and 2027 cuz that's a short period of time. I think that if you look out 10 years and you look at how every other shale basin has reacted, they'll be down 40 to 50%. from from their peak. >> What that looks like this year, I don't know for sure. >> Well, interestingly, you know, you noted in your report that and this is a chart that I saw in the subsequent one too, prior one. Uh, Perian shale oil year-on-year growth, it's rolled over. That's the big news. But every all the rest of the basins, um, other shale, all the shale basins. So, so we're not going to get that growth out of that. And and what I found was really big news was Harold Ham. I mean, he's drilled. He's one of the earliest pioneers. 30 years they've they've just been drilling like crazy in North Dakota. And this is going to be the first time in 30 years where he's just pulling his capital and says, "Ah, no need to drill it when margins are basically gone." Um, and oil is still roughly at that same he was it was 58 a barrel at that time. It's what 61 today or something. Anyway, probably not enough to get Harold to get off his seat and go out and get wild drilling. But as Harold goes, probably other operators go too. What are your thoughts there? >> Oh, I think absolutely. Look, I think that's the price where the industry stops making sense. What I think is interesting is um you know it's a it's a it's a difference in in psychology also between depletion and abundance because if you had huge drilling reserves and huge amounts of forward potential to grow and you would look at that and you might say to yourself look as long as I can generate any profit I mean first of all profit's profit right might as well drill it it's a big fixed cost business you bought the land already you know it's variable cost for the crew cruise to come in and and drill it. So, as long as I can make economic profit there, why not? Uh but you wouldn't do that if you felt that you had a finite amount of drilling locations left, right? If you felt that you were sort of running out of tier one acres to drill and you had a couple of them left, you're like, "Well, what am I going to do this for no profit? I'm going to save it." The other reason you might continue to drill if you had lots of abundant locations is that you don't want to start losing crews and stuff like that, right? For when the market does come back. So, we've seen that a lot and we've seen oil at 55 before and Harold Ham is thrilled and he doesn't want to do it this time. And the reason I think he doesn't want to do it is that a I think the quality of his wells are lower than they were before, but b I think it's also that you just don't have that many of them left. So then it becomes a question of well why would I want to produce this and sell it and generate nothing for it? I'll just sit on it and and drill it some point in the future. >> Yeah. And and of course obviously inflation's under that. Steel costs more. I've heard the insurance costs have gone through the roof on these things. So their their other input costs are are much higher. So I don't think 55 today is 55 of your um so how do you how do you play this at at G&R? What what how do you you look at all this or where where are you where are you putting the the chips on the table? >> Well, it's getting a little trickier on the oil side because there are so few good drilling locations left. So we start by owning the shale companies that we think do have some good locations left, which is not many but not none. Um, you can look at our holdings. They haven't changed too too much. Um, we have decided to add to some oil sands names up in Canada. Those are really longived assets. All the capital has been put paid into them. They're going to last for 60, 70 years. They have very good optionality to rising oil prices because of their longived asset base. Um, and then we really like the offshore drilling space. So, we really like some of these companies that own drill ships um that that are going to benefit from a move back from US light tide oil, which is where Energy Capex has been concentrated back towards uh longer lead time global offshore projects. And those companies trade at 10 cents on the dollar of their replacement costs. So, those are just really mispriced assets. Um, you know, frankly, obviously we're playing it to get exposure to oil, but you could just play that as a special situations if you wanted because, you know, they're they're just extremely depressed. And what's nice about them is that they've always moved in these big cycles. You're very clearly, if not at the bottom, towards the bottom of a cycle. You're not at the top, I'll tell you that much. And I think you're at the bottom. Uh, but you know what's what's interesting is that normally at the bottom of a cycle, you run the risk that they're going to get into balance sheet trouble because it's kind of like real estate. It relies a lot on on lending. You know, you go to the bank and they give you the money to go build a ship and then you sign a long-term contract against the debt and you let it delever over time and then you play for a carry trade uh for for an option cycle. But maybe it is a bit of a carry trade, you know, when I think about it. You go to the bank, you buy the boat, you put a contract against it. Um now they've wiped out all the debt because they all went bankrupt during CO. So what's nice is that at the bottom of a cycle, they actually have uh cash flow margins and they actually, you know, are not in bad distress shape. So I think again like a carry trade, the left side of that tail risk is kind of been clipped off because the way these guys get into trouble normally is um is by going bankrupt. And you still get the right side of the tail if you get the cycle right. You'll still get that really strong return, but the risk is much lower than it's been in the past. So, I I I I want to thank you too for um uh because you put out a really great piece where you pointed my attention to this. I I hadn't really dug into this. It's a big long meaty report from the IEA, the implications of oil and gas field decline rates, but it was rather astonishing because they said here and right in the beginning, first they did a bottom-up analysis. They said detailed analysis of the production records of 15,000 oil and gas fields. That's awesome. from around the world world reveals that the global average annual observed post peak decline rate is 5.6% for conventional oil 6.8 for conventional natural gas and of course those go up even higher for unconventionals. Um that that's astonishing. And then they put this little chart in there and they said oh yeah by the way here's how much oil and gas we've been discovering by decade and it's by the way it includes oil and gas and that red dotted line is our our billions of barrels of of yearly consumption. We're not replacing it. I mean, I just look at this, Adam, and I can't think of anything other than, wow, we have decades of catch-up to play here, if we even can. Um, and you know, the way they put all this together was they said, well, let me see if I put it in here. Um, they said we're going to have to spend a lot of money on this. Yeah. They they sectioned out how much oil and gas are going to come out of the ground by billions of investment. And two things to note. If we don't put any money in, it's just like we're out of out of the game. The next 200 billion buys you a pretty good red wedge. The next 200 billion buys you a decent but smaller wedge. The next hundred billion buys you like like it's just um by the time you're up to 500 billion, we're getting less and less and less back from this whole thing. So it just says to even just sort of maintain flat is going to require $400 billion for oil and that's if we're lucky. And that's I believe this is um this is annual expenditures. I mean it is just massive. >> It is annual. >> So >> no it it it it's absolutely massive. I think it might have been the most important piece that the IIA's put out in a number of years. It runs very counter to a lot of their what they call the flagship report which is the oil market report. That's the one that everyone reads and moves markets persistently and categorically bearish all the time. This one is was decidedly bullish in my reading of it. And um I don't know I don't know if you know I I actually went to go meet the IEA about a year ago in their offices in Paris and I was really taken with how professional and how strong their analysis core is and you know to the point that by the end of the meeting I think I kind of said to them like how is it that you know I really respect you guys and we just and they seem to be enjoying my presentation and I said we just come at like 180° I'm always bullish you're always bearish and they kind of chuckled um and didn't really give me a good answer. Certainly not an answer that I feel like I can repeat. Uh but you know, I sort of wonder if on some level that working group kind of gets superseded by the you know, editorial boards at the top and stuff like that um that that that want to have a certain message. And so this not being the flagship report, maybe they had a little bit more liberty. I don't know. But it was decidedly more bullish than uh than anything else that they had put out. Um the other thing that that report misses is that it assumes two things. So first it assumes uh how much spending you need to hold oil supply flat. However, they also released a report that said they no longer expect demand to fall. They expect demand to grow. So now you don't have to holding oil supply flat is not the game anymore. It's growing at 10 million barrels between now and you know 20 what is it then 2035 I think it's basically 700,000 a day for the next 15 years. Um and when you do that to your point it costs more to get each incremental little wedge there. So how much do you have to spend to do that? The next thing that you really have to dig deep and I wouldn't advise any of your listeners to do that. I spent most of December reading through that report several times uh is that it has a huge huge contribution from shale from here >> and I don't think that's going to come. So you put those two things together and I estimate that they say basically you need 500 billion or so to kind of hold production flat and they say that's what we're spending now so we should expect to hold production flat. That says nothing about growing demand and that says nothing about replacing the shale. You put those two together, I suspect you could easily be looking at needing a trillion dollars a year instead of 500 billion. And that's, you know, that has to come with how do you attract an extra $500 billion a year of investor dollars into the space when it's 1 point or 2.4% of the S&P and everyone hates it and even the biggest bulls. I just got back from a conference. Maybe we can end it there, but I got back from a conference. I spoke with a you know very esteemed colleague of mine very bullish and you know he's thrown in the towel as well and gotten a bit bearish and so you know I think I think that the bearishness is pervasive pervasive in the space and and I think when I look at the fundamentals and I consider that at this point um most of OPEC's spare capacity is now in the market there's not a lever to pull there can something happen of course something can happen you can oil trade down of Of course, it could trade down, but in general, when we look back in a few years, I think we'll realize that we're awfully close to the bottom, if not already past it. >> I agree. And it's most likely spark to get this next inflationary bonfire going. Um, so we can rhyme with the 70s. Uh, I think it's it's that the fact that it's just so completely overlooked, but it's all sitting there. The data is what it is. Um, and we're not ready for it in any way, shape, or form. Certainly not from a narrative standpoint. So, Adam, thank you so much for your time today. And of course, um your your funds, please let people know what they are so they can take a look at them. >> I'll do my compliance and legal team a favor and I'll just say go to our website. We have all of our information. We're Garing and Rosenwag. We do uh have investment products uh available in the United States and abroad usage fund and things like that. So, um just go take a look. We're easy to find. Um and um and please have a look. All of our letters, all of our podcasts are all on there and you can find information about how to invest as well. >> Fantastic. Well, thank you for that. Thank you for your time today. Uh we'll do it again in a quarter, I guess, but um really fantastic report. Thank you so much for putting it out there and again your time today. >> Thank you. Wonderful chatting with you as always.