Odd Lots - Goldman's Jeff Currie on the Silver Squeeze and the Coming Boom in Commodities

Episode Date: February 4, 2021

It's been a weird several days in the market. What started with a short squeeze in GameStop, driven by Reddit traders, somehow morphed into a huge surge in demand for silver. Whether it started on WallStreetBets is unclear, but something happened that caused demand for the metal to surge. So we talked about this with Jeff Currie, the global head of Commodities Research at Goldman Sachs. We also discussed why he sees a huge bull market coming in commodities. And why Biden's policies of green stimulus and redistributive economic policy may push the price of oil even higher.See omnystudio.com/listener for privacy information.

Thanks for listening to Odd Lots. Follow the show on Amazon Music for more future episodes or just ask, Alexa, play the Odd Lots podcast on Amazon Music. Hello and welcome to another episode of the Odd Lots podcast. I'm Joe Wisenthal. And I'm Tracy Allaway. Tracy, so obviously markets have been really fun and wild and crazy lately. You know, I think that when we started talking about some of the stuff with GameStop and everything and illiquis. small stocks being pushed on message boards.

We didn't expect it to move to a major commodity market. No. And I have to say, I'm reminded of the post you wrote a week or two ago

about how it can always get crazier. And I think what we're seeing right now is proof that it can indeed always get crazier. But what started

with a relatively small single stock, GameStop, migrated to a of other stocks like AMC and Nokia. And then it seemed to go to the silver market. And I think silver futures jumped quite a bit, although as we're recording this, let's see, it is February 2nd and they are starting to come back down a bit. But the notion that retail money would go after a market as large as silver is pretty intense. Like that is a big market, certainly multiples of

GameStop. It should be noted that there is some ambiguity about where this silver trade emanated from, there are people on the subreddit Wall Street bets to say, hey, this isn't us. We never said anything about silver. That's not clear. What is clear is that something happened. And in a span of just a few days, starting at the end of the last week, maybe Thursday, Friday, and through the weekend, basically every retail silver coin site was just instantly out of inventory.

some of them saying that they got as many sales in two days as they would expect to get for an entire month. So something happened that just sent silver demand both through physical demand and also plays on the ETF and then into the futures market, absolutely wild. Yeah, this is why I find some of the Reddit or Wall Street bets pushback on this really weird. They're all saying that it's hedge funds buying silver and its bots trying to push the prices. of silver up on the subreddit. But the fact that all the coin stores are sold out of American Eagles kind of makes me think that there is a retail component here. And I'm sure, you know, Ken Griffin isn't going down to his local coin store to load up

on Philharmonic coins or something like that. Now, Tracy, we're going to get to our guests in a second. But have you posted a video yet of you stacking silver? You promised you were going to do that. I did. but then I got really sidetracked and I'm tired by the podcast recording schedule. I will do it. I will try this week.

I promise. Again. Maybe you could time the release of the video for this episode. So unfortunately, we're not interviewing your dad because we've been talking about that forever. We know your dad is a big silver bug, but we're not getting him. But I'm extremely excited about our guests. In fact, we booked him before all the Silver Mania happened because there is actually so much more to talk about in the broader world of commodities.

And it was originally, we're going to talk about all that. So there's so much going in commodities, silver, oil, the broader macro picture, industrial commodities, copper, et cetera, all wild stuff this year. So we have the perfect guest for it. We're going to be speaking with Jeff Curry. He is the global head of commodities research at Goldman Sachs, a role he's occupied since 2006, longtime veteran at Goldman Sachs, been there for 25 years, and really just, sort of knows more about the commodities world than almost anyone you'll speak to. So the perfect

guest today. So Jeff Curry, thank you so much for joining us. Great. Thanks for having me. Jeff, I don't want to get you in trouble or have you say anything bad about people who buy commodities. But honestly, what is the deal with people who buy silver? Because I will say that in my career following markets for the last 10 or so years, there's something about silver people. They're just like wired a little bit differently. Silver people. I'll just leave it at that. Silver bug, silver people. What is the deal with silver, and why does stuff like this happen? Well, you know, the piece we put out this morning was silver remains the populist medal. And you go back in history for, you know, hundreds of years,

silver has always been associated with populist movements. And so the market today is focused on the Hunt Brothers' cornering of the silver market as the historical analog. We think the appropriate historical analog is actually William Jennings, Brian's cross of gold speech where essentially he argues that the government and the banks were suppressing inflation and economic potential, which is similar to the rhetoric that the Wall Street veteran, Reddit group was advocating. And the key here is that, you know, take somebody like Brian, he was advocating silver cornage as a way of getting around this.

And so it has that historical populist element to it. And I think that's really what it's at play here. And the way we view the Wall Street Betts group is this is just a continuation of the rise of populism or it's just, you know, a crescendo occurring, you know, week after week that's representing, I think, this need for governments to address some of these issues around income inequality and other social needs. So we alluded to this in the intro, but trying to force a squeeze in a commodity market is very, very different to trying to force a squeeze in a single stock with a high short interest.

How effective do you think retail could be, and again, we should just repeat the Wall Street Betts is refuting the idea that they're behind all of this. But how effective do you think retail could be in moving the price of silver? At this point, again, going back to the Hunt Brothers, there was significant regulatory changes in these markets, in particular position limits, that makes it almost nearly impossible to be able to squeeze these markets on the same scale that we saw 41 years ago. And also in terms of thinking about the magnitude, the size of these macro markets versus, let's say, GameStop. You know, the size of the silver market in terms of what's being produced and all out there

is, you know, somewhere around $300 billion dollars. You know, that's 300 times the size of the original market cap of GameStop. And so when we, and by the way, that's a, in our world, silver is one of the smallest markets we deal with. You put something like gold, you know, in terms of you include everything in the central banks. It's just like a $7 trillion market. But I think the key point here is that if you take the, what, 5 million Wall Street bet subscribers,

they would imply that each one of them would have to own somewhere around 4,200 ounces of silver to be able to replicate what the Hunt brothers did. Then the ability for them to do it, given position limits, means that you would have to split the position 53 ways with each position representing $217 million. and they would all need to be coordinated. So in other words, it's nearly impossible to do in the current environment. And that's one of the smaller commodities.

I think Wall Street Betts is now 7 or 8 million subscribers. So the number keeps going up. But point taken about the amount of firepower that would be needed, yeah. It still seems very unlikely that they're going to do what would be needed to really corner this market. Jeff, you know, there's this persistent myth. Or this thing that people say, and I don't really understand it, but I guess it gets back to some of the William Jennings Bryan populism. There's this persistent myth out there that the Wall Street banks,

and in particular JP Morgan, for some reason, and I've never understood why what the story is, they're like, oh, they're sitting on this huge naked short position. And if we just jack up the price of silver enough, they're going to have to cover, and then that's the way we're going to take down the bankers and get them back and all that stuff. Do you know, like, what the, what, can you walk us through the origin of this notion that for some reason banks, like, where did they get this idea that banks are sitting on these huge unhaged, short silver positions? If you look at the CFTC positioning reports, what you see is that the swap dealers, the banks are, have very large short positions in precious metals. Now, the thing that's forgotten is that these are typically hedges to the physical positions in, like, the ETFs.

And that's the one thing that makes commodity markets very different from financial markets or the long-only markets is that there's zero-sum, meaning that for every long-law is a short. And I think people forget that. And also, you know, it goes to a broader point about the ability for speculators to impact these markets. When you have a speculator come in and buy the share of a company, the only way you create more supply of those shares is through the SEC approval and then you issue new shares. So if the speculator buys those shares, they can drive up the price. Now, when you think about a commodity market like, let's say, you know, oil or something like that where you have the, you know, every long there is a short, you're adding more longs means you're adding the short. Now, what separates silver and gold from all the other commodity markets is that ETF is physically backed. And so to answer your question, what they're observed is the fact that the likes of the entities that are supporting those ETFs are using the Komek silver market as a hedging mechanism.

And hence, that's why you see the shorts in that market. I actually, I just want to quickly go to a point about the physical aspect of those ETFs, gold and silver. please, is if you take the current size of the gold ETF, you know, it's somewhere around $150 billion of gold, you could put the $150 billion into your office. It may break the floor. It's so heavy, it falls through, but the key point is that you don't need a lot of space to store it. Now, in contrast, if you take the oil ETF, which is all paper, not physical, and you look at the total amount in there, it's something like 180 million barrels. By the way, don't quote me on these numbers. I may, they're changing quickly. But the point I want to illustrate here is that if you take 180 million barrels, one BLCC carries 2 million barrels.

So think about this. 180 million barrels is 90 BLCCs. Now, I want you to envision in your head parking 90 VLCCs in the East River in New York or the Tames here in London, it becomes incredibly difficult. Now, in contrast, you take that 180 million barrels at $50 a barrel. That's $9 billion parked out on the Tames River. And if you can think about the gold ETF, I've just stored $150 billion in my office. I'm going to, again, you need a concrete floor to be able to store it. But the key message here is you can do it.

You can't do it in oil, hence why you have physical ETFs in both gold and silver. Yeah. Don't take physical delivery of oil, something I learned. Tracy knows all about that. From first-hand experience. So what's your take on why the price of silver actually moved this week? If we're saying that retail probably doesn't have enough firepower to do it by themselves, what's going on here? Well, I mean, in terms of looking at near-term volatility, absolutely.

they can create volatility by moving, you know, in and out of the market and creating velocity and changes in open interest, which they are doing, because, you know, we're down again today, similar to this we were up. But in terms of thinking about a long-term structural shift, you need to have physical demand for those coins and real physical silver. Yeah, it's increased somewhat, but is it going to create a squeeze or anything of that, Megan, two, the answer is no. And so I don't want to dismiss the inability to move markets, because clearly they did yesterday, silver was up 8%. But the question is, are they going to stay in this market and maintain those positions? That becomes a much more difficult task is the one thing about

commodities that separates them from, again, from financial markets is not only are they long short, but also there's an expiration that they mean the financial market expires into the physical, which means at some point they have to roll these positions back out onto the financial market to avoid taking delivery, like our example with oil. And because of that need to roll, they prefer, you know, these financial instruments like the ETF, which is where most of the retail activity remains. On April 4, 2023, around 2 in the morning, a man was found stabbed multiple times on a sidewalk in downtown San Francisco. Hey, who did this to you?

What happened next turned the story into a political firestorm. Reports have identified the victim as Bob Lee, the founder of Cash App. From Bloomberg Podcasts, this is Foundering, the Killing of Bob Lee, beginning April 16. So regardless of where the idea to go crazy to buy silver originated, it did happen. Obviously, we saw the buying in the SLV ETF. I mentioned that the coin dealers, all had to put up signs saying we can't sell coins right now because we're out of inventory. As an analyst now, now that you've seen this happen in the silver market, how do you think

about it going forward? Because maybe, okay, this is going to die down and maybe silver in a week or two weeks, we'll be back to where it was. But now that this can happen and we're aware that this sort of like flash mob buying can happen in a physical commodity, how does that make you think about sort of like volatility in the space going forward, the risk of it happening again, and sort of changing the ability for the market to get at least short term disrupted so quickly, so fast? Across all these markets, the volatility has started to rise substantially. And this represents a significant departure from, you know, let's say two to three years ago. And I think it has to do with the fact that you have these markets running at much lower inventory levels.

which goes into this more structural story. I think as you're aware, we're advocating, we're entering a new super cycle. And the evidence that we're in this transition between a tactical bull market and a structural bull market is that every single one of these markets, with the exception of zinc and cocoa, is in a deficit right now.

That's a very rare dynamic, which means that when you have volatility of positions going in and out of a market that has tight physical fundamentals, it's going to manifest itself in greater volatility. We like to say that the biggest shortage facing silver today is the ability to get the physical to the exchanges, whether if it's the LME or the Comex, and that's the type of volatility that's being generated, because if you have more than adequate inventory everywhere, getting it to the exchange is pretty easy.

When you're short, it becomes much more difficult and creates much more volatility. On that note, walk us through your structural bull thesis, because I think for a lot of people, many people are going to still be thinking about 2020 and we have this big hit to economic growth. We saw oil prices of collapse. And a lot of people are thinking also that we're getting this green energy revolution, which might be bad for oil. So the notion that we're entering a long-term up cycle in commodities might be counterintuitive to some. What's your line of thinking here? Well, when we think about oil itself, it actually

benefits from the green stimulus in the very near term long before the energy transition begins to hurt its demand in, let's say, 20, 30 to 20. And so when we put oil into the mix, we're talking about over the next, let's say, you know, three to five years. We would see that that tipping point is somewhere around 2024. But let's talk about what we think is creating the structural bull market. And we like to emphasize that while the vaccine represents tactical upside, the pandemic itself creates the structural catalyst for a super cycle type of bull market. And we would use an analogy more like the 70s than the 2000s, but it is we expect to see a bull market along those lines. of either like the 1970s or 2000s.

And there's three themes that we're focused on. One is structural underinvestment and supply. And historically, we've termed that the revenge of the old economy, meaning that the new economy has sucked capital away from the old economy because they have much better returns, starve the old economy of the ability to grow out the production capacity that then creates a problem once we see a recovery in demand, as we're witnessing today.

and why nearly every single one of these markets is in a deficit. And then we overlay ESG concerns on top of that. You know, you see a very tight supply picture going forward, particularly in oil. Second big theme that we're focused on is policy-driven demand. And we like to call that revving commodity demand, R-E-V. And what does the R-E-V stand for? Redistribusional policies, environmental policies, as well as versatility and supply chains. And you can think about comparing this to the 70s, redistribusional policies are like the war on poverty in the late 60s and 70s. The environmental policies, again, like the 70s, are like the war on acid rain, where he took all the sulfur out of the fuels. And then the versatility and supply chains would be like the Cold War with the

Soviets, this time we have a Cold War with the Chinese. And by the way, that Cold War type dynamic is really at play today. The Chinese are buying grains at a very torrid pace right now. And one of the key reasons they want to create security and supply, just like the Americans and Europeans did back in the late 60s and 70s against the Cold War with the Soviets, build up these strategic stockpiles of these critical commodities. So again, that's why we kind of liken the current environment more being more like the 70s. This is fascinating. I mean, talk to us a little bit more about the underinvestment we've seen in commodities. I mean, in the post-grade financial crisis era, I think, like in the immediate way, 29, 2010, we saw this pretty big oil spike and jump in other

commodities. But basically, it was just all downhill in a lot of industrial commodities, in particular for the last decade. Talk to us about what that did. That, that long, decade-long, bare market in commodities did to investment, how much underinvestment created, and really what we're talking about when we talk about various industrial commodities being in deficit? Yeah, I think the bottom line is that the companies in these industries had very poor returns. And those poor returns, you know, basically were, you know, reached a peak or, you know, they capitulated when we reached negative oil prices in April of last year.

And so when we look at the willingness of investors to come into this space, it's going to take a significant track record before they show any interest. And the reason why we termed it, the revenge of the old economy goes back to the dot-com boom in the late 90s and early 2000s, a period in which the tech sector was a attracting all the capital because of, you know, the much better prospects and outlook. And essentially what occurred over that time period is investors abandoned the space. That's when you created the Exxon mobiles, the BPs, the shells, because they had to reduce costs to survive in an environment with very poor returns. I don't know if they come back this time because you have the ESG overlay.

Because you have to ask yourself, even if we went to a $100 barrel hole, are you interested investing in oil when you know it's only a two, three year, maybe five-year proposition at best. I want to go back to that, the notion that there's a sort of arms race in commodities and securing things like food and oil. One thing I've never quite understood is I understand why you would want to build a stockpile of something like grains in the short term. But I'm trying to think how to phrase this. This is kind of a stupid question. But how long would that stockpile actually lasts. Like if you're buying a boatload of grains because you're worried about food security way out in the future, like how useful is that to you? What exactly is the strategy

here? Is it about actually accumulating physical commodities in case you run out? Or is it about building relationships and securing supply lines with suppliers and countries and partners for the future? answer that question, you just go back to biblical times and you ask, where does that seven-year number come from that you hear over and over? But when we think about the strategic reserves in oil, the U.S. has, you know, 600, 700 million barrels of oil that was built up during those 1970s, the oil lasts a lot longer and they recycle it in and out and they make sure that it is, you know, up to par in terms of being able to create products. But I think, you know, going to your broader question

here is that when you look at China, there's a lot of different motivations here. And we talk about versatility and supply chains. You know, we're thinking about duplicate 5G networks, responding to the trade war with, you know, manufacturing supply lines. You've heard Biden talk about made in America. That's part of this dynamic that we're talking about. It means, you know, if Biden wants to go out and promote EVs that are made in America in using unionized labor, it means you need to build. different supply chains in America, and that's going to take time and require more commodities. So that's what we mean by this versatility in supply chains is this need to create your own secure domestic supply chains to deal with, you know, host a different issue, whether if it were

concerns around COVID, you know, people realize supply chains are vulnerable, concerns around climate change, you know, do you have enough firefighting capabilities in places like California? So I think you get the point here is it's a more of a broad, type of comment here than it is specific like it was like it was in the 1970s. But it's kind of that same dynamic. And when you look at cap X, you look at global cap X cycles, since the 1950s, we've seen two big cap X cycles, one that started in the late 60s and ended somewhere around 79, 80, and then another one that started around 2001 and ended around 2011. And both of those corresponded to big bull markets and commodities because commodities ultimately are reflection

of a cap-x cycle. So I love this idea that, you know, the Biden administration could be great for oil because obviously it's counterintuitive, but the way you describe it is fairly, it does make a lot of sense. And it's interesting. I mean, you have to sort of figure the Trump administration was pretty oil-friendly with its policies, but that was a brutal for years. for oil stocks, the companies, the whole industry.

How much of an effect does this have, like, you know, say, okay, like the Biden administration is going to have a less generous approach to new permitting, drilling, and so forth? What does that mean for sort of the domestic industry and then therefore the upward pressure that that puts on prices? Well, you know, first of all, the one thing about the policy here is that it wants, to use a carrot more than a stick. You know, you look at Europe and now the blueprint in China, it looks more than using a stick. Get rid of the dirty technologies and replace them with the following defined technologies. At least administration here is using more of a carrot and incentive approach. Now, when we think about, you know, raising the cost of oil, the way I like to think about it is on the federal lands, which represent nearly three million barrels per day of production,

they can actually create an implied wellhead carbon tax there that raise the marginal cost of producing a barrel of oil. And because that shale barrel and these barrels in the U.S. are the marginal barrel that sets the price to the rest of the world, it effectively creates a carbon tax that is imposed on the rest of the world. So if you think about it in that context, and he has a unilateral capability to do it. Take away drilling credits, tax credits, raise royalty rates, and so forth of that nature. So it is a way to get at this, which then in turn incentivizes investment in other types of clean energy. Let's say, like, he's proposing, you know, doubling wind capacity offshore. He can do that through, you know, unilateral credits on the tax side as

well as, you know, improving lending standards for that type of investment. So, you know, so I do think that the one thing that's different about this approach is it's focusing on the carrot as opposed to the stick. Because one of the problems historically with the U.S. is if you use the stick, you go and don't make these investments in these technologies, it gets tied up in the courts. And if it's tied up in the courts, you know, you can see Obama's clean air policies still tied up in the courts today. I would feel very remiss if we talked about oil and didn't mention OPEC. So when we talk about oil getting structurally more incentive through, what's the word I'm thinking of, an inadvertent carbon tax, I guess. Sorry, it's late, and my vocabulary isn't as good as it normally is.

But how would we expect OPEC to respond to that? Why wouldn't they like it? Because ultimately, you're raising the price of oil. And they're the, so you basically, they're the two bookends. In fact, when you look at the ability to grow supply is that the only short cycle production that can be brought on in the world, if we see a big spike in price sometime in the next 12 months, it's the Middle East and the United States. And they're the two bookends on cost. Middle East is the lowest cost and the U.S. is the highest cost. Everything else in between is unlikely to be invested in. In fact, actually, when you look at part of the reason why Saudi is willing to do a unilateral cut is that Nigeria, Angola can't even produce

at their quota right now because production is dropping due to a lack of investment and decline rate sitting in. Mexico, another example of declining production. So when we look at non-OPEC production or even some of the non-GOLF OPEC producers, they're struggling to be able to maintain production where it is in the face of a lack of investment. It goes back to that theme of underinvestment. A lot of short daily news podcasts focus on just one story. But right now, you probably know, need more. On Up First from NPR, we bring you three of the world's top headlines every day in under 15 minutes because no one's story can capture all that's happening in this big, crazy world of ours on any given morning. Listen now to the Up First podcast from NPR.

What separates good leaders from transformational ones? I'm Jessica Chen and in season two of Leading By Example, we'll sit down with executives like Grace Chen, of Bertie Gray to find out. It's important to understand where you spike, but also really acknowledge where you don't and find people who can fill those gaps. Listen to leading by example, executives making an impact

on the IHeart Radio app, Apple Podcast, or wherever you get your podcast. You know, another thing that you said in terms of identifying the big pillars of the structural bull market in commodities, redistributionist policies. And it seems like, like the new administration is definitely going to, you know, something in the air, more people

are into it, the idea of actually redistributing wealth downward, giving more households buying power. And you liken that to the seven days. Talk to us a little bit more about how that plays into your broader thesis. Absolutely critical. And it's, and it's hard to distinguish between the redistributional policies and the environmental policies. because, you know, to use a term from the UK, green leveling, using green CAP-X to level income is, you know, a policy initiative. So the two begin to blend in with one another. Now, in terms of thinking about how this differs from the previous 10 to 15 years, is following the financial crisis, policy was focused on financial stability. And as a result, it went into banks that systematically created a decontal.

decline in interest rates which mechanically raised equity valuations and created a wealth effect. So stimulus worked through the wealth channel. Who owns financial assets? The higher income households. Now, they have a very low marginal propensity to consume. You give them a dollar. They're going to save it. They only spend three cents on each dollar.

In contrast, today, we look at most of the stimulus goes directly into the hands of the lower income households who have a marginal propensity to consume. of 100%, meaning you give them a dollar, they'll consume 100 pennies of it, versus the higher income household that will consume three. That is significant, because what that tells you is that going forward, and you already see it in the postcode level data in the U.S., is that you're seeing a mechanical upward shift in consumption. So that's point one. Point two is that the consumption is more commodity intensive. High income guy, he drives a Tesla. He, he drives a Tesla. He, he's his house is well insulated and he eats fish. The lower income guy drives a SUV with poor

gas mileage, a poorly insulated house, and he most likely eats beef. The beef consumes four times, or excuse me, eight times more grains than the fish. And then there's more consumption going into the SUVs and into the houses. And you put this together and you know, you look at the, at the margin, the lower income households, you give them a dollar, 50 cents of it goes to commodities. In contrast, the lower income households, you give them $0.35 cents of it goes to commodities. So not only do you get the upward shift in commodity or in overall consumption, it's more commodity intensive. And then one last point, you look at the correlation between these transfer payments and commodity prices,

going back to the 60s, they're very highly correlated. I go back to the point about Milton Friedman made the point that, you know, inflation is a monetary phenomena. I think he needed a clause to it. Now we've learned after 0809, provided that the money gets into the hands of the people who will spend it. I love the idea of measuring direct payments in terms of impact on commodities.

So you mentioned inflation at the very end of that, and I wanted to get into this because the dollar also factors into your structural bulkcase. Can you walk us through how you're seeing the dollar and what it means for commodities and also how that would feed into inflation? Let's start with the reflation feedback loop. How does it work? It is the, call it, petrodollary recycling story or whatever you want to call it, is let's take, you know, U.S. spends money. That weakens the dollar, similar to what we saw on the second half of last year.

A weaker dollar mechanically raises the cost of producing oil and commodities. Take copper in Chile, 40% of the cost of producing copper is denominated in local currency, like wages for the truck drivers. So a decline in the dollar and an increase in the Chilean pay so just pushes up the dollar price of copper. So then we get to higher commodity prices. Higher commodity prices then increase the terms of trade for those different countries, and they now start building global liquidity.

Hence, even Saudi Arabia in the month of November and December saw a rise in their liquidity because prices, we got into that $55 range. And so the global liquidity then in turns gets lent out or creates more dollars, which does two things, weakens a dollar further, increases the demand for commodities, and then you cycle back over again. So that's how you get that reflation feedback loop. But I want to go into tying this into kind of the bigger theme here and drop back to the redistributional policies. If we look at, you know, the current issues, you know, the populism and so forth, you know, I would argue they're mostly tied to this whole idea of income inequality.

And I challenge you to take a picture and look at income inequality over the last hundred years. And when we look at when it's at its lowest point or when the world was the most equal in terms of wealth and income, it was in 1979, 1980, a period in which we had the highest real commodity prices and substantial inflation. And the reason why I bring this in with the discussion of the dollar is that you take, you know, July 14th, 2008, we reached peak oil prices of $147. it was also the weakest dollar ever observed, 1.61 against the euro, the exact same hour that oil spike to those higher prices. So when you see that dynamic between commodity prices in the dollar, it really does feed on itself. But we go back to that whole point about redistribution. If the policy aim here is to try to solve income inequality over a longer period of time, you're probably going to end up with higher commodity prices as being a, call it a collateral damage of it, because ultimately you get more consumption.

You know, I really didn't expect this conversation to go there, but it's interesting because it's such a recurring theme on this podcast of a conversation that Tracy and I have, which is are we essentially at the end of the Volker era? And so if you think about the early 80s and when the war on inflation really started to take of this monetary policy dominance and this sort of 40-year cycle, we always sort of come back to this in different ways of, is this the turn, or are we coming to the end of this idea? It's sort of really interesting to hear you put that in the commodity context, but when you say that, you know, it makes a ton of sense. Yeah, I just like to emphasize that when you think about

these dynamics, they're really these longer terms that you're talking about, they're really political choices. And the political choice back in the late 1960s is very similar to the one we have today. Now, social unrest was high. Racial tensions were running high. Hence, you had the war on poverty. You had, you know, at that point, you had, you know, the environmental situation was terrible. You had smog, and so you had to have that war on acid rain. By the way, on that war on acid rain, taking the sulfur out of the fuels and out of the sky to get rid of the smog actually accelerated the carbon problem and heated the atmosphere because sulfur is a coolant suit heats the atmosphere. But I think the key point is we had all those similar type of

social dynamics at play in the 60s and we had to choose to solve them. And as we chose to solve them, one of the implications of that were higher commodity prices. Joe, I'm waiting for you to bring up MMT and ask what it means. No, no, Tracy, you always troll me with that, but I didn't, I wasn't going to, I wasn't going to go there. I have two sort of lightning round question type, and then I'll let you go. First, I'm just curious, what were you doing when the price of oil hit negative 40 last spring? I'll tell you, you guys don't want to know. I was on CNBC talking about oil price.

Okay. Yeah, we know what I hear. That's fine. All right. No, actually, I do have a, but this is, and this relates to the silver question and the precious metals angle. And this is just something I'm curious about. We don't need to go too into it. But there is this meme out there that somehow the rise of crypto is eating into some demand from the very rich who might otherwise have been putting their money into gold and silver as a store of wealth. Is that something that you observe at all from your perch?

very small at the margin. And the reason why I say that is right now you look at, let's say, the crypto or Bitcoin, you know, the overall crypto market is roughly a trillion dollar market. Yeah. Bitcoin is around 600 billion. The institutional involvement in there is somewhere around $7 to $10 billion. It's still relatively small in the magnitude of about 1%. So what's left over are the respective retail investors. And they behave in a very risk-on fashion. They're not treating Bitcoin and cryptocurrency as a defensive asset like gold. Instead, they're doing it like a turbo-charged risk-on asset that trades very much like copper or iron ore, which trades off of positive growth news. And so at the current environment means, do I want to own crypto as a defensive asset? The answer is

not really, no. And then there's also the inherent transparency issues. Do big institutional players and, you know, high net worth individuals want to own crypto given those issues? The answer is probably unlikely. They're still going to have to use a custodial bank to purchase this stuff. And then the custodial bank actually owns the crypto. So why do we have crypto? And I'd like to go to the point, what are the physical properties of Bitcoin that make it a commodity? It's the very very, very first time in the history of digital money, you can take it off the grid, you can put Fort Knox on the key fob, put it in your pocket and walk away. Why do you want to take it off the grid? Maybe they should buy GameStop stock as a store of value instead. That's a true.

Oh, thank you. Thank you for clarifying that was a joke. Jeff, this was so great. Jeff, this was so great to chat with you. Really appreciate you coming on. Super fascinating. Love the big picture thoughts as well as the specific mechanics. Thanks for coming on the show. Great. Thanks for having me. All the best. That was really great, Jeff. Thank you. Tracy, I really did not expect this conversation, as I mentioned, to sort of like fit in so well with some of our like other broader macro conversations. But just the way like Jeff rounded that out, that was so good. He's another one I could listen to him to for a very long time. Yeah, for sure. And I got to. to say his point about the redistributive effects of direct payments being different to

quantitative easing like we saw after the 2008 financial crisis. I thought that was really interesting and something that I hadn't considered before. The idea if you're putting money directly into people's pockets, they're probably going to go out and spend it on things that use a lot of commodities to come into being. That was interesting. Yeah, and just this whole idea of like the sort of backloaded or front loaded effects on commodities from green spending. So at some point, the internal combustion engine may come to an end, and we really might have structurally lower oil prices forever. But in the meantime, that is a lot of capex spending right now on all kinds of things and more

money in people's hands that then increases the demand. And then if you add on top of that, it's like, okay, well, like, Who is going to invest in expanding oil supply when in the long-term oil demand really will collapse due to everyone having an electric vehicle? You can see how you could have the real makings of a sustained spike. It may not last forever, but you could see how you could have several years of extremely elevated prices. It makes a lot of sense. I think the thing that comes through really clear here is the idea that we're in a transition phase from some sort of old economy to some sort of. sort of new economy. So, you know, call it whatever you want, like the baby boomer economy that

was focused on returns and financial assets and didn't really care about things like the environment or fairness or equitable distribution of wealth. And then maybe the new economy starts to look a little bit different, tech heavy, very ESG focused, looking at fuzzy concepts like fairness and things like that. And the transition period is going to be, volatile to Jeff's point. But you can see how it might throw up weird oddities, like commodities prices, the oil price getting higher in the interim, even though the place we're eventually going to is a place where oil is used much, much less.

No, it's weird, but it makes sense. And again, you know, I go back to the last four years. It's like literally the opposite of the Trump administration, which was super oil friendly, but in the end, terrible for oil, given, look, if you just look, if you just look, at oil prices and the price of oil company stocks. And so you can see how there's sort of like a very big, the ultimate irony of how like ESG and redistribution of wealth and all this stuff could lead to also that was super interesting.

I did not realize. And he described it again so well what Biden can do unilaterally by placing that, by essentially the de facto carbon tax. Super interesting point. De facto. That's, thank you. That was the word I was looking for. Yeah. No, that was really interesting. The idea that Biden could sort of lead a global de facto tax by virtue of the U.S. being the sort of pricing benchmark for oil. That's a big change.

So much. I learned a ton in just in that period of conversation with Jeff. That was great. Yeah. Jeff's good. All right. Should we leave it there? Let's save it there. This has been another episode of the All Thoughts podcast. I'm Tracy Allaway. You can follow me on Twitter at Tracy Allaway. And I'm Joe Wisenthal. You can follow me on Twitter at the stalwart. Follow our producer, Laura Carlson. She's at Laura M. Carlson.

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