The Derivative - Miami Hedge Fund week panel 2024 - Commodities: Outlook on Prices, Volatility, and Portfolio Diversification

Episode Date: February 15, 2024

This packed panel discussion featuring Tim Pickering (Auspice), Brent Belote (Cayler Capital), Gerardo Tarricone (Arion) and Derek Stroke (Equanimity Advisors) focused on commodities as diversifiers and opportunities in commodity trading and investing. Our panelists discussed topics like the reliability of commodities in portfolios, ESG factors, the potential for a commodity supercycle, and educating the next generation of commodity investors. They debated drivers of long-term commodity prices and the impact of trends like energy transition. Panelists also highlighted volatility in energy markets, shifts toward separate managed accounts, inflation expectations, and strategies for including commodities in diversified portfolios. This session illuminated both risks and rewards for navigating evolving commodity markets, leaving attendees energized to pursue these opportunities through dedicated managers and stay tuned for what's in store in the world of trading and beyond. – you need to check this one out! SEND IT! Chapters: 00:00-01:32= Intro 01:33-13:25= Commodities as diversifiers with industry experts, EV’s/ greenflation & energy trading opportunities 13:26-20:53= Trading commodities for alpha & diversification 20:54-30:37= Commodity supercycles & its potential impact on prices & Volatility and China demand 30:38-44:02= Inflation, central bank policies, and educating the next generation 44:03-54:30= Questions from the audience: “Drill baby Drill”, weaponizing commodities & India’s middle class 54:31-01:00:22= Final thoughts on the future outlook for commodities Panelist Performance Stats: Click here You can follow along with all our panelists on LinkedIn @ Brent Belote, Tim Pickering, Gerardo Tarricone & Derek Stroke Don't forget to subscribe to ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠The Derivative⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠, follow us on Twitter at ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠@rcmAlts⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ and our host Jeff at ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠@AttainCap2⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠, or ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠LinkedIn⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ , and ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠Facebook⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠, and ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠sign-up for our blog digest⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠. Disclaimer: This podcast is provided for informational purposes only and should not be relied upon as legal, business, or tax advice. All opinions expressed by podcast participants are solely their own opinions and do not necessarily reflect the opinions of RCM Alternatives, their affiliates, or companies featured. Due to industry regulations, participants on this podcast are instructed not to make specific trade recommendations, nor reference past or potential profits. And listeners are reminded that managed futures, commodity trading, and other alternative investments are complex and carry a risk of substantial losses. As such, they are not suitable for all investors. For more information, visit ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠www.rcmalternatives.com/disclaimer⁠

Welcome to The Derivative by RCM Alternatives, where we dive into what makes alternative investments go, analyze the strategies of unique hedge fund managers, and chat with interesting guests from across the investment world. Hello there. And depending where there is, you might be a little chilly right now here in the middle of winter. So this week, we want to take you to the warmth of Miami, where we co-hosted a four-person panel during hedge fund week, talking the good, the bad, and the ugly in commodities. The panel had two newcomers to the show here, Derek Stoke of Equanimity Advisors and Gerardo Terricone,

Terricone, sorry, I don't know how to pronounce that exactly, of Arian Investment Management, as well as two show veterans, Tim Pickering of Auspice Capital and Brent Belote of Kaler Capital, and was hosted by our friend at Cohen & Co., Camille Clemens, which is, I have to admit, a great podcast name, Camille Clemens. Maybe she's coming after my spot here. Anyway, listen in as the panel dives into commodities as portfolio diversifiers, the impact of ESG, the potential for a commodity super cycle, and educating the next generation of commodity investors. Send it. This episode is brought to you by RCM's Managed Futures Group, who help investors identify, invest, and programs like the pros on the panel here. Head over to rcmalts.com slash podcast to see the write-up on this episode or the RCM

YouTube channel for this episode to find the link in the pod's description to see the full performance record of these managers and explore the rest of the RCM database. And now, back to the show. Thank you for coming and to all of the sponsors and specifically our CMO Trinitivs for getting us all together today. Our agenda I'm just going to run through really quickly will be introductions by our esteemed panel, a little bit on their experience and where they are in the industry as far as what their level commodity trading is what they're focusing on we're going to talk a little bit about the reliability of commodities as a diversifier for a

portfolio how the last couple of years this asset class has had some strong returns so how that's affecting us on a go-forward basis and then I'd like to also dig into a little bit about the education of the next generation of CTA investor or commodity investors we're hoping for a really dynamic dialogue these guys have a ton of experience are super interesting have great backgrounds and then of course questions from the audience so let me just start my name is Camille Clemens. I work for Cohen & Company. We are a public accounting firm that's 47 years old. We do a lot in the alternative space supporting investment strategies throughout structures. We have a large practice on the registered fund side of

things too so we're definitely seeing an intersection of public versus private ways of accessing this investment strategy in the marketplace so I would pass it on to you tiny microphone it's so funny I run Taylor capital we're a systematic oil CTA and I've been around for a little over five years now and pass on to typically Auspice Cap is a firm I founded 18 years ago. Former head trader for Shell Oil. I guess the time of the commodity side, TD Bank. So we run commodity tilted CTAs.

We were the first CTA to launch an ETF ever. I really wanted to go hear that panel. We did that in 2008 with natural gas based out of Canada, Eco Gas for those that know the energy market. We run ETFs in Canada and the US in our brand and other brands as well as publicly available CTA strategies on both sides of the border as well. Hi everyone, I'm Gerardo from Iron Investment Management in London. We are a commodity focused investment manager.

We run multiple strategies by multiple PMs. We cover anything from oil products to base metals, precious, grains and soft commodities. How's it going everyone? I'm Derek Stroke, one of the founding partners of Equanimity Advisors, where it's a CTA, CPO, with a hybrid focus in liquidity providing and fundamental trading on the vol surface of specifically natural gas, US-based natural gas futures and options, heavily focused in the vol surface and the options space.

All right, Brent, we're going to start with you. I've heard you say on a couple of occasions, if you're not long commodities, you're short them. And I'd like you to talk a little bit about that, specifically your experience through all facets of oil investing. I know you started your career early on in one area, and now you're running your own shop. Where do you see the supply and demand balance over the next year? I'm also interested if you can kind of weave in your thoughts on EV. Yeah, absolutely. So my background, I really glossed over it. I worked at JPMorgan before this for, before I started in Kahler Capital for 10 years. In terms of, we'll kind of go backwards,

in terms of EV, it's been a very fascinating time for... Honestly. That's always been one of the things that I believe is if you're not long commodities, you're short them, because every commodity, especially oil, which is our primary focus, flows into every aspect of your life whether it's your car whether it's to eat your house whether it's the food

you eat and you have exposure to it whether you like it or not so you're gonna lose money if oil goes to two hundred two hundred fifty dollars you're gonna end up having a reverberating effect on your life for a long long time which is something I've always believed in you know I always like to think that we're in kind of the golden triangle of oil trading where supply is slowly declining every government in the world is kind of trying to kill it outside of the Middle East and everyone wants to switch the green revolution but demand is still increasing and there's going to be a point where the supply does not keep up with the growing demand and we lose about five or six percent

of oil just from decline rates and as that kind of goes if you're not constantly investing in that demand is going to outpace it and I think we're kind of hitting the point where everyone's planning that the green revolution is going to switch on like that and it's going to end up being a situation where the supply-demand balances are going to switch very quickly and I think everyone's going to be under invested and under prepared for those four or five year period where it can't catch up in terms of EV obviously I'm an oil trader so I'm biased but has anyone ever seen the amount of mine that is required in materials that are required to come out of the ground to create an electric vehicle on top of the power grid

probably should have added a power trader for here as create an electric vehicle on top of the power grid. Probably should have added a power trader for here as well just for that. But, you know, the power grid is not equipped to handle anything that we need to get to a full, you know, 100% EV green revolution. And I don't think that over the next 10 years even, I just don't see that being a reality, especially when you look at the pockets of where demand is still growing, especially in the EM space. So, I mean, in terms of EVs, you know, I'm going to be combustible engine until I die, but I think I also live in zero degree weather, so batteries go pretty quickly there.

But I think it's going to be a long time. It's even interesting to see some of the requirements from an infrastructure standpoint when putting in new developments, right? There's just not enough power to draw from. So I think there will come a time where we're going to have to just admit to ourselves it's not an endless availability at the moment. We do have to spend some time catching up. I mean, you can look at some of the nuances here.

So think of the Texas production, and think of in Alberta and Canada where I'm from. So you get some of the biggest oil production in the world. And where are the two of the power grids who've had the biggest failures in the last few years? Canada, just in the last 60 days here where I'm from, and in Texas. So if we can't solve it in those places, just think what that implies. And the whole idea of going green, and even if you tie in ESG as a concept, it's all a good idea, right? But we're just not prepared for it. We're nowhere even close to being prepared for it. And so even as we coast down that sort of path, what does that imply for us as commodity traders? Volatility. that sort of path what does that imply for us as commodity traders volatility as long as we go for all we can make money in some capacity and this push

towards decarbonization and this green revolution we just we're nowhere near ready for it and so it's going to be good for what we do yeah we agree so it's definitely probably the only demand driver for commodities. With this energy transition requires a lot of metals to be taken out of the ground. And there has been obviously underinvestment in metals over the last 10-15 years. If you want to have a new copper mine it might take you 15-20 years from discovery to production. So I think what we're going to see in the next few years rather than a massive commodity super cycle, it's going to be a longer cycle.

We don't know how long it's going to take for this energy transition to actually to materialize. But one thing that I think we're going to have is certain volatility in oil as well as base metals. Metals like copper, nickel, aluminium. It does not take much for certain spreads, for certain flood price to spike. So I think for strategies that are relative value, like what we do for example with Tarion, I think it's going to be, regardless whether we are going to go fully green in the next five, ten, fifteen years, one thing we're going to have is volatility dislocations, and this is gonna benefit, I guess, all of us.

Not to sound repetitive, you guys hit a lot of great points there about the green revolution and the increased volatility and the trading opportunities that that bring. And as CTAs, we're not just here to be, we're talking about a commodity super cycle, but the trade opportunities from a ball perspective the what's we're in this uh transitionary period of you said oil at the

same thing in natural gas and power prices and you hit on the ercot power prices and what happened we've seen two years ago with this the um yuri in texas and we had these large spikes in the ERCOT, plate failure in the grid. We just saw in the past month record low weather temperatures in Texas just two weeks ago which drove up prices to $1,000 for the weekend. We saw a Henry Hubb natural gas prices from a spot perspective trading at 10-year highs so this brought this really volatile natural gas environment over the last month where we went from $2.50 to $3.50 back down to two and a quarter now March is $2.07 today which is at a contract low this transitionary period in this ESG and the trading

opportunity that it's bringing for the CTAs and this increased vol the last two years for natural gas for the highest vol, sustained vol ever. So this is all this transitionary period that's going to probably sustain for the next five to ten years before we are ready to move towards more of a renewable standpoint. Can I ask you a question? Yeah. Since I'm familiar with your strategy, like how, you know, obviously people talk

about the end of oil and where it's going to go, and what do you do when oil is $14 forever because we have too much of it? And I think NatGas is a good kind of, you know, when I started my career, I think NatGas was like $14 or $15, and now it's consistently in the twos. Like how has that evolved for you guys in a lower price environment, but still high vol? Yeah, from percentage moves, I mean even though we're trading at, last year, two years ago we went from $10 to $2

and we sustained this north of 77 vol for the average of the year. Last year we were more in a $2.50 range, but we still had these large percentage moves and these vol opportunities. There's these spikes, and as we move towards maybe a greener energy, there's going to be these short-term trading environments and these short-term potentials where the green energies go back to Texas,

and roughly 30% of their power maybe in the summer now is coming from from wind and a little bit more from solar so like 40% of the grid but there's going to be times where the batteries aren't there yet right now, so it's going to create these short-term opportunities in natural gas even though if we're sustaining $2.50 it's still a weather-driven product where we're going to have short-term dislocations, as you mentioned before, in your products. So the opportunities are going to continue to be there, even though in a lower-priced environment, there's always going to be short-term opportunities. Tim, I'm going to come to you for the next kind of portion of this because I think it

is a nice transition. You were the head trader for Shell for a bit and then you started Auspice and now you trade everything. Can you talk to me a little bit about why did you go beyond energy and how does that play into this conversation? I mean, that's a good question. So, I mean, I was really trained to manage vol. And so ended up focusing at TD Bank and then to Shell on energy because it moves. So you want to trade vol, energy was the place to be.

And I'm a little older than Brent. So, you know, at the time, natural gas, it really was the Bitcoin. It was this chaotic thing that the power market was still developing. So if you really wanted to trade in the big merchant energy shops at the time, whether it was Shell, BP, Enron, there was a whole host of them that are now gone. But it was a great opportunity. But why I bring that up is what we learned and what we honed trading first at TD Bank

and then at Shell was how to trade this really chaotic commodity in natural gas. So the way I like to describe it is natural gas at 30 vol is not the same asset as 120 vol. It's a completely different animal. And I'm a quantitative trader. I understand the fundamentals. I don't act on fundamentals. But we need to come up with a systematic, and in this case trend following methodology, that made the transition from trading low vol to high vol and kind of going through these regime shifts. Natural gas would be low vol and it would be high vol, it would go back there if you blink. And so what we did was we developed trend following strategies that made that transition. It was really focused on energy markets that did this because in our view that was the need. If you

were going to be an effective trend follower you needed to adapt to the volatility and that's how we describe it. So why all markets? It was an epiphany with myself and my trading partner, Ken Corner, he's the co-founder of Auspice, we've been trading together since 2000, so 23 years, was sort of why are we just trading energies? If we developed a strategy that adapts to the different volatility regime shifts, why are we just doing that in energy when other markets do this and we're not a fundamental trader? So we tried to push that boundary at Shell.

It really wasn't the place for it. We just said, we're going to go off and do this on our own. We left in 2005, left Shell. I left in January of 2005, I didn't really even know what a CTA was. I mean, I was a quantitative trader, used futures contracts, that's the most cash-efficient way to do it. You know, why not trade everything? And in fact, I remember getting ready to launch the first fund and somebody in Chicago, I can't remember, FCM or something, asked me,

you know, you're going to trade grains. Why are you going to trade grains? They don't move anymore. Like why bother? It's like, we're going to trade everything. And we're completely agnostic in terms of market and with one tilt, and that is commodity. We run 75% commodity risk. We don't care if it's long or short. We don't care if it's long or short. We don't care if it's this or that. We do throw in financials from a diversification standpoint, but it truly is because there is more alpha opportunities in commodities. Commodities are the most diverse asset class there are. It's not even a debate. And then you get to the diversification benefits for a portfolio. If I'm targeting an institutional investor,

that's truly what they're after is diversification and true non-correlated returns. So to us it was just a natural thing and that our strategies could make the transition. Our strategies aren't built for energy per se, they're built just for volatility. Great answer. Long-winded answer.

I won't start to ask you about your feeling around alpha. That's a whole different conversation. Oh, that's for me? No, no, no. Well, I would like to add to what Tim just said. Commodities are the most diversified asset class. Same thing that we do at Alio. Initially we started with a focus on base metals and mainly copper, specializing in geographical art between copper trading on the LME versus copper trading on

COMEX and then in 2019 we decided to expand into other products like fuel oil, distillates, gasoline. And then a few months ago, we decided to expand into other commodities like grains and soft commodities just because if you focus on, if you hire specialists looking at focusing on one or two commodities, if you manage to cover like 15, 20 commodities, there is always something going

on in one commodity or the other. So you can have exposure to that diversification that commodities can offer. I sort of hit on some of the points here, but the volatility opportunities and why invest in commodities and the diversification of a portfolio. There are a lot of alpha-driven strategies in the commodity space because we can't rely on the beta of the equities world. And you have a lot of talented traders that have made their way into commodities where we're able to, you know, our returns are completely agnostic to the equity world and even to the commodities that we're trading ourselves.

So we trade natural gas but we don't have any exposure long term or completely uncorrelated to the underlying price of natural gas in our strategy. So it's really diverse diverse a diverse instrument to really enhance your portfolio from that perspective. I just second this you know Brent came from the oil trading background and you know we started natural gas we kind of traded all energy as HL I mean the things you learn in the energy trading environment I do believe it was a gift in my career in terms of perspective, in terms of managing risk, in terms of, you know, the rest of it, think volatile times going through COVID or 9-11 or financial crisis. You know, just another volatile period.

COVID was nothing any different than any other time period. And when crude went negative, we traded negative before, right? Natural gas, we trade negative as a balancing factor way back in 2000, 2001. So we already knew what to do in that case. Even though it blew up half of all marks across the street. Yeah, for sure. But, like, I mean, you know, these things happen in energies, and you're prepared for them.

You're mentally prepared for them. Your risk is prepared for them. You're mentally prepared for them. Your risk is prepared for them. Gerardo, let's talk a little bit about the long-term drivers of commodity prices. I know that you're kind of knee deep in that across a bunch of different markets. Can you comment on the longer term view here? Sure. So I think, yeah, the title of this panel is like commodities super cycle. I was speaking with some of you earlier. I don't think it's really, I don't think it's gonna be a super cycle.

I think it's gonna be a long cycle. Commodities are certainly in play. I don't see a big like big demand coming from you know a country like like china that was like 10 years ago china is obviously still there that's less compared to five six years ago uh the man coming from the energy transition is not something that is going to materialize in the next 12 months, 24 months, or something that might materialize over the next 10, 20 years.

Some things are going to be more, the real driver or commodity process is going to be more supply, whether supply shops or supply deficit in certain commodities. So I think rather than calling it a commodity super cycle, I think we can almost call it, as someone mentioned earlier, a commodity like super squeeze, where prices will be driven by short term squeezes that you can have in one commodity or the other. This will certainly offer opportunities to whoever trades, whether it's not long-only, but trades, other volatility, other buy options, or other relative value strategies. So here's what I'd say no um you're wrong so we may as well have fun we may as well

have some fun we may as well have some fun there's two basic ingredients for a commodity super cycle there's a period of lack of capex or lack of expenditure and commodity supply right so we've had capex peaked out about 2012 and it went down for a decade. We've only seen it come back a little bit and that's pretty much commodity wide. It's everything from energy to mining to everything. That's your setup and in every one of these cycles, that's the setup. There's a lack of capex for an extended period of time. I'm not talking one, three, five years. I'm talking a decade. We saw the same thing in the mid 90s one of us dot com and everybody forgot about commodities and then came china that leads to the second part there's

some sort of generational catalyst that occurs to get a commodity super cycle going and back at the start of my career it was mid 90s i got on the desk at t, focused on commodities. People thought I was throwing away my career. It was dot com, NASDAQ, the internet. This is old school stuff. It doesn't matter anymore. Well, along came China. This demand factor changed everything. And it really was the catalyst at the time.

When I think about the catalyst we have in the marketplace right now, it exceeds that China factor in multitudes. And it's everything from we've got more geopolitical tension right now than any time since World War II. That's one thing. We've got various supply and demand issues that keep happening, whether it's the hoodies or whatever straight or problems in the Panama Canal due to drought. We've got deglobalization. We've got decarbonization. We've got demographics. We've got India now as the largest population in the world with the third largest middle class.

Remember, commodities go up in price and get inflationary when you've got not only population growth, but you've got affluence, when you've got income. And when China hit about 4,000 GDP per person in 1999 and 2000, that got the party started. India just hit that level. They're already the third largest in the world in terms of middle class. They'll be the largest middle class in three years. So we've got a lack of supply already. And what's happening with countries like India is they're weaponizing certain commodities. Think in the last year, wheat, rice, sugar, some of those foodstuffs start moving.

What do I care? I'm just an agnostic trend follower at the end of the day, and I'm not a fundamental trader. But when I look at those factors that bring in the volatility, because there is that supply and demand imbalance, there's already a lack of supply. The volatility that follows and the trends that follow out of that, I haven't seen this set up since the mid-90s, late 90s. So I think we're in for not only a period of volatility, and then we can get to inflation in a second. Please, let's get into that. But this is a structural shift. This idea that we're going back to 2% inflation, I'm sure somebody's going to take this bet on me. This idea that we're going back to 2% inflation. I'm sure somebody's going to take this bet upon me. This idea that we're going back to 2% inflation is laughable.

The central banks don't control cost-push inflation. That's wages and commodities. They don't have that lever, right? So what's going to probably happen is we're going to have a structural shift where the narrative starts to change, where the average of 4% inflation that we've seen since 1970 is starting to be their narrative again because they can't

fix that problem. And we're going to have to accept higher oil prices. And natural gas is way damn too cheap. And all these commodities are going to continue to rise because the world ain't getting smaller. And the Eastern world wants the same thing we have in the Western world. And all that's going to mean is we've got to accept higher prices and more volatility we are absolutely in for a super cycle but when i say super second i mean it's going like this i mean it's going like this it's going to be volatile and for what we do for a living it's

like the most exciting proposition ever we make our our money on war, famine, and strife, and hurricanes, and all this shit. That's just the way it is. We never root for them. Right. You just know how to capitalize. I kind of do. Well, Derek, maybe you can speak a little bit to the concept of the volatility of natural gas prices and some of the things that you've seen from a development of our ability to handle the production and where we put it and how we kind of manage that I know it's something you focus on yeah yeah I'm trading volatility and the opportunities that are brought by whether it be a cold snap across January or

flash sort of this shift in the world that we've seen is the U becoming the largest exporter of LNG the past year and now it's a newfound volatility of a new risk in the US that in the US for natural gas prices are these LNG export facilities that we put in all basically in the Gulf where there are hurricanes and we used to have this production risk in the Gulf 15 years ago. That's now shifted to the LNG export facilities in the Gulf where we saw Freeport go down two years ago and we went from $9 gas to $6 gas in one month. Eventually we came up and realized roughly 100 vol for that time period, but this shifts in everything that's changing in the market, these different vol opportunities as we bring in new ESG projects, new LNG projects. It's a fundamental shift in the pricing, and it's going to bring vol with it.

We've even got regulation doing that. You just saw that in America here in the last 96 hours, right? Let's stop LNG exports. We've had that same problem in Canada for a decade. We were on top of the LNG exports a decade ago and got beat to the punch. And that regulatory aspect is adding more and more volatility in the Western world.

If you go to Asia, anywhere, go check it out. From a commodity perspective, they don't care. Flow the commodity. Well, yeah, the world needs the natural gas anyway, so it's going to come from somewhere. If it doesn't come from the US and we shut it down, somebody's going to supply it because we need power. Everybody likes having their lights on and heat irons are in the winter. I was talking to Bobby about this earlier, who would have thought like in the last, you know, in this era of ESG and green, one of the fastest growing physical commodity firms out there right now is focused on coal. That's a little bit of a surprise if you think about it, those guys are growing fast. We just saw New York, NISO, they're walking back some of the transitionary coal periods.

They were supposed to decommission to New York City coal power plants, peaker plants. And they had to go back and walk that back and extend it for two more years because there's nothing to make up that power right now. So we've decommissioned all this coal, and this is something that's led to some of the natural gas volatility in Texas and such recently. We're just not prepared to transition away from these products yet, and that's brought on this new level of volatility.

So it makes for a great trade environment, and it's going to last for the next decade to come because it's going to last for the next decade to come because it's going to take time. So speaking of taking time, let's talk about interest rates and inflation and how we think, like what are we thinking? Because I feel like if you've been trained to trade volatility, who knows? 60% of the world will be going through some sort of an election this year. How does that come into play? Can we talk a little bit about that? I know it's kind of broad but it's

simple to me. What do you run for a margin to equity? Me? 5%? Yeah. So we're 6-6 over 18 years. That's a nice little tailwind. Yeah, that's good. I mean I think that's actually an interesting thing where we've got a lot more interest because people are looking at what you can get on the risk-free rate versus us. And so rather than have a commingled vehicle where you're paying, you know, the time cost money of five, 6%, you know, we're five, 6% total margin equity. So a lot of people kind of where we're finding, it's kind of been a tailwind for us on the back end with where interest rates are is as people like us from a perspective of diversification they like us that we're low cost to get into we offer daily liquidity for our investors and it's been kind of something that

we've seen is people who have had maybe two three hundred million tied up with a commingled vehicle is kind of coming over to more of the SMA space it's also kind of speaks of the structural changes that we've seen where I don't think there's been a lot of commodity fund launches in the past or in the last like five, six years if I look historically just from a standpoint of there's been so much money flow into the multi-strap model that a lot of people who would have gone out on their own and started new funds are now it's just so easy to go to the Millenniums, go to the larger guys and have a dedicated seat with VAR right on day one as opposed to kind of launching your own.

So I think if you kind of made it through this transition, I think there's not as many of us as there used to be, especially in the oil space. That's for sure. I already gave my bit on interest rates and inflation, so how much to add to that? Yeah, I think inflation is way higher than 4%. I think anyone who goes to fill up their car with gas or goes to the grocery store doesn't believe anything the Fed has thrown at them. So I don't see that

going back as far. They've done this many times and all the central banks they want to push out a narrative and they don't want panic to ensue. Because they never talk about commodities because that does instill panic. And they don't have that lever. It's as simple as that.

They can't make it go away. Now, theoretically, in the 70s, they did because they raised rates for 10 years until it was high teens. And then it killed the economy. But they're probably not going to do that this time. So they're going to have to get more comfortable at a higher rate. And I think people are slowly going to get used to it. Because right now it's not at 4% anyway. So if it averages out at 4% where it's been since 1970,

there's probably a comfort zone in there. And I think we've just got to get used to it. Yeah, another thing we kind of got used to it. In the last two or three years, yeah. I don't think inflation is gonna come down anytime soon. You know, I'm probably less, I believe less of the other commodities super cycle, but I'm certainly convinced that

the volatility in commodities is here to stay. And inflation, I don't think, is going to come down anytime soon. Yeah, I think everybody likes their comfy life, and if you want to get rid of inflation, it's going to take some pain in the markets. And I don't think politically or nobody's nobody's ready to take that pain so it's gonna stay with us. I mean what's the incentive here right so rates go up even to where they are so it's a rapid increase it's not that high on a historical basis but what's the

incentive you bring up rates does that incentivize more short-term commodity supply or incentivize investment in long-term commodity projects it doesn't it makes it harder and so all this exacerbates the problem we're not making the problem easy we're making the problem harder and and that's just our reality then you get to green which I love the green side of the equation and you know who's making a difference and you got to give Elon Musk some credit and you don't have to like him or not. But who's investing money in the green space? It's the energy companies.

We all understand that. It's the shells and the chevrons and the VPs that have the engineering know-how and the capital to do it. They're the ones making a difference. And if we screw them, we don't have a way forward. And so that's the reality of the world. This becomes sort of a self-fulfilling cycle. And commodities are going to be the benefactor.

California is a great microcosm of that. If you've been seeing any news about the Chevron facility that they've been threatening to close down. California gasoline is super unique. Number one, they're idiots because they created a new gasoline that's way more expensive than normal gasoline, and it's impossible to resupply there. So they either have to import it

or they have to lower their standards, and they're not gonna do that. But what do they do? They threaten Chevron with all these refining sanctions and making it more difficult to be a refiner there. What's Chevron gonna do? They're probably just gonna close down their refinery. And you make gasoline $10 a gallon in California.

And it might mean that everyone in California drives Teslas, but it might be a situation where people who can't afford a Tesla are the ones who are going to pay for it. So it's interesting to see kind of that microcosm of... I don't know if you heard that news that Hertz, I rented a Hertz this year.

Hertz just announced they're getting rid of a large part of the EV side of their rental fleet. It's too expensive, people crashing too much, and they're blowing it up. It's just, you know, it's a great idea, but we're not ready. I live in Calgary, it got cold in the last month. I mean, we're just not ready for certain things.

It's also the reason I, California born and raised, and I live in Wyoming, so it's also a reason I California born and raised I live in Wyoming so everybody's well shortage of new gas stations being built which is another thing that I find very interesting yeah I have a question since we're talking about the generational event that's going to provide additional to be the catalyst, if you will, for the commodity space. Hi, I know that we've got everything from SMAs to ETFs represented on this panel from an access perspective.

How are we going about educating kind of this new generation of investors to ensure that they understand the benefits and how commodities really are a diversifier in a portfolio as opposed to just kind of a more retail, if you will, investment. Can we talk about that for a second? Yeah, is that where you want to go first or I'll go? A simple thing to just educate people would put a blended portfolio into it and then put in this mix where you're going to have this diversifying factor that's going to blend out your returns over time you know you're taking money away from

something that's going to really just look at it as a blended portfolio and what your long-term risk or board needs value that I didn't come out of it is there some sort of SMA that's going to diversify a large portion of your portfolio? I think it's interesting because you don't need to have, you know, I think that's, you know, like the commodities, we're never going to be the 60% of the pot. Like we just aren't. We're always going to be a smaller piece. And so even adding a small chunk of that to it, and that's just kind of something we needed to understand is,

you know, it's going to be hard for any of us to to be a you know the size of a credit fund or a rates fund just from a standpoint of flows but i think even adding a little bit whether it's five or ten percent you know across diversified is kind of what we're seeing and i think that's kind of been the mo as you're now seeing a lot more funded funds and multi-strats and different different people get into the space of allocating you know for lack of better word the little guys in the commodity space. And I think they're getting a lot of alpha out of that when you take four or five, 40 annual vol, 20 annual vol, 35 annual vol, you put them in a portfolio and all of a sudden you're like, wow, it's actually 17 with a two and a half shark.

That's a pretty good portfolio. So it's fascinating to kind of see as they piece it together and run the numbers, how uncorrelated we are versus everything. Like you guys are negatively correlated to the nat gas, we're negatively correlated to the price of oil, even though that's all we trade and that's all you trade in. And so it's like fascinating to see kind of how everyone's kind of coming around to it over time. Something you could do with the commodity space and whether it be via SMAs or a K-Learn equanimity, you could put those two portfolios

together and see how that looks in your portfolio over time and how that's going to bring down diversifying across the space. You're going to have these very good returns with probably pretty low risk if they're diversified across four or five of them that are annualizing 20% with a one plus shop or so. It's going to look good in your portfolio, I promise. Here's a quick answer. Education is kind of everything in what we do and it has to be a big focus for our industry. It is a big focus for our industry and I think it's started to come a long way I mean all these terms are opaque and weird you know CTA managed futures we're all scared of commodities futures back to futures you know it's scary stuff so it does take a lot of work in terms of the education and it's not just retail versus institutional we spend as much time educating our pension clients as we do is our retail ETF clients and so we

covered the whole spectrum at auspice and it's it's really pointing out some simple things and these guys have already done it but the one that's kind of struck me lately if you look back at inflation and periods of inflation and the 60-40 portfolio and bonds and equities, you can go back in time and as soon as you go back to a period pre-2000, it is normal inflation and normal interest rates. I'm not talking 20% of the early 80s, late 70s, just normal inflation. Bonds don't hedge equities. All you have to do is point that out, that we're in a period where bonds don't hedge equities. And so what's happened? You've got to look for something else. Well, let's look at private equity. That's not going to solve your

problem. And so institutions have started to get this. Retail investors have started to get this. And you only have to look as far as the ETF launches in the retail space that Retail investors are looking for and they're craving this diversification, too All you have to do is point out that your biggest investors your smartest investors in this base I pick on one like Ontario teachers pension plan They look at that factor You can see the bring down their fixed income as soon as inflation starts to come above, where are they putting it? They've got 10% of the entire portfolio of Ontario teachers pension plan portfolio in direct commodities.

10%. And they're already a diverse investor. So as long as we kind of keep on that narrative, and it's going to take work, you should have a good distributor, you've got a few, you've just got to keep working at it. But it's all about the education. I think as soon as institutional capital starts flowing to something again, and it feels like it was right for a while, and then the great global financial crisis happened, and that was the pocket of liquidity that these investors could draw on, right? Because you, things were

tied up in hedge funds, things were tied up in private equity, the public markets were in shambles, and so the place they went, of course, was to these commodities. But just remember that the institutions, the really smart people, of course, we've got those clients, but retail investors can move faster. The RIAs can put money to work far faster than the pension that rolls us up through their IC and takes it to the board and everything. Oh, then we're going to invest in commodities again. Oh, I thought we said we were never going to do that. But the RIA can make that response much quicker.

If you would have told me as COVID hit, as COVID hit in 2020, our focus at Auspice was entirely institutional, entirely outside of Canada. We raised, we've multiplied by four or five times our capital and it's come a lot of it from retail investors who are looking for that just because they can react faster. Institutions are going that way, it just takes a lot longer. But it's the same education, it's the same narrative, it's a process. It's pointing out the same things. Yeah, I think I'm just gonna summarize.

I think the summary is you've got to where commodities in the portfolio, especially in the last three or four years, commodities are in play. They offer clearly a diversification than how you're gonna build your commodity portfolio. You wanna have diversification than how you're going to build your commodity portfolio. You want to have diversification of style in terms of strategies, discretionary, systematic. You want to have diversification in terms of sub commodities, whether it's exposure to energy, base metals, grains, soft commodities.

And you want to have RV and directionality, but yeah, definitely you want to have commodities now that are polys, all is back. I just have a quick question. Bloomberg read an article not too long ago, which I think was purely fiction, but it blamed CTAs for price volatility and high prices. I think it might have even been referenced. I think I was the front page of it. Do you think that that comes from a place of pure ignorance, or is there something more nefarious? I think pure ignorance out of the writer from Bloomberg, considering the interview I gave for that, was very pro-CTA and trying to kind of teach everyone about how futures and oil space work.

I do think there is some nuance about it that, yeah, we do look at shorter-term signals sometimes and we can't be fast removers. But I think calling us the reason behind that, I mean, you could say an ETF liquidation is just as volatile for it. But yeah, that was a left turn. Oh great, the article came out. Whoa. You know, it's surprising. When I think about it, CTAs are agnostic, long and short.

We're talking a bunch of bullish stuff up here. I'm mostly short commodities right now. We talked about this.. I'm mostly short commodities right now. I think they talked about this But we're mostly short. I'm long-term bullish for fundamental reasons, but I'm gonna follow the trend CTS are bringing liquidity I mean everybody gets this narrative now so Bloomberg got it wrong. I mean, I'm not sure who I wasn't familiar with that Right there was just silly. There were some great CTAs that responded to that article as you probably saw. Yeah, I mean, there's just silliness. That's like saying, take away the shorts from all markets. You know, shouldn't be allowed to short. That would kill us. You guys mentioned, somebody mentioned politics over the next, I don't know, year or two.

We had 70% or somebody said it's that error. 60% of the population will experience an election this year. An election this year. I know I just focus on our little hemisphere. I know Canada and the US kind of have some issues coming up here. If the right, if the people get in there, let me just say it politically correct. If the people get in there that let me just say it politically correct, if the people get in there that have been saying, drill, baby, drill, do we get down to 40 bucks in oil or something like our commodities?

Do we lose that super cycle short-term piece that you guys have been talking about? I'll take it. Well, I think right now you're looking at a lot of headwinds in oil. I mean, I think without Saudis, most importantly, having a ton of spare capacity currently, we'd already be over 100, given what's going on right now. So I think the fact that they're sitting on their spare capacity and their voluntary cuts has really led to it. I think Biden is on the phone with them a lot because the last thing they want is to see the spike. I wouldn't be surprised if they came out and kind of did that. Now, if they go back to the drill, baby drill, I don't think it's going to materially change stuff you're still running into the headwinds of every oil production costs a lot

more to make just because you know at four percent that means you need to make almost close to 11 on your money to do it and you're about getting that out is coming in so all these new oil projects have such a large lead time that even if you know january of 25 they set foot in the white house and it's like yeah whatever you want federal lands let's go you're still going to have large lead time that even if you know January of 25 they set foot in the White House and it's like yeah whatever you want federal lands let's go you're still gonna have a hard time getting that out in a meaningful way now once you're five to seven years away from well you can say let's go right now yeah and and even if that happened they opened up west coast of Canada which would probably

never happen five seven ten years away I mean this is a layer of the volatility didn't talk much about that's at regulatory side yeah I mean shales really fast to drill like you can drill shale fast but they're kind of doing that already we saw big resurgence in shale this past year and the growth but the problem with shale is your decline rates like I heard it great that someone called shale Ponzi scheme and it's kind of true you know like in the first 15-16 months of shale oil well you get about 75 or 80% of the total value of that well out. So if the decline rate is almost parabolic to the downside and so you're having to constantly put money, put money or get

more efficient and they've gotten better and more efficient but you're still decline rates and you have to keep investing which is why if you look at the CapEx budgets of some of the larger it just keeps going and they keep going because they want to see that hey we increase production 20% a year and you have to keep investing which is why if you look at the capex budgets of some of the larger it just keeps going and they keep going because they want to see that hey we increase production 20% year-on-year okay well capex had to go up by XYZ you know there's a reason why they're these shale companies aren't issuing massive dividends because they have to keep putting it back in the company to keep it going so I mean I do think that you know we talked about the oil shale cycle oil super cycle we have to get demand

has to catch up to the saudis right now there's one or two million of spare capacity and i think that's about 12 to 18 months away so i think next summer is kind of when i think oil will be in trouble i think this summer unless unless you have a material outage somewhere else in the world whether you know we've sanctioned iran for the last 18 months they're still producing almost a max because basically russia and you know r India, China, just says we don't care, we'll take whatever we want. You sanctioned them, but nothing happened.

Yeah, exactly. Let's not get political. Wyoming. With the geopolitical risk, and I think a lot of that gets overstated somewhat. But just this week week and you mentioned it before Biden said that we're going to pause all future LNG approvals and the timeline as you were saying for that to have any impact on natural gas prices now we're talking about a decade plus it just takes two two plus years just to get through the EPA never mind to start building

and such there so we're pausing LNG export facilities. How is that going to impact natural gas prices right now? Well, maybe in eight years that'll have some sort of impact on the supply demand if we don't have a major technological change or a new party comes in between now and those eight years. Maybe it'll impact prices then. So I think a lot of the geopolitical risk and what we're talking about gets somewhat overstated and sort of just posturing, if you would, to some degree. Remember when COVID hit and we were all wondering, you know, because oil went negative, you know, how long is it going to stay down here? And where's all this oil going to go?

Because we're all flying around and we're not doing all this stuff? Look where we are, right? Where did all the oil get gobbled up? It went places. It's not going away. And so I think we can see, and I'm short, but the reality is I think the upside risks are far more plentiful than they are on the downside. Overall, when we look at commodities, has a role. And when you've got countries, again, like India, weaponizing commodities, taking them off the market,

playing those games, you're introducing a whole other dynamic, like we need another cartel type of concept, right? You brought us back to India, and that's where I wanted to go. Okay. You brought us back to India and that's where I wanted to go. I thought your comparison of late 90s China middle class tidal wave versus what we anticipate coming out of India, I think it's perfect, it's beautiful.

How do you see those two events being similar and different? Could you explore the weaponization of commodities a little bit? They are very different. We're getting into the weeds here. We're never sure what we get out of China from a numbers perspective. It's opaque. It's communist. You get what you get. You don't get upset. You try to figure it out. Put your money there as a CTA. hopefully you get it out. India is different it's

educated democratic very capitalist motivated you got a government that is trying to expand so fast they're spending 20% of their GDP 20% right now on infrastructure just think about it it's such a game changer. Plus, it's a very educated population. It's mobile. And so India is different, and it is going to play out different. It isn't going to be the exact same as China. But I really believe, and what I've seen in spending time trying to figure it all out, it's that catalyst point when the middle class gets to a certain point. They can be taxed and they demand stuff, right? India's point of inflection has just started to occur, but it's going to occur so much faster

And so you've got this massive middle class there That's just it's it's going to be the largest middle class some say in three years some say in five It could even be faster than that Right that's ahead of the US.S. and ahead of China. Ahead of the U.S., think of that for one second. So it's such a game changer, and that is where a lot of the commodities are going right now. That's what, you know, I was trying to figure out in late 22, I went over to Asia, and a friend of mine is head of one of the biggest consultancies over there,

and my question to her was, is China gonna open up and she said you're asking the wrong question. China's gonna be China if it's a monster. The question is is really about India. Oh I'm sorry the follow-up piece was the could you jump quickly and a little bit into the weaponization that you referred to? Well, they basically done that with rice, with sugar last week. Sugar was the best-performing thing in my portfolio last year. They basically imported it and wouldn't let it hit the markets.

They banned all exports in a number of markets because they need them internally. Where I was going is, do you see that continuing or would that be part of... Who's going to slap India's head? They can do whatever they want. Yeah, that's true. Like, I mean, this is the thing with commodities is who's going to stand on high and control this situation when we're clearly at some sort of, you know, margin, if you will. Right?

If one thing... I liken it to, like, you know, you're leaving downtown after work. at some sort of margin, if you will. I liken it to like, you're leaving downtown after work, and it goes swimmingly, but if one car gets a flat tire leaving downtown, everything backs up. That's what the commodity market feels like right now. Works great until it doesn't work. And India's playing those games, and they're not the only nation, they're just the big boy.

So what do I care? Volatility. It's great. Final thought for what we've talked about today and what you're thinking about for the balance of the year. And please take a look at my ear. I'm getting yelled at. So, while recapping what we spoke about today, you have this opportunity to really diversify your portfolio in some great performing CTAs that are going to give you a better blended return over time.

There's a lot of talented commodity traders out there and you don't have to just invest one, you could diversify across a handful of them and you're going to have this great return profile with some some pretty good upside versus the rest of your portfolio yeah i'm just going to say you know what you said a few minutes ago you you got to have commodities in in the portfolio commodities are certainly playing or have commodities in the portfolio. Commodities are certainly in play. Everything started in the second half of 2020. You can tell that things are moving in a different way. If you've been trading commodities in the last five, six, seven, eight years, you

can certainly tell that you want to be in this game. I think it's all you know it's all about you know having exposure to different strategies within commodities you don't know whether it's going to be copper it's going to be sugar it's going to be something else you just want to have exposure to all of those you want to have directionality in the book as well as me because I think we saw enough you know enough these locations in the last like two or three years with a negative TI, gold EFP blowing out, copper art that is one of the strategies that the focus on that reached no levels but the art between London and New York reached levels never seen before so I think these things will happen more and more and again I think I'm volunteering which is something that we mentioned a few times in the last hour.

Something that I kind of missed there with the exposure to the CTAs and the managers and we kind of touched on this before but a quick recap like our strategy is completely agnostic to the price of natural gas. Brent's strategy is completely agnostic to the price of crude and we're still able to extract return so even if we have this these short-term volatile events we're not just and this commodity super cycle doesn't happen if commodities don't go up the next 10 years we're still extracting alpha and still returning um that's a good part of the strategy i forgot the question i mean dd but so commodities go up commodities go down i think we're a better short traders than a long trainer

so you know i'm indifferent here to be honest with you but i just think let's be realistic about what's going on so if you look statistically if you had a negatively correlated return to a portfolio anything that adds value and trend following has been proven to be one of the most accretive to a portfolio so commodities trend following negative correlations I mean there's nothing more to say it's just try to find the delivery mechanism to raise money whether it's an ETF or a managed account, it really doesn't matter. That's a good take-over.

Yeah, I think the moral is short Canada, right? We just had your guy, Tucker Carlson, up there saying short Canada. I'm sure he was. I think, again, just to reiterate, I think everything is kind of shaping up for a really fascinating year in oil. Obviously the first couple weeks of the year have been kind of off the charts in terms of the news cycle. Every single day it's been something new. But I think the relative value trades are going to be just as interesting as we start to approach in the summer, whether it's gasoline or distillate.

Those are still growing tremendously, and I think there's going to be a shortage of at least one, possibly both, in the summer, whether it's gasoline or distillate, those are still growing tremendously and I think there's going to be a shortage of at least one, possibly both, in the summer. So I think relative value in the oil space is going to be the theme for 24 and then I think going on, like I said, I realistically think in 25 or 26 we definitely see 150 oil at some point, just from the standpoint of we're not investing currently and it's going to catch up. All right. All great points. I would encourage you to remain curious about the asset class and this exposure you can get through the likes of these gentlemen.

Follow them and learn from them. I know that even in my preparation for this panel, I learned a ton. So thank you to the panel. Thank you. Thank you. Okay, that's the podcast. Thanks to Brent, Derek, Tim, and Gerardo. Thanks to Camille for running the panel down there in Miami. And thanks to Jeff Berger for producing.

We'll be back next week with a guest who's blending equity exposure with global macro allocations. What's that all about? Tune in next week to find out. Peace. You've been listening to The Derivative. Links from this episode will be in the episode description of this channel. Follow us on Twitter at rcmalts and visit our website to read our blog or subscribe to our newsletter at rcmalts.com.

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