00:01 Hey, guys. John Polomny here, Actionable Intelligence. Today is Saturday, August 8th, and this is the weekly market update. The disclaimer, anything that you hear or see on this podcast or video is not to be taken as investment advice. I am not a registered financial advisor, and I cannot give you personal financial advice.
00:24 Please do your own due diligence. It's your money, it's your responsibility. Okay, another tremendous milestone for USA coming up. Within the next several weeks, we should be — several weeks, a month, whatever — we'll be closing in on $40 trillion in federal debt. So, hooray for us. The indebtedness continues. I joke about this, but it's not a laughing matter.
00:54 This is going to get worse over time. It's going to accelerate. It's going to cause a lot of issues, seen and unforeseen. Part of the problem is, as you know, and we've been noting, is the fact that this is putting upward pressure on interest rates. US Treasury securities — one of the reasons why the generational bond rally, the decline in interest rates from 1980 till just a few years ago, is over is because debt continues to grow.
01:31 The deficits are huge. Again, we're still running 6 to 7% per year of GDP deficits. That's how much we're spending, and how much is that contributing to keeping the economy afloat? You're running deficits that are similar to what you ran during World War II when you were the arsenal of democracy, and you were spending all this money to fight the Japanese and Germans.
02:04 It took a couple decades to get that straightened out after the fact. One of the ways that was used to get that situation corrected of the tremendous amount of debt to GDP was yield curve control and financial repression, and we'll talk about that some more later on in this discussion this week because that's — we're heading towards that.
02:33 But this is something I talked about. You say, "Okay, well, for the average person, you can't even conceive of what a trillion dollars is, much less 40 trillion." It starts just becoming something that somebody says — the numbers are so large you can't even wrap your head around it.
02:51 It's like how many miles is it to Alpha Centauri? It's just mind-boggling, right? And so I don't put this on here to be provocative or to say that the United States is going to collapse next week, but what I'm telling you is this is insidious, okay? It's not a problem until it becomes a problem and then it will be the only problem that matters.
03:20 It will cause some type of dislocation that will change things forever. This is another reason why I am — and I've said this, probably people are sick of hearing it because I say it all the time — this is another reason why I'm a very big proponent of hard assets because I want, in scarcity, I want to own things that are scarce.
03:44 Okay? Because the government, the Federal Reserve, all of these people that are conspiring against you — there's one thing, they can create money, they can create regulations, they can do whatever they want to do to try to paper over or fix these problems, but they can't create real things that we need. As a matter of fact, what they do in many cases is make decisions that cause even more scarcity.
04:12 So, as I've said in several interviews recently, I've kind of thought this through a bit more. When I say scarcity, it doesn't mean we're going to run out of stuff. There's plenty of minerals and plenty of materials in the Earth's crust. It's just getting more difficult and being made more difficult by various decisions that are taken by governments and companies to extract it.
04:40 It's becoming more expensive. You have to go to more dangerous areas, more complex places to operate. This raises the cost. You need a higher long-term price to incentivize people to take these risks. And so this all conspires to create the scarcity that we're interested in. You layer on top of that the never-ending debasement of the reserve currency.
05:04 Well, this is just like keeping something on a slow boil over time. You already have that energy attracting and pushing these prices higher, then you add the scarcity elements that I talk about, whether they're geological or political, and you have a perfect recipe for higher prices. So, I want to talk about US Treasuries, right? Right now, this is in billions of dollars.
05:34 You see that the largest holder of US Treasury securities are foreign entities. The second largest being the Fed itself. The Fed's going to be becoming an even larger holder of US Treasuries as the years go on. It's interesting though — see all these other entities that hold it, like banks hold $2 trillion of Treasury securities and many of them are now underwater.
06:04 And if they had to mark to market their Treasury losses — because what happens is they were encouraged to buy these Treasury securities when rates were substantially lower just a few years ago. Rates have went up, the bond prices have come down, and they have been allowed — this is part of the financial chicanery that goes on in the financial markets and with the government's acquiescence — they haven't had to mark these securities to market and if they did they would be insolvent.
06:34 The losses would be tremendous. And so the view of the banking regulators, the Fed, just says, "Well, you're going to hold these things to duration, so you'll get your money back at some point." Okay? So your 10-year Treasury security that you hold or your 30-year Treasury, whatever they're holding, yes, you'll get your money back.
06:59 But what's that money going to be worth in 10, 20, 30 years? And so none of this is taken into consideration. Again, we're back to the concept that was prevalent in the late '70s, early '80s when Treasury securities were called — well, slandered, as rightly so in my view — as certificates of confiscation.
07:24 If you're buying something at 1% that's giving you a 1% yield — or remember when I pointed out like five or six years ago when there was a plethora of securities around the world that came to market during that time of artificially low interest rates where people were issuing 50 and 100-year bonds at like .1%?
07:47 I mean, these things are probably at least cut in half or worse. Okay? And many people just don't understand that a bond price is inversely correlated to interest rates. As interest rates go up, the price of bonds goes down. Why would I want to hold a bond that yields 1% when there's a 3 and 1/2% inflation rate when I can get short-term Treasuries at 3.8%.
08:21 See, people do make rational decisions. And so — well, you'd think, but the way the regulations are set up, insurance companies, which are big holders here, pension funds, you see here, banks, they are, through different regulations, incentivized to hold these securities. And so, getting back to the foreign holders, they're losing confidence in the United States because of those debts that I pointed out that are never-ending, because of the US's behavior, running around the world attacking
09:01 everybody, acting crazy, throwing sanctions on everybody. I mean, who wants to — So, we've seen that. We've shown that chart. And what is happening with foreign holders, especially foreign central banks? The Treasury securities are being replaced by gold, which was, prior to the '80s and '90s, and historically, gold was the reserve asset for these central banks, okay? And for foreign governments.
09:29 And that went away because, remember, way back in the early 2000s, when gold was bottoming around 250 or 275 an ounce, it was a relic. It doesn't produce. It's a doorstop. It's — you know the litany, okay? And that's reversed now because of just the prevalence of lack of restraint among these various governments in the West and these welfare states to control their spending and their debt.
10:01 So, and especially as it relates geopolitically to the United States — why would China want to hold a bunch of US Treasuries long-term if we keep telling the Chinese that they're our biggest enemy and competitor in Asia and, at least in the prior administration, have senior officials including the chief of naval operations say that we're going to have a war with them in the next couple years.
10:29 Would that be a good idea to — you don't sell them the next day, but you say, you know what? Stop buying them and let what we have run off and let's not keep buying more. We'll just buy gold and other things. This is another reason why China has increased its gold holdings.
10:50 Why it is increasing its oil SPR, okay? Like well over a billion barrels. I mean, why not take the surpluses and recycle them back into hard assets? Why would I want to support my enemy and support their debt market? And so this needs to be taken into consideration. Again, things are slow but insidious. They just keep, year after year, week after week, month after month, getting worse and worse and at some point this is going to be a problem.
11:20 I don't know what the breaking point is in the bond markets. I don't know, but I know I can give you examples after examples where countries have got themselves into these situations and it eventually ends badly. So, this is a pretty good X thread that Doug Casey had. I put here at the top "yield curve control coming to a theater near you."
11:47 So, what can a government do when it keeps selling more and more debt, the market's choking on it, and so it starts demanding higher rates as compensation for the risk of the lack of restraint by the government spending money. It's part of the problem. And so rates keep going up and what can we do? We have to sell this debt to keep the game going.
12:16 We have all these responsibilities, all these commitments we've made to all these people. People have created expectations, they vote. We still have elections, people vote on this stuff, and they want free stuff. We're not going to get into all that, into the esoterica of why — Austrian economics.
12:42 This is just human nature. Bastiat talked about this — the desire for people to try to live off their neighbor through the ballot box. So, anyways, here's what Doug Casey says as it pertains to yield curve control. Something that I think is coming very quickly. We already see — and to say it's not going to happen, it happens all over the world.
13:04 The United States did this after World War II. I talked earlier in the discussion today about how we got out of the excessive indebtedness that we incurred during World War II. Well, we used yield curve control. And this is what's probably going to be initiated at some point in your future. So: "yield curve control may sound like an obscure technical policy.
13:29 It is not. It is one of the most important tools of financial repression. In plain English, yield curve control means the central bank decides what interest rate the government should pay on its debt and then uses its money printing power to enforce that rate. If the free market demands 6% to lend to the government, the central bank wants the government to borrow at 3%.
13:51 The central bank steps in and buys enough bonds to force the yield down. In other words, yield curve control is price fixing for government debt." Indeed, that is what it is. "And like all forms of price fixing, it creates distortions, misallocations, and unintended consequences. Of course, they may not call it yield curve control.
14:17 They will probably invent some new euphemism or acronym. They may call it financial stability policy, emergency asset purchases, market functioning support, temporary intervention, or something else entirely. But the label does not matter. The result is the same. The central bank buys government bonds with fake money it creates out of thin air to suppress yields and stop them from breaking.
14:42 Remember, the Fed has only two tools in its toolkit, currency debasement and gaslighting." I think that statement is profound. That's the reason why I like gold and why I like hard assets. They have two tools in their toolkit, currency debasement and gaslighting. To finish up this blurb from the article: "that explains how yield curve control works mechanically.
15:11 But the more important question is why politicians and central bankers would be able to get away with it." Well, I'll put a link to it. I'm not going to read the whole article. I'm going to put a link to it. You can finish reading it, but this is the future. And people say — well, if you're not aware of how the New York Fed trading desk can buy and sell Treasury securities to move rates around, you probably need to get yourself to understand that, okay? Again, bond prices and interest rates are inversely
15:44 correlated. And so, if you want rates to go down, you buy more government debt. This is why the Fed owns $4 trillion in debt, okay? People say, well, the Fed can buy the debt. Okay, where does the Fed get the money? It just creates it out of thin air. And I get back to the idea of central planning.
16:06 Initially, this will be advertised as being beneficial, and it will look beneficial at first. Why? Because the large cohort of people that own houses, old people — if rates go down, housing prices will be supported, they'll go up as these people are liquidating their housing stock as they pass on and assets move to their heirs, okay? So that cohort will feel it's a good idea.
16:41 Younger people that are having trouble getting into housing — one of the major problems that people say is a political problem, housing, the cost of housing, we've seen that, okay? They'll like it also, right? Because they're a major cohort of voters also, right? So initially people will like this, but they don't understand that when the Fed creates money out of thin air and sticks it into the economy and buys bonds, okay? Remember, we've talked about this before. This all ties together.
17:14 See, all of these lectures I give and all of this thinking kind of ties together. Because if I own a bunch of bonds, and I understand that the government's going to do yield curve control, I need to get out of these bonds. I want to sell them. I can see what's going on. I'm a rational actor. I sell the bonds to the New York Fed.
17:33 They create money out of thin air. They deposit cash into my account. Well, if I'm an insurance company, a bank, a private investor, I don't just let the cash sit there. What do I do with it? Well, I reinvest it. What do I reinvest it in? Stock market, real estate, who knows, right? Remember the Cantillon effect? The created money — we never know where the created money's going to go.
17:55 Again, when we put slugs of created money into the economy, we don't know where it's going to end up, but we know eventually, as it meanders down — as the headwaters of the Mississippi start in the boundary waters of Minnesota, if you double the amount of water there, well, it won't initially affect Memphis or New Orleans or Iowa, but at some point as that water moves down the Mississippi, it creates floods in this area, it breaches that levee.
18:26 It's the same thing with this, the Cantillon effect. The initial effects and the initial beneficiaries like the created money, okay? But then eventually, if you're not an asset holder, eventually this money works its way, meanders its way through the economy in unknown ways that we can't necessarily forecast, and ultimately ends up in higher prices for the average slob that's living paycheck to paycheck.
18:54 Ergo, the cost of living crisis. So, how many people in the United States — this is interesting. I talk about this all of the time. And there's probably not one person in 100,000 in the US that understands how this works. And the reason that I know that to be a fact is the fact that all of these people are screaming about the cost of living.
19:17 Everybody wants to — we want to have socialism and communism, more government intervention into the economy by dupes that don't know anything, okay? They're going to fix it. Band-Aid on top of a Band-Aid, right? On top of a Band-Aid on top of a Band-Aid. But no one talks about the engine of all of this, which is the central bank.
19:37 And the central bank — this is not some nefarious scheme to take over the world or to hurt people. This is what they have to do to keep the game going. Ultimately it's the government itself that ran up these debts. And we have a democratic republic. You send these people there. You allow it.
20:00 Okay? And so does anybody in the government talk about how this works? I mean, Ron Paul used to do this. He used to have these — you can watch the old YouTube videos when he would get into these really, really deep conversations in committee with Chairman Greenspan. And Greenspan knew.
20:20 They all know, okay? But again — I had an interview last week and we were talking about some of these things and it's interesting, people that are rational, people like myself — I mentioned different names of investors that I follow that talk a lot about this also, the monetary system and how it affects things.
20:43 And it's like, you take a guy like me and you say, "Well, what would you do, John, if you were the chairman of the Federal Reserve?" I wouldn't take the job. It's a no-win situation. It's not a nefarious scheme. It's just decade after decade of mismanagement, central planning, it eventually gets out of control.
20:59 Why would I want to be the president? Why would I want to be the Federal Reserve chairman? They're neither — ego trips for people. They're not going to be able to solve it. The problem's too big. It cannot be solved. And so we're going to run this thing and pretend like it's fine and put more Band-Aids on it.
21:15 And this is what Doug Casey says here. Let's go back to what he said. I like this. "And like all forms of price fixing, it creates distortions, misallocations, and unintended consequences." Well, this is what you have. Gee, I don't understand why prices aren't going down. President Trump said he's going to lower prices.
21:36 Do you understand that when you have inflation, the price level resets, it never comes back down. You'd have to have deflation or disinflation over a period of time. And that's unacceptable for the financial markets. They're based on an inflationary monetary policy and a debt-based system. It cannot go down. Once the price level resets to a higher level — yes, around the margins it can, but you won't see — grocery prices are up 40% for example.
22:03 They won't come back down to where they were before COVID. It will not happen. Okay? This is what I talk about — scarcity and inflation are your worst enemies. Okay? And you have to understand this and you have to stay ahead of this, okay? Or you are going to be — there's nobody going to come and save you. You can put Mamdani in, you can put Karl Marx in, you can put whoever you want in, okay? They're not going to fix this problem because nobody is discussing the root cause of the problem. If you go out in your yard
22:36 and mow the dandelions down, don't get mad when they pop back up. You haven't dealt with the root cause. And the root cause is the monetary system itself. And to reset that — I mean, people like Bessent understand this. He's talked about this at the margins, about resetting the monetary system.
22:54 It would be such a dislocating effect. I don't think they can pull it off. And so the idea is, hey, I get to play Treasury Secretary, I get to play Chairman of the Federal Reserve board, I get to be president, yada yada yada, I'm on top of the world and I'm out of here in four years and it's somebody else's problem. No one talks about what the root causes are anymore.
23:21 Okay, people used to. They had various congressmen and senators that kind of knew what they were talking about. Now it's just a bunch of yo-yos. And so it's not going to get fixed. You have to understand the game that you're in, the rules, how they're set up. And you're not here to change the rules.
23:39 You're here to play the game and take care of your people and make sure that you come out the other side. Again, when you have a Cantillon effect, what did Cantillon say? He who is closest to the king and the gold wins. Well, in modern definition, he who is closest to the money printer wins. So, interesting comment from Jordan Roy-Byrne.
24:09 Gold stocks surged more than 20% this week. You probably saw that. Gold was up a couple hundred bucks, I think. What does that imply going forward? And this is what I like, some of these historical facts I'm getting ready to glean here. Probabilities — again, we like to play with probabilities. Things that have happened in the past, if they repeat, what has been the outcome? So, going on here, it says, "Historically, one-week gains of 15% or more after a deep decline have been a strong bullish signal and suggests the bottom is likely in.
24:41 These moves are bearish only when they occur after a major advance. Gold stocks were even more long-term oversold in 2008 and 2016 and less so in 2020. In each case, explosive one-week rallies marked the start of a powerful recovery. Backing and filling is possible, but the lows are definitely in." Well, I would caution Mr.
25:04 Roy-Byrne — one thing I would caution is to never say definitely or for sure or will, because financial markets have a way of surprising people. But we can look at similar situations of oversold conditions and then a big rally off that and we've seen in past situations where this has resulted in the bottom being in.
25:26 Never say definitely, you can never say for sure. That's very dangerous to do that. But it's probably worth looking at. And a lot of the gold stocks I hold in my personal portfolio — we don't hold a lot in the AIA portfolio. I have one gold bank, if you will, in there that holds a minute amount of gold in the ground that'll eventually probably get acquired, but in my personal portfolio, I do have quite a few gold stocks because I'm bullish long term on gold.
25:58 And I suggest — there's some real value. I'll probably be going down that path a little bit more with some ideas where you have enough of a value cushion there to protect yourself. But I think you have to — gold mining stocks are more speculative, right? And you have to be careful with this.
26:20 We've talked about this before. And a lot of people say, "Well, if you're so bullish on this, why don't you hold more gold stocks in the portfolio?" Because I don't want to turn the portfolio into a junior gold mining newsletter in a portfolio. A smattering here and there is fine, but if you look at the portfolio results, we're looking for companies that can do three, five, 10 bag and with less volatility.
26:50 And it seems to be working. We just recently cashed out a seven or eight bagger in an oil field services company and we have a couple other companies that have done very well and continue to do well and we're always looking to find — recycle — and after something moves five times, six, 10 times, whatever, which we've had a few of those in our portfolio over its history, we're looking to recycle capital at that point into the next something we can find that can compound.
27:22 And again, so I'm not opposed to this in my personal portfolio. This is why the Discord is good because we talk about a lot of what I'm doing and what other folks are doing in their personal portfolio, not necessarily what's in the AIA portfolio. So a lot of the names end up making it into the Discord, which is a benefit — as a paid subscriber, you get access to that Discord.
27:47 This might be one of the reasons. This is from Tavi Costa. Gold miners free cash flow per share — you see it's at a pretty high level because of the gold price. If we are in the bottom and gold price is going to now recover somewhat, we will see higher gold prices. So far some of the results that I've seen from some of the mining companies reporting have been pretty good.
28:15 So this is — again, I'm bullish long term on gold. I'm bullish on things that cannot be replicated by the central bank as they are going to gear up to create a lot of US dollar currency units. Copper — I'm just really bullish on it. It's really worked out well for us.
28:42 We have a holding in our dividend portfolio. It's a unique company that isn't necessarily a mining company. It's a processor of other mining companies' waste streams and it goes out and takes the waste stream and drags all of the residual copper and molybdenum. It's done very well. As the copper price goes up, it's a fixed cost business.
29:09 So as the price of copper goes up, of course its cash flows go up also. So that's worked out well. I'm also bullish on — we have a copper producer in the portfolio which had some struggles but it's a multi-metal mining company but I think that they had a recent issue with one of their mines. They've recovered that and they're doing very well.
29:37 They're in a fortunate situation because they're wrapping this mine back up and they also have some unique other things going on that I think make the company a tremendous opportunity over the next three to five years. So this is what I talk about, scarcity, right? Governments intervening and causing — helping increase scarcity.
30:05 DRC bans copper concentrate exports. We've seen this before with other governments, right? Why do they do this? Well, they want to capture the value add. They say, well, you're not just going to go out and mine this ore and then ship it out of the country. We want it refined here, processed here and have value added to it and capture a portion of that value add.
30:27 We don't want the value exported out of the country. We want to capture it. And so a lot of these countries will tell miners or people that are extracting, you have to process it here and create copper cathodes for example, and then — just get the raw ore out of here and send it to some smelter somewhere else, some processing facility somewhere else.
30:53 So it says the Democratic Republic of Congo has banned exports of copper concentrate and cobalt concentrate as it escalates efforts to force domestic processing and retain more value from its mineral resources, the government order reviewed by Reuters on Thursday shows. Congo is seeking to leverage its position as the world's largest cobalt supplier and a major source of other energy transition minerals including copper to build domestic processing capacity and retain a greater share of the wealth flowing from its mines. So again,
31:29 this contributes to scarcity, right? It's not one element in the copper story, but it's another thing that forces the price up because — okay, well if I can't export copper concentrate, then I have to build a processing facility. Well, that could possibly change the dynamic of a mine I was contemplating building and may not be able to do it then and so the supply is held back of copper.
32:00 Price is forced up. We need tremendous amounts of copper. We are short of copper in the long term and we need investment and this type of thing contributes to the scarcity of the material. Again, there's plenty of copper in the DRC. It's going to end up over the next 10 years becoming one of the largest copper exporting regions in the world — which it already is, it'll even get bigger.
32:27 But this is — if it's slowed down, if we pull back on the reins because we introduce these — and I'm not opposed to it, they can do what they want. I get the point of what they're trying to do, but it's going to slow the process down of adding new mines. Or could have the effect of doing that. So, another problem, acid disruptions — this is all sulfuric acid that's needed for copper production.
32:56 More than 15% of global primary copper, about 3.6 million tons a year, depends on sulfuric acid to process ore into the metal. And so we've had acid disruptions because of the sulfuric acid and sulfur disruptions from the Persian Gulf. This is another thing that's being caused, secondary condition.
33:22 I know, for example, one of the holdings in the portfolio has a copper smelter in a country that is short of sulfuric acid. One of the byproducts of the smelter is sulfuric acid. And so this company is in the fortunate position that a waste stream that it would have from its byproduct stream from its smelting of copper is sulfuric acid.
33:50 And we've seen prices of sulfuric acid in this particular country — prices back to the situation in the Gulf — go from $400 a ton to currently $1,300 a ton. And so this is a benefit for this particular company because it sells sulfuric acid to other people in the country that require it, okay? For their mining operations.
34:15 And so a waste stream or byproduct value has exploded because of the distortion caused by the war in the Middle East. This is a perfect example of what I'm talking about. So, this is again more issues with copper. Codelco, which is the Chilean national copper mining company, suspends work on life extension
34:44 of its largest copper mine. I messed up on a lot of these spellings of these titles. Anyways, on life extension of its largest copper mine. This is a Bloomberg article. I don't pay for Bloomberg, so I just give you the headline here. Codelco is suspending work on a project designed to extend the life of its biggest copper mine after identifying a new source of seismic risk a year after a rock burst killed six workers.
35:09 And so again, mining's hard. You can't just flip a switch and increase copper production or any kind of production. And so these things all contribute. So, I told you, things are going to get more difficult. You have to get into more complex areas. All the easy stuff has been mined.
35:30 So you get into — and this is what happens, this type of scenario. And this is reflected overall. We've been reporting on this for a couple years now how Chilean copper production is rolling over and heading south. This is the largest copper producer in the world. And in a scenario where copper demand is forecasted to expand exponentially over the next 20 years, we see more and more areas having more and more difficulty being able to expand production.
36:08 And so, if you can find those areas, if you can find those companies that can mine at a good — and have great resource and have the ability to have good cost control, I think you're going to make a tremendous amount of money, okay? Going back to this, one of the things I've talked about publicly is Glencore.
36:33 I love that company. If you look at their earnings from Q2, their production of various minerals isn't necessarily expanding, but their ability — one of the reasons I like them and what I'm seeing more and more of these mining and oil companies get into is trading. They're involved in the whole value chain.
36:53 And their trading profits were — I don't know, they were tremendous. It was a really good result from Glencore. And this is what I like to see. I'm seeing like Total in the energy sector is very good at this, right? They try to capture as much of the value down through not only production of energy, for example, in Total's case, but also trading of these, okay? And Glencore is one of the mining companies that excels at this, also.
37:20 And so, something to take a look at. I've publicly talked about it in the past that I own the company in my personal portfolio. So, I thought these Saudi Aramco comments — the saga of the Persian Gulf continues, the war with Iran, President Trump desperate for some type of deal to try to get out of this quagmire they got the US in.
37:50 It's interesting because I think the manipulations can only go on so long. We need to restore the Gulf to its normal operating condition. Problem is as we do that, looks like the United States now is going to be forced out of the Middle East to some extent or a large extent and Iran will have control of the Strait of Hormuz.
38:17 Now, of course, all of these Gulf states, everybody's running around going to have all these bypasses and stuff like that. That's fine. But in the interim, this is going to lead to an increase in Iran's stature in that area, okay? But here's what Aramco says about all of the lost production.
38:39 This is from its Q2. Remember, it's a publicly traded company now. From its Q2 report, it says the prolonged US-Iran conflict continues to aggravate the biggest ever energy supply shock in history, removing an average of 11 million barrels per day of liquid supply. The release of inventories have now been largely deployed and are not only more difficult to be maintained, now need to be rebuilt from critically low levels.
39:08 This would require call on additional and restoration of production. And that additional production also calls on access to reserves. Where we had already highlighted before that the level of investment has been insufficient for many in the industry and needs to be addressed. Global oil demand has remained resilient as the supply shock was masked by an estimated 9 million barrels per day of strategic petroleum reserves and commercial inventory withdrawals and around 2 million barrels per day in demand management.
39:43 The unprecedented liquid supply loss has continued into Q2 and the world lost over 2.6 billion barrels of oil that was destined to a number of critical industries such as food, semiconductor, mobility, and petrochemicals. This has been partially offset by alternative flow bypassing Hormuz, the release of strategic petroleum reserve by governments, and the utilization of Aramco's East-West pipeline, which resulted in reducing the net supply loss to currently around 1.
40:16 8 billion barrels. To put this into context, if the Strait of Hormuz was to open today, it would take up to 18 months at an average rate of 2.1 million barrels per day to replenish depleted inventories on top of demand. And so, again, I'm bullish on oil companies. I'm bullish on companies that have refining capability. I've said I'm backing the companies like Cenovus, Suncor. I like the Canadian oil sands, okay? I'll mention another one, Athabasca Oil. I recently bought. This is the cash machine. I just recently was at a conference, participated in a conference, and I've owned this company off and on, and the case was made to me that this is a long-term, basically, cash cow, following the same model that I like, repaying debt, excess cash flow now, long-life asset in a
41:17 relatively stable jurisdiction, and what's it do with this excess cash flow? It's buying back shares. This is what I like, okay? Cannibalization of shares. And so, in a recent interview I had, this is what I've been pointing out. Being able to buy oil assets — I talked about, I was asked about Latin America.
41:39 Well, I like Petrobras. I like the fact that we have a changing government in Colombia. So, it's probably worth taking another look at Ecopetrol, Parex, which is there also, GeoPark, these type of companies, okay? What's happening in the Vaca Muerta in Argentina, how that's exploding. Argentina is becoming an increasingly larger and larger oil exporter.
42:05 As this changing government — this is why it's very important to look at geopolitics and to see how changes in government and changes in policy that are economically positive can lead to tremendous knock-on effects for individual companies, okay? I know that Howard Marks and Stanley Druckenmiller have taken large positions in YPF, which is the largest oil producer in Argentina.
42:32 So, these are all opportunities and they're being repriced already. And as this area is more volatile now and has a higher risk premium, you want to own assets in areas that are going to be insulated from that geopolitical conflict. They have a larger value in my view. And so, that's the thinking there. So, US manufacturing is booming.
42:59 This is the ISM manufacturing index. Anything above 50 is expansion. Well, this is a part of the reshoring effort. This is part of the build-out of AI. All the gas turbines you need, all the electrical components, transformers. This is all a reflection of that. And so, when I look at the United States, you have to look at and say, well, why aren't people — we've talked about it's not going to affect everybody equally, okay? You have to pick your right spot of what industry you work in
43:35 or where you're working to take advantage of this, okay? But this is actually positive. And I think a lot of it is due to the fact of the misallocation of capital into AI data centers, but that's a story for another day.
43:58 We've already talked about that. But this is a fact. This is what's happening. And this goes back to a report that came out from Apollo and I'll get into these charts about how AI is contributing an outsized amount to US growth. Says, "Data center CapEx adds 1.7 percentage points in just 2 years, from 1.4 of GDP in 2025 to 3.
44:27 1 in 2027, or roughly 0.85 percentage points a year. Housing's quickest phase, from 5.1 in 2002 to 6.6 in 2005, ran at half a percentage point a year, and telecoms at around 0.15. The AI cycle is building at close to twice the pace of the housing boom at its fastest." It's interesting to point this out. This is my own commentary now about housing and telecom ended up being bust.
44:53 That's my whole point here. AI is contributing to GDP at a rate that was similar to telecom's build out and housing's, okay? And those ended in bust. And so you saw what happened to the economy after that happened. This is why I think eventually, whenever it is, '27, '28, whenever it blows up, okay? Then what does that mean for the economy? Because AI now has become such an outsized portion of economic growth.
45:26 It's basically carrying the load. And so I go back to continuing on with the comments. "The same arithmetic runs in reverse. Housing's unwind from 6.2% of GDP in early 2006 to 3% by the end of 2008 is what made that recession severe. While telecom's much smaller reversal produced the mildest one. A cycle that builds at 0.
45:50 85 percentage points a year can unwind at a similar pace. And that, rather than the build out itself, is the macro risk if AI demand disappoints." And so, I guess it just depends on what you think. Will AI demand disappoint? I mean, I see no path to recovering the capital that's being invested. And so it's eventually going to bust.
46:11 And then we're going to have an unwind, and it's going to be similar or worse than what the housing bust was or the telecom bust. It's just that simple. So, here's hyperscaler growth relative to housing investment before the GFC. You can see the years here, '96, 2000. Residential investment, this is a percent of GDP, is in orange.
46:34 Hyperscaler capex is in green. This is 2026, and you see how it keeps building as we go forward. And so it's not quite as large a contribution to GDP as housing was, but it's still fairly significant. And so, hyperscaler capex is higher than telecom in the 2000s. Remember we had the bust in '99, 2000.
47:02 You see that happening as we peaked at 1.2%. This still caused a tremendous — and they're forecasting — the problem is they're forecasting — we're in 2026. This is the consensus forecast for the rest of the year, but then they're forecasting these huge amounts which are similar to what we saw in housing back before the housing bust.
47:27 So, it's a sword of Damocles. Everything's fine now. Everybody's making money. The story works, but at some point, if they're not able to get a return on capital, the investment — the money's going to dry up at some point. And I believe that's already starting, okay? So, we will see. Again, it's hard to pick tops and bottoms, but I don't want anything to do with this.
47:56 The time to get into this was probably back here in 2020, not here. We always see these consensus forecasts. Whether or not it actually goes there, we'll see. So, I wanted to point this out. This is from US Global Investors. I always talk about how, longer term, why it takes so long sometimes. The portfolio that I have is structured for outcomes to be 3 to 5 years for them to work out, and we've seen that.
48:31 I was looking at a review and I talked about that a little bit in the August issue of the AIA newsletter. It's important to understand that multi-baggers take years, okay? Whether or not it's a recovery from a bottomed-out shelled industry that's turning around, or if it's a capital compounder, typically what I've seen is for these five baggers and pluses that I have gotten in the portfolio, the average time it seems to take is around 5 years, okay? And so, that's why we're constantly looking for new ideas
49:09 and capital compounding situations or situations that are really bad and are now turning, okay? And with the understanding that this is not a trading service, okay? I don't trade for a living. I look for themes. I look for ideas that are going to play out over several years or decades.
49:30 This is why I'm bullish on hard assets. As we talked about today in several examples, how the supply is being constrained for various reasons, geological, political. But yet, the demand can increase and with the never-ending energy upward bias because of monetary debasement, okay? But that doesn't mean it's going to happen next week.
49:56 It takes time for the market to realize these things. So, you have to have the ability and think ahead. As Stanley Druckenmiller says, don't look at the situation at bay. But the problem that I have with this AI build-out — it's violating one of the classic rules of one of the greatest investors, and he's not the only one that talks like this.
50:17 This is how you have to think about it. Things are not valued for what is going to happen in the future. But you need to look out as an investor speculator out 18 months, 24 months. And you have to sit down and say, "Where are we going to be in 18 or 24 months?" Okay? The market's looking backwards or looking at today.
50:37 That's not how you invest your capital. You need to look out and say, "Okay, I'm pointing out that we're having a hard time getting more copper. The copper demand is going to go higher. Supply is going to constrain. What's it going to look like in a year, 18 months, 2 years? Well, there's going to be fluctuations, but the supply-demand dynamic gets worse over time.
51:00 It's the same thing with like uranium. Now, the question is how do you put together a position to take advantage of it? That's the trick. It's not really that difficult to figure out long-term. Same thing with like energy. Energy is scarce, not necessarily because of geological constraints, but because of political constraints, okay? Whether they're geopolitical or domestic policies or what have you, okay? For example, like in Europe, they have high energy prices because
51:35 they desire to have them. Their political class has made energy more expensive, okay? Because of bad policy making. Doesn't mean that the stuff's scarce. There's a lot of onshore oil and gas in Europe that can be developed, but you're not allowed to frack for example in the UK. They've raised levels of taxation and royalties in the North Sea to confiscatory levels, so who would invest? Okay? So, it's not like the oil isn't there, because we see what the Norwegians are doing in the offshore of Norway, okay?
52:08 They continue to invest, they continue to extract, okay? Germany's decision to not import pipeline natural gas from Russia because of the war in Ukraine has led to energy costs skyrocketing in Germany and industry is now shrinking. So, you can make the moral judgments if that was the correct thing to do. That's not what we're here to do.
52:41 We're here to invest. And so, again, you need to look out over the years what's going to happen. I look at this debt situation for example. There's no way out. They're going to eventually end up with yield curve control. They're eventually going to print a lot of currency units and cover up this mess. That's going to put a bias on hard assets, notwithstanding the volatility you'll encounter.
53:05 Remember, just a few months ago we were making all-time highs in gold. And we pulled back considerably and everybody's euphoric at the top and everybody's sad when everything pulls back. But you have to look at things further out. That's my point and that's really where the real money is made. Basically, the longer that you're in the market — this is just the S&P now, okay? If you're in for 3 months, this is your positive periods and negative.
53:38 The shorter term trader has more difficulty making money than the long-term investor. And I'm not just constraining myself to the S&P. You have the ability now to access markets all over the world. And so you can go into undervalued markets because these things all cycle, right? At some point they're undervalued relative to the US, and then other periods they perform better than the US, and vice versa, okay? And so you have to utilize the concepts to stay ahead and achieve the goal, which is one small sentence: compound wealth consistently. That's what we're here to
54:16 do. So I think the facts, the data, is without question. All right, guys, that's it for this week. Appreciate you tuning in, and we'll talk to you next week. Thank you.