Oil Isn't Dead - John Love on Why Energy Markets Are Defying the Headlines

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Speaker B: Well live, this is Value After Hours. I'm Tobias Carlisle, joined as always by my co host Jake Taylor. Our special guest today is John Love. He's the president and CEO of UCF Investments. They're a commodity energy ETF firm. John's going to give us some views on where copper and oil are going. How are you John? Welcome to the show.

Speaker A: Thanks for having me. I'm doing good. Thank you.

Speaker B: Tell us a little bit about uh, the firm.

Speaker C: Sure.

Speaker A: Well, uh, USCF Investments. The, the acronym is short for United States Commodity Funds. We've been around for 20 years. We launched our, our first ETF in 2006, uh, April 2006. So just celebrated a uh, 20th anniversary and uh, we were the first uh, oil ETF. The, the third commodity ETF to exist and had a lot of success with that. Uh, a lot of people familiar with the ticker uso, uh, that's us, um, more so than the firm. Um, but we shortened United, uh, States Commodity Funds to USCF Investments because we branched out a little bit in the ensuing years. But our, our product lineup is Primarily uh, commodity ETFs. So after oil we went, we did natural gas, we did kind of a contango mitigating fund. Um, we've done copper. Uh, and we've also branched into broad commodities where uh, we think we have uh, a pretty good strategy that's done, done really good uh, this decade so far. It's actually beaten the S p and um, NASDAQ 100 over the last five years. So pretty uh, pretty proud of that. So yeah, we just keep uh, trying to innovate in the space and, and that's us in a nutshell Congrats.

Speaker B: Uh, I think copper is particularly interesting potentially because it's used in AI. Um, I've been telling the story that the world needs six more escondidas and uh, we don't have eight more escondidas and we, we don't have eight more escondidas that tell us a little bit about what's happening in copper.

Speaker A: Yeah, I think you nailed it. Uh, the challenge right now is the short term versus the long term. Like everybody knows, I don't know if everybody knows, but over the next five years I think it's a pretty established fact that unless there's an interruption to this AI story, there is not enough. In fact, even before AI, there's not enough copper for all of the things that we're trying to do, just standard manufacturing, um, and growth. But then you add EVs, you electrification across the board, um, and then you know, the AI story, data centers coming into it, there's just not enough copper. It takes a long time to, to bring new uh, supply online. That's starting to happen. But it's, you know, it's a very long process. People, they're saying 10 years, it's probably more 15, uh, depending on your jurisdict, it's probably uh, the rest of your life. I mean it's just, it's a challenging thing to do. Uh, in the short term, it's a little harder to say. If you look like at analysts, um, right now, from Goldman to JP Morgan, I think that's the people on both ends of the spectrum. Goldman uh, is saying there's a surplus of copper. JP Morgan is saying there's a deficit right now. And so it's pretty hard to nail down where are we at the moment and what's going to happen? Uh, you know, one thing that has been a headwind has been the Iran war, uh, just because if that slows the global economy, copper still is tied to that. So yeah, in the short term, uh, you know, what's going on could, could uh, affect things. It's affected China, uh, China's manufacturing, uh, pmi, the reading is slightly bearish. Uh, you know, they've slowed down, uh, here and there, but they also have committed to a tremendous amount of new, new grid, uh, capacity which requires a vast amount of copper. So just across the board, um, I think that the copper story is bullish. Um, in the short term we always have to be careful and um, it's hard to say when might we see a downturn, uh, in the global economy? How might that affect things. And um, will the long term supply deficit override that anyway, and that's a definite possibility.

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Speaker B: What do you think about Copper's, uh, role as Dr. Copper? Is it still, is it still the doctor or is it uh, less so?

Speaker A: I think, yeah, uh, yeah, I think you, uh, know, yes, it used to be very predictive. Um, now because of the deficit, there's, there's more of uh, you know, its own fundamental story, um, that it could actually, you know, we could be in a situation, I kind of think we are, where there's some, there's some real headwinds to the global economy. Um, and yet, you know, Copper over the last couple of years has done, done quite well and it sort of keeps, uh, buffet. I mean obviously stocks have done quite well as, as well. But I think if you look at some of the things, um, that uh, you know, tend to lead to downturns, um, copper isn't, isn't in that same place. So I think, you know, there's, there's certainly, uh, you know, Dr. Copper still has his uh, white coat in the closet somewhere. But I don't know if it's as much as it used to be.

Speaker B: I just wonder given uh, one of the metrics that I like to track is copper and gold together just to take out the US dollar influence. And obviously gold's had a very good run until the last few months and uh, Copper's had a good run alongside it, which to me might be a little bit counterintuitive because gold tends to be more of an uh, asset that runs in Distress, whereas copper seems to be more predictive of a stronger economy and they're both running together. And if you look at that copper gold ratio, it's actually troughed recently and it's sort of in a place where you would see it at the bottom of pretty substantial recessions and stock market drawdowns. So to me it looks like it's like a 2016, 2009, 2000 kind of bottom, uh, versus gold. But if you look at the stock market, you wouldn't have known that that was happening, which I find kind of an interesting thing. Do you have any view on what might be causing that or have you observed anything like that?

Speaker A: Yeah, uh, I think, well, just like copper maybe not having that as much of a role in prediction, I think gold at least this year is somewhat confounding as well because everybody thinks risk asset and then you know, it hits an all time high in January and then you have the Iran war breakout and you'd expect, well that's, that's going to drive it up even more and you still have all that, all the tailwinds for gold that we had before the uh, Iran war broke out. Um, and yet it did quite poorly over the last uh, I mean, I guess not terrible, but not as we would expect over the last three months. And then you know, with the announcement of the, the Iran deal, you know, it's back up, it's moving back up. So I think both of them have been, you know, a little confounding and, and so you know, you know, as far as that metric, I tend to look at the gold silver ratio. That's when we, we get asked about more. But that is a, a really good one to look at is, is the gold, copper and uh, I'll have to take a look at that more. But I, to, to be honest, I haven't, I haven't looked at it. But yeah, they've both been performing which is definitely counterintuitive because usually gold's the risk, risk off asset and copper's the risk on asset. And, and now they seem to have, you know, they seem to be playing um, you know, both risk on and risk off in somewhat unpredictable ways. Gold obviously there is a, you know, there is some, you know, reason for, for what's happened, but it still has all those tailwinds. I mean central bank buying has not dropped off at all. In fact it was a record I think in, or the highest level it had been Q1 versus the previous five years and none uh, of the G20 economies have stopped buying gold. So that's still going on. I think you still have, uh, with the potential for, I don't know if we're going to have interest rates be able to do interest rate cuts or not. I'm kind of inflation worried, uh, about inflation myself. But um, it certainly changes, um, the probability and the odds if we don't have the war going on. Um, so we'll see. But uh, yeah, it's interesting for both those metals that they're, they're behaving in different ways, uh, relative to the past. And it's not just black and white, cut and dry as it has been.

Speaker B: You raised it. Uh, and I find it's another interesting ratio that I track too. Silver, gold. Uh, when gold was very, very strong, it sort of took silver a little while to catch fire. But when silver catches fire, it really does run hard against gold. And it went parabolic. And I posted a chart on Twitter when it went parabolic saying this is typically closer to the end of the run of these monetary metals when they do that. And it seemed to be close to the breakdown. But what does the gold silver ratio tell you?

Speaker A: Yeah, I mean, uh, I think kind of the textbook thing is when it gets low, that means silver's doing well relative to gold. And where it is right now is gold's uh, back, um, on top. So when I first discovered it a long time ago, I thought, oh, this is brilliant. If it's uh, you know, if gold's running at a huge premium to silver, then just invest in silver. But of course you can sit there for years and you know, but when it happens, just like you said, it's high beta to gold. So when it does move, it tends to move a lot and be a very rewarding trade. But you know, then you, you annualize that over how many years you were waiting for it to pop and, and it might not quite be as, as exciting. So I do think it's worth looking at, um, you know, if you, you know, run moving averages on it or you have a system that um, can kind of tell you when it's time, time to get in. And like you said, when it goes parabolic, um, it's definitely an interesting trade, but it works both ways. You've got that high beta to work with.

Speaker B: I saw that. Uh, one of the interesting charts that I like to track is uh, the ten year, or, sorry, the two year treasury as a proxy for what the Fed might do with rates. I think that that's, that's not an uncommon thing to do. But uh, since the Iran war that the two year has run up very substantially, uh, over the Fed funds rate where it's been at a bit of a discount for a while. Which to your point, seems to make the likelihood of rate cuts, uh, low. If anything, it looks like we might be seeing interest rate rises. Do you have any, do you have any view there?

Speaker A: Yeah, I mean, I think interest rate steadiness or rises are the logical, rational, uh, thing right now. Pol politics being what they are. You know, there is a possibility that we, we get rate cuts, uh, anyway, which um, would obviously, you know, be beneficial for, for not just gold, but many assets. But yeah, I do think the market is telling the government and you, you certainly have seen the chatter calm down about, you know, we, we have the new Fed chair, uh, who's supposed to be, you know, more, uh, do. Yeah, yeah. Than Powell. And yet there hasn't been any chatter about cutting rates. And I think a lot of that is, you know, everybody knows when the bond market is signaling, okay, this is, this is getting out of control. Rates are going up. People are demanding that, that higher premium for not the two year, but just, you know, longer as well. Um, you know, I think you have to, you have to take that into account. I mean that can be absolutely disastrous if we don't. And we have. You look at the deficit, and that is just the most frustrating thing to me in the world is that you have 30 years almost and 25 years of um, running up deficits when we actually had a surplus. And now the debt is what it is. And I think I saw a headline yesterday. We went from a trillion dollar debt to a trillion dollar deficit. Sorry, trillion dollars in interest payments. It's just unbelievable. So I think the bond market's reacting to that. You need some kind of catalyst, explosive growth, um, AI saving us from ourselves. But we got to have something. Otherwise, um, I am worried about where interest rates go.

Speaker B: Well, I can't believe it's taken us this long to get there. But let's talk oil. Is it the most interesting market in the world at the moment? What's happening in oil?

Speaker A: Oh, not much. It's been quiet. Yeah, it's been, uh, I would say the most exciting three months for bad reasons. Obviously. Um, war is never, um, you know, something you want to see. But, um, it's been such a, such a back and forth and um, you know, just, just bizarre. You know, when it first broke out, obviously that was the, you know, most exciting point. And now, you know, since April, we've Been in a different, uh, a different place. I think there's some skepticism about what happens now. But, you know, where. Where we are versus where we were, I'd say, you know, entering the, the war period. I think the White House and some people in the market, uh, are a little skeptical now of higher prices. Uh, there's still risk out there, is what I'm trying to say. And I think there's a lot of skepticism, uh, about that risk because some of the most bearish calls, in fact, bearish calls that were pretty common. We're going to have $150 oil. We're going to have $200 oil. At first it was the end of March, and then it's like, okay, we did the coordinated SPR release in the G7. So now we have till the end of April. And, you know, that got pushed out. And I think everybody's kind of like, well, did the industry cry wolf? Why didn't this materialize? And it's really because, you know, not just the SPR release, but there are a number of things that I think people just, you know, at the time couldn't foresee. Um, you know, we. I think one thing that we always discount is how creative industry can be in the face of crisis. And one of the things that, uh, we've seen is China had built up their, uh, reserves substantially over the last. The, uh, previous three years. And they were able to rely on those, draw those down. That's not going to last forever if this doesn't get resolved. I mean, this doesn't truly get resolved as everybody's expecting right now. But that had a big effect on, uh, the price of oil and kept it down. Um, just before you move on for

Speaker B: that, do you have, do you have any view on what caused that? Was that. Was that China accommodating the US by drawing down on its, uh, drawing down on its own reserves or. I don't. Is it a slowdown in China or what's the. What was the reason for that?

Speaker A: I don't think so. I think if you look at. I mean, it certainly helped us, but I think it was more. It was self interest. I mean, you look at the other Asian economies that were, you know, Korea, Japan, um, where they didn't have those kind of reserves, um, they had to have massive demand destruction which is going to impact your economy. Um, China had the, the head, uh, you know, the headroom to do that, um, as well. So I think it was, hey, we've been, you know, this is what. We have this for let's, let's use it. Um, I think, I just think it was self interest, yeah, that, you know, things are a little soft over there. The last thing they want is, you know, significant, uh, impact from actions, external, you know, uh, events outside their control. And they know that or they, at least the gamble is, you know, we use the reserves and then when the price goes back down, we refill them. The danger, of course, has been and remains if this is not resolved, they get to the, and I think they're getting fairly close. Um, they're going to have to say, all right, we have to start importing again. Um, they also canceled exports, uh, most of their exports, uh, too. So they were basically, you know, somewhat self sufficient and a tremendous amount of the Middle east oil goes to China. So they, they really said, all right, you know, this is, this is what we have to do. So my opinion, yeah, I think it was self interest. Um, I think it just happened to accommodate, uh, the U.S. but uh, I could be wrong. There, there could have been some coordination, but it kind of, I think it was more, um, what worked for China.

Speaker B: I mean, Trump did go visit Xi Jinping in Beijing, but it was a little bit, kind of like halfway through the, halfway through the process. I just also, uh, wondered about the US Uh Strategic Petroleum Reserve. There's been this sort of increasing chatter that we're getting closer to the bottom. I don't really know exactly what that means, whether that's like literally they drain it or whether it sort of gets to a point where it's not structurally sound if you pull too much oil out. But it seemed to suggest that we're like weeks away from the bottom of the spr. And I don't know what the consequences of that are. Uh, but do you fill us in what happens there?

Speaker A: Well, I think there's. Well, first of all, I think yes, uh, you know, that, that is, that's out there. A number of other things. We're weeks away from this and that I think this deal kind of had to happen right now. And so. But yeah, with the SPR, um, it's at about 350 million, uh, barrels right now. It is as they've shown in the headlines. I mean, the last time it was that low was when they were filling it back in 1983. First got to that level. It got down to that level in 22 when we had, you know, the, you know, we drained it for the Ukraine war really to keep prices down, which I think proved to be probably unnecessary. We didn't refill it for years. It started going back up a little bit and we got over, I can't remember the exact number, but maybe 450 million barrels. And then, you know, we've, we've dropped it again. So if you get down to about 300 million barrels, that's the level, uh, where yes, it's functionally, uh, harder if not impossible to, to pump out. You do need a certain level in, in the tanks. I mean obviously you can get it out, you know, if you absolutely have to, but that might not be something where you can pump it as, as quickly as you could. So that functionality floor, uh, we are getting close to, despite the fact that 300 million barrels is, is a lot of oil, but we really need to restock it. One thing about the, uh, the oil that is getting restocked right now, or that will be restocked is the US Government did something I think was fairly smart, which is, you know, they sold swap contracts. So you can take a, you know, for every barrel you take, you have to give 1.25 barrels back. Um, and so, you know, we'll be getting um, some additional, um, you know, build back in, in the spr, not just the barrels coming back, but even more beyond that. So assuming we can get uh, those barrels at a reasonable price and that'll be the challenge.

Speaker B: Well, we.

Speaker C: Sorry, J.C. i was going to say assuming that we do, uh, rebuild. I've been wondering if everyone is not going to think like, well, I don't want to have this happen again. Maybe I need to be like 150% of what I was running at before just to give myself more cushion and maybe like, structurally we just have higher oil prices for longer.

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Speaker A: Yeah, I think that's very much a possibility. I don't know what happens in the US because uh, there's some dysfunction but around the world, uh, governments are talking about that. They're talking about refilling and they are talking about that exact like 1.5 or more because yeah, we can't handle. It was a big wake up call in the US we're more cushioned from it. So we can handle an SPR where it is right now as long as we don't go much lower, but the rest of the world can't. And it's not just oil, but it's distillate, it's gasoline, uh, it's jet fuel. So people are talking about uh, making reserves for those where they might not have had them before, uh, as well. So. Well, one thing I think the market may be missing is that people are going to be, or countries are going to be building back up their reserves and higher levels and levels of reserves, uh, and that will uh, probably put a floor on the price for a while.

Speaker B: Before we came into this year, oil was uh, WTI was sub$60. And um, all of the valuations that I had done, I'd penciled in $80 oil as sort of a bullish outcome, um, before it sort of before the Iran conflict came around. Um, where do you see the oil prices now given that we may need to do these refills? Uh, across the board, there seems to have been some infrastructure destroyed around the world. What do you think is a base case, Bear case, bull case for oil over the next five or ten years?

Speaker A: I think bear five or ten years,

Speaker B: um, or whatever time frame you feel most comfortable with.

Speaker A: Yeah, I'll, I'll, I'll say for the next year. Um, I mean a lot of infrastructure's damaged a lot. You know, we have to clean up the straight of Hormuz. We have to, you know, get things flowing again. A lot of barrels have, have drawn down, you know, not just SPRs, but inventories around, you know, around the globe. Uh, commercial inventories have been drawn down so that all gets replenished. I think that over the next year, at least as that's happening, um, you probably do have a floor. Uh, I, you know, I'm always hesitant to, I'm always, it's very difficult to, to put those things. I mean there's four millions of forecasts out there, but I think probably around 70. I wouldn't be surprised by you know, dips lower if something pessimistic happens. But I think I would probably put an average, you know, at least on Brent Oil, probably around, you know, 80, close to where it is now with spikes up into, you know, 90. Uh, you know, it all know, a lot depends again on global economy and all these, you know, external factors that, you know, it's, it's, it's hard to foresee, but I'd kind of center it around 80. Um, there's no, uh, guarantee that's, you know, where it's going to be. But I, I, I definitely see, you know, it's a volatile commodity. So, you know, a dip down to, to 70 at some point is possible. The one thing that um, could um, eventually push it down as OPEC has, you know, they, the one thing that supported the price for years was the OPEC put, um, you know, they would, you know, every time it got down to a certain level, they were putting quotas in place and voluntarily restricting production, very much a reverse of what they did in 2020. Now, even though they don't have the capability, they have symbolically raised their, their output targets. Um, and as they are able to fill those over the next year, maybe not as, as high as, you know, they've, they've published, but that's more oil going into the market. So that'll be a little bit of a headwind to the price. But uh, at the same time a lot of structural, I mean, uh, infrastructural damage, um, and, and just um, uh, just, just uh, logistics that uh, have to be repaired.

Speaker B: When you say that, uh, OPEC doesn't have the capability, what do you mean by that?

Speaker A: So they have, I think their most recent, like just last week they announced or over the weekend, 188,000 were all the quotas and voluntary cuts they'd announced over the years, um, several million barrels. You know, they've been slowly, they started unwinding those uh, in 2024, um, and putting a little oil back on the market very cautiously. And when the Iran war broke out, they suddenly said, okay, we're going to throw, you know, 200, 400,000 barrels back into the market. But they couldn't actually do that because Strait of Hormuz was closed. A lot of oil was trapped and their production was shut in because they can't get it out. They had to shut in production. So they actually aren't producing that much. They have to restart, um, facilities. Uh, they have to, they have to get, you know, the oil out through the Strait there's this backlog. So, uh, even though they say, all right, this is how much we'll produce, for, uh, example, Saudi Arabia, I think it's, uh, you know, I think they're able to produce about 7.5 million barrels a day right now. Uh, their, their, um, quota or their, their, you know, level where they're willing to go to is 10.25 million barrels a day. So there's a, you know, 20. They're basically their target. They're 25% below their target. And every country in the Middle east is kind of in the same, same boat right now.

Speaker B: Let's talk, uh, natural gas. I understand that the US Is the Saudi Arabia of natural gas. We've got giant natural gas deposits. It's a strategic asset for the U.S. talk to us about the natural gas market. What do we need to know?

Speaker A: Um, yeah, I mean, from 10 years ago when we exported no natural gas to now when we're exporting 18. Uh, well, we're exporting about 16 billion cubic feet a day. Uh, capacity right now is 18.3. So that's a huge increase compared to where we were. Uh, there's a lot of terminals and facilities that have come online that didn't exist ten years ago. And there's another, I want to say, four and a half, uh, billion cubic feet capacity coming online the next two, three years. Um, and it's really come online at a time when it's desperately needed. Europe needs our natural gas. Um, yeah, we're shipping some to Asia, but, ah, I think 68% of it goes, goes to Europe. Um, with the outbreak of the Ukraine war and then the Iran war, that's been desperately needed. But, uh, it's interesting because U.S. natural gas, we have absolutely tons of it. It's a byproduct of crude oil production, which of course has exploded. Uh, with the shale revolution, um, we really don't have a problem, uh, you know, with natural gas. And that's kept prices low. It's always been a domestic market. It still is. Uh, it's going to be much more affected by weather than exports. But that export story is becoming part, uh, of the story. And over time, as, as we expect, as we, um, export more, uh, and as it starts getting used in data centers, I think that'll start. I mean, as the data centers are built out, as the AI story continues, which a lot of that is powered by natural gas, um, there's a lot of demand there that, uh, that is increasing. So where it's been, I would say almost A weather story for you know forever. Um, it's becoming a, a demand story both internal uh, domestically and internationally with the exports. Uh, Australia actually uh, is another big producer. Uh, Qatar is a big producer. Um and oh that's, and that's the big thing going on is they're uh, their big LNG facility was severely damaged. Uh, they're trying to get uh, back to you know about 50% capacity in a few months, 80% capacity by the end of the year which is pretty quick but they're still going to be 20% of their capacity. That's going to be offline for years. And so that's probably about 4% of global Ah, LNG supply. So that's, that's going to be uh, that's something that's been taken out completely and that is a years long story that's probably um, adding a, a bit of a premium to natural gas uh for the us, For Australia and everybody.

Speaker B: It's long been sort of known as the widowmaker trade, the gas trade because for whatever reason it's extremely volatile. There seems like there's a lot of downward pressure on prices most of the time but every now and again there's a massive spike and that takes people out. Is that how the market trades or how do you see the market?

Speaker A: Yeah, it's definitely a very volatile market for people that enjoy volatility and we have some of those uh, fans uh, of our funds. Natural uh, gas certainly does that the whole time that we've had our natural gas fund out 19 years ung. Ah, not the whole time but um, the majority of the time it has been under pressure. Um, and that is again is, is primarily this, this abundance and then you get a you know a cold weather snap or you get something that takes out production and it does spike up. But I think that now one thing that's, I don't know that the volatility goes away but I do think that the price um, is probably a bit inflationary. You know the highs on the channel um, is, is going to go up uh just because of that, that increased demand. But um, it's definitely exciting market and I think will, will remain so as long as we have weather, heat, cold and um, global disruption. So.

Speaker B: Well folks, uh, we're coming up on the top of the hour. Uh, let me just give a shout out around the horn and then JT's got some veggies for us. Uh Tomball, Texas. What's up? Tyler Valparaiso, Toronto, London UK thanks for specifying. Not Ontario, Orlando Orlando, Florida. Havertown. Tallahassee. Snohomish. Petitva, Israel. Golden Grove. Guyana. Nice. Boise. Philly. Toronto. Lausanne, Switzerland. Welcome. Cincinnati. San Diego. Madeira Island. Portugal. Bellevue. Turku. Finland. How do I go with that? Palmer, Spain. Gurney, Illinois. Lanzarote. Spain. And Scotland. The brave. Thanks for joining us. We appreciate it. Jt, what do you got for us? You're on mute.

Speaker C: Yeah, um, coming at you live from, uh, an airport, so hopefully it's not too much background noise. I tried to find somewhere quiet, but then it got noisy on me. So, uh, so the veggies. You know, we've all heard this bamboo story before, right? It's on every LinkedIn post and half the sales conferences in America. Usually right after some slide about like an eagle that reinvents itself after it's 40 or, uh, you know, a bad Michael Scott office quote. But, you know, with the bamboo, you plant a seed, you water it. Year one, nothing's happening. Year two, nothing. Year three, four, still nothing. Then in year five, it grows 90ft in six weeks. And the lesson is supposed to be about patience. So you keep watering and, you know, your breakthrough is coming. Uh, an overnight success, 10 years in the making. Right? Uh, it's a nice story. It's also kind of wrong. Uh, and the real version tells us something about the biggest current bet on the planet right now, which we'll unpack. So, as you know, that bamboo is not doing nothing for those five years. It's working the whole time. It's working underground, building a rhizome, which is this web of roots and stems where the plant banks its energy underground. It builds the engine first, basically, in the roots, it's stored carbon, and the machinery then is built that eventually, uh, allows it to raise the shoot. So here's the part that's not on the motivational poster. When the chute appears, its diameter is already set. The whole architecture is compressed inside of it already. And then it turns that bank energy into height at an absurd speed. And a botanist in Japan plucked, uh, one shoot growing nearly 4ft in one day in 1956, which is incredible. And the stock, which a botanist will call a culm. Culm comes, uh, out as its final width. And it never thickens. So, sorry, Toby, but the bad news is, no matter how much you wish, uh, you can't will your way to a thicker stock. So, uh, I digress. But how big a stock is, is thrown, is capped by how developed the engine underneath it is in that rhizome. So if the rhizome is Weak, it's not going to throw a giant cone and instead it'll throw a small one or maybe no one at all. So it's time for us to now start torturing our analogy. Uh, in business, like, you likely need to get the underground route unit economics right first before you scale, uh, you know, before you open that second store, you need the first one to be earning more than it costs. And that's the unit economics of the rhizome and an engine that throws off more than you feed it. And of course, you know, Michael Mobison wrote a white paper called the Math of Value and Growth, which gives you all the details on the math behind this. But growth really only creates value when the next dollar you put in earns more than what it cost. And if you're at your cost of capital, exactly that growth is worth exactly zero below it. The growth destroys value. So the faster you grow, the more that you're destroying. So wework, you know, was a 90 foot stock built on a baby rhizome that couldn't feed it. No underlying engine really. And so of course the IPO cracked for, you know, obvious reasons, despite, you know, community, uh, adjusted ebitda, um, however you wanted to dress it up. So let's make this all a little bit more timely. Friend of the show Chris Bloomstrand gave a talk at Manual of Ideas earlier this month. And, uh, it's called the Value at a Secular P Plateau. And his warning was around really kind of the bamboo story. Uh, right now, today, we're forcing up the biggest stock in history with the AI buildout. And Chris put some numbers around it. So the hyperscaler Capex was over 400 billion last year and it's headed for something like $4 trillion over the next decade. That's the projection. Here's the part that starts to rhyme. Loomstrand lined this up with every capital cycle boom before it. Canals, railroads, fiber, et cetera. Everyone's a frenzy of building. Uh, but of course most of those builders went. Uh, only 4% of the fiber was actually lit during the dot com boom. We just had crazy overcapacity. But the Internet still got built. They'll use the fiber later. Twenty years after the wreckage, uh, for all the people who paid that original tab, you know that unfortunately they didn't survive that. So, so let's run this bamboo question on the AI stock. Can the engine feed it? So we're spending 4 trillion on chips and data centers. If you depreciate that over 10 years, that's 400 billion a year baked into the cake every year, whether revenue shows up or not, by the way. And 10 years is quite a generous assumption. It's probably more like three to five years depreciation schedule for these chips. But if we cut that 10 years in half to five, the bill doubles to 800 billion a year in depreciation. Okay, then you have to put a return on that, uh, just to break even at the cost of capital. You need maybe 400 billion a year in profit to earn what these companies are actually used to earning at like 20% returns on invested capital. It's more like 800 billion that you need. And right now the entire S and P earns about two and a half trillion. So in this one build out to throw off something like a third of all the profit in corporate America today. We need it fresh on top of all of that existing that they're making in order to justify the spend. So, and of course today's revenue numbers, if we look at, um, we look at, uh, Anthropic is running at, I don't know, 47 billion or something, chatgpt at 25 billion. Real money, big numbers, but like nothing compared to 4 trillion. And then here's kind of the concerns when you get to financials of big tech right now. Two years ago, CapEx ate about 40% of the cash that these companies generated. Today, it's effectively all of it. And these cash machines are spending everything that they make, basically buybacks are shrinking and the rest is coming now as debt. And a lot of that is parked off balance sheet. When you see some of these structured finance things and of course fresh equity raises now, which, uh, you know, you saw with Google and Berkshire recently. So plus today, a lot of that revenue that's showing up is a lot of these kind of same dollars that are circulating around between a handful of these. Whether you know how much profit you can make out of that, who knows? Um, so it's. We're in all in this poker game where everyone is basically keeps buying chips from the house, which, the house is Nvidia today. Uh, and the pun was intended there. Um, so anyway, no doubt the tech is real. I think we're all using it, we're all experimenting, we're all benefiting from it. It's awesome. But the Internet was real too. It's pretty awesome. Still did not create high returns for the companies that built it. In fact, it killed many of them. So whether you're in a bamboo garden, uh, in a startup or in a data center, that's the size of a city. There has to be a real engine down there in the rhizome that's throwing off more than you feed it. Or you're kind of just looking at maybe a ravenous hole in the ground eventually. So I honestly don't know how this all ends or over what timing, but it's going to be exciting to watch it play out. So where do you guys see this thing going,

Speaker B: I wonder? Um, there's a good comment here. We're supply constrained on Compute. How real do you think that is?

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Speaker C: Well, I mean I can go off my own personal usage where, uh, because it's kind of a pain in the ass to decide like which model do you want to use for which task and you don't ever really want to underpower the model. So you're basically like going, oh, I need max deepest, most expensive for changing this file name or something like nothing. So I think there's actually probably a lot of room for improvement on model optimization where you send the load, you send the query to the right model, you get like kind of minimum effective dosage. Um, I don't know. I'm not smart enough to know all the permutations of all the variables there, but I feel like we will figure out how to do less with more eventually. In which case maybe it's not so constrained.

Speaker B: The other thing is that there has been this. Those mag, uh, seven. They do seem to have. Their earnings have exploded, um, over the last five years and they've certainly grown much faster than small and micro and mid cap. So there does seem to be a huge revenue growth there. It's like it looks to me like it's going parabolic and I don't know what the driver of that is, whether it's just that there's huge amounts of investment and then that investment inevitably creates some profitability or whether it's uh, like real demand and real uptake and it's going to outstrip the capex. But uh, uh, it's a very difficult thing to model out and pick. So hats off to anybody who's done that. But it must be, John, it must be a good thing, uh, for the commodity complex. Uh, where's the capex spend going? It must, at some point it's flowing through to the metals and the energy producers.

Speaker A: Oh, yeah. Well, first of all, to JT's question, I, I lived through the, the dot com crisis. I was, you know, at multiple firms that, that went under and I remember that really well. It leaves them an impression. Um, but as you just said, you know, Tobias, the one difference is these companies that are spending, are spending from profits that are coming from somewhere else. Whereas the, you know, in the.com.com era it was, there were no prop, you know, these were companies with no pets dot com. I mean just no, no real business model. Ah, just an expectation of future growth which as jt, you mentioned, eventually came, but it came to not necessarily the people that were business in business in the late 90s. So I think it's very hard to say, uh, I kind of have this view that at some point there's some interruption to this. At some point the market has to say, okay, the dollars are not materializing as fast, or maybe they do. I mean, if, if revenues catch up, if there's business models that develop and all of a sudden there's all these products and, and certainly there's use cases, there's products, it's beneficial, but where's the revenue, uh, coming from? And uh, I think that'll be the challenge. Now, whether that's this year, three years, five years, that's m. Impossible to say. But, um, yeah, the more parabolic it goes, maybe, maybe the sooner we uh, get to that point. As for commodities, yeah, I mean, it, you know, I've got basically a copper behind me. You know, it's, it's a fuel for copper, but also so many other things. You know, silver is more an industrial metal than a precious metal. Uh, it's critical. Uh, but everything, you know, aluminum, nickel, um, you know, a whole bunch of different, uh, commodities. Like I said, natural gas, maybe that doesn't go through the roof, but there's probably you know, support for it as we build out uh, data centers and, and the hyperscalers are saying we, we want to pay our own way, we'll build power, uh, facilities. I'm not sure how genuine that is but that's what they're saying so but we think even without the AI story there's a lot of support for commodities. When you look at broad commodities, you know every individual commodity, you know it's, it's a you know, rise and fall supply demand, you know, individual supply demand story. You put them together though and if you allocate in a smart way and rotate in a smart way, um, I think that can be a real beneficial uh, thing to your portfolio. So we think unlike the 2010s which was challenging for commodities, uh the next five to ten years look uh, quite positive.

Speaker B: Good for small and micro businesses, good for mid cap businesses. All of that spend just flowing through the good guys for once.

Speaker C: Toby, I'll give you a, a little stat to push back on that whole like earnings uh, growth story. And I, when I read this it about made my jaw drop. Q1 2026 three companies, Alphabet, Amazon and Nvidia reported $69 billion in non operating other income. That counts towards earnings for the S&P 500 which was a 12% increase for uh, the S&P 500 from these three companies. And what did that come from? Marking up their investments in anthropic. Um, so these are non cash. It's just a mark to market game, circularity game. Can you imagine paper profits.

Speaker B: Excuse me, just to play devil's advocate a little bit there, we've seen, I mean SpaceX hit the market and SpaceX has uh, gone into orbit from the, from the moment that it's hit the market there. So it certainly seems like there's, and it was four times oversubscribed or something like that. So it certainly seems like there's, I mean SpaceX is one of one, it's not anthropic and it's not open AI but there certainly seems to be demand uh, for IPOs at the moment at least.

Speaker C: The bull market baby. Let's go get in on the phone.

Speaker B: Well, SpaceX is going to create data centers in space that do all of the AI processing in space and just send information back to earth spent, it's going to send AI, uh computation, uh, back to earth. What do you guys think of that? That's, that's.

Speaker A: Well I mean on the one Elon Musk has done some remarkable stuff. On the other hand you know, yeah, these are pretty audacious ghost cities on Mars. Uh, I mean, Starlink is, you know, sound sounded crazy and it's, you know, a very viable thing and uh, never on his schedule. So I, I don't know. I, I, I'm not in it, in, in the, the tech space enough to know how viable that is. But m, you know, I, I think, you know, eventually at least some of it comes to fruition.

Speaker C: Uh, yeah, I mean, I, I don't know how real these numbers are, but, um, I've heard it's 20 of the cost is energy. And effectively, if you're up in space and you're kind of always pointed at the sun and there's lots of room for solar panels, like you're effectively like zero marginal cost on energy. That, uh, um, that sounds cool. I mean, I don't know. It's getting it up there as long as it keeps getting cheaper. Maybe that does make sense. I think it's a cool idea.

Speaker B: Johnny, do you look at the equities for any of the commodities that you, or are you just sort of directly focused on the commodities?

Speaker A: Yeah, the commodities keep me busy enough. Um, you know, we, the equities, we get asked that a lot. You know, though, how do commodity equities differ from, from commodities? And it's probably fairly obvious, but, you know, commodity equities do have a beta to the overall stock market. And um, you know, they're going to certainly have a, uh, beta to the commodities they, they traffic in. But it might be like, you know, 0.6 or something like that. Um, which is kind of where, uh, maybe the broad market, different times, you know, it can range and depend on the commodity. But we tend to, you know, the reason to buy commodities is that diversification, the zig when everything else zags. And we saw that in 2022. Um, we saw this last year. Uh, there's a, uh, copper, uh, equity etf. And when copper itself, they opened up this giant premium, uh, the copper equity ETF was only up like 1%. Our copper fund, uh, CP was up, uh, substantially. Then we had Trump reverse. Say, I'm not going to tax copper. Um, copper itself crashed back down, but then over the rest of the year it climbed up and went over where the premium had been and that differed from the commodity equity etf. So that's just one example of certainly the commodity equities. Copper equities benefited from the rise in copper, but there are other things going on, including, uh, idiosyncratic risk with the individual companies. So if they're managed well, if they're managed poorly, that's going to have an effect as well. So I think they both, uh, you get exposure, if you're broadly invested, you get exposure to commodity equities anyway. We kind of say if you want what commodities really offer you, which is diversification, opportunities for outperformance at times, and possibly, uh, inflation protection, in fact, historically, some very substantial inflation protection, then you want to be in the commodities themselves.

Speaker B: Um, there was this narrative in the early 2000s. There was the commodity super cycle driven by China's buildup. And, uh, China slowed or that all cooled and it's sort of gone away a little bit. But where are we in terms of the commodity? I mean, I don't want to call it a super cycle, but where are we in the commodity super cycle? What do commodity pros call that?

Speaker A: Well, the super cycle definitely ended in, uh, maybe around 20, 2010. It went past the financial crisis a little bit, but definitely, uh, ended and commodities turned over in the 2010s. We're in a new cycle. Uh, I don't know if we want to. The China build out is not at that same level, but with certain commodities. Uh, China is a huge, huge portion, copper being one, aluminum. You know, there's certain things where, where China is, is the driver. So you want to pay attention to, to China. But there are other things, other things too. So we're bullish, uh, over the Next, you know, five, 10 years, we think we are in, um. Some people say a new super cycle. I'm always hesitant to use that, that word, but, uh, you don't want to jinx it. Maybe that's it. Maybe that's it. Uh, some people reject it on academic terms and some people embrace it. And so, um, but I think there are new drivers. Um, it's not quite on the scale of the China build out, but, you know, China is going to continue growing their economy, uh, U.S. is going to continue to innovate. So. And there's just a lot of tailwinds to a lot of commodities at the moment.

Speaker C: John Diogeny I, uh, what. Is there any chance that the world kind of breaks up into two hemispheres of influence and we get kind of almost two separate entire supply chains of, of the, of these commodities. And maybe the world looks quite a bit different from, um, globalization from 1980 to 2020?

Speaker A: Yeah, I think that's happening. I think, you know, it's unfortunate because I think it does, it makes everything less efficient. But I think that's one of the reason commodities have gone up in the last couple of years. Years is supply chains have been, supply chains have been disrupted. You know, the Ukraine wars is one thing. It's just, you know, suddenly something that we could get fairly cheap or, you know, Europe could get cheaper gas from Russia, you know, okay, now they've got to buy it from us. It costs, you know, I can't just run it through the pipelines. And that story we've seen play out across the board, uh, straight. A Hormuz is sort of a microcosm of that story. But yes, I think, you know, between, you know, and China is, uh, you know, going into Brazil and doing business with all these other, other countries. So you're kind of rerouting things across the board. So I, I think that is happening. It has happened to some degree and unfortunately probably will continue to happen when it, it would probably be better for all of us if we, uh, you know, if we can continue to have a, you know, at least some smart globalization where we're not, you know, hurting our, our own workers.

Speaker B: And so, John, are there any interesting commodities that aren't getting discussed enough that you think are sort of, uh, going to become interesting maybe over, uh, the next five or ten years?

Speaker A: Five, ten years or shorter time frames?

Speaker B: I give five or ten as they're sort of beyond what's thinking about in the short term?

Speaker A: Yeah, first I was going to throw out, you know, cattle. Um, that was a big story last year. Cattle herds are at their lowest level in 70 years. Not adjusted for, for the population. Just on an absolute level, they are, uh, as low as they were 70 years ago, if not lower. And so that's kind of astonishing. Uh, and now we have this screw, uh, worm infestation coming into Texas, maybe New Mexico. That's a really frightening story. I mean, that could affect, you know, the global food supply, the US Food supply. Um, so we'll see what happens there. But that's been one. You kind of never know. I uh, shouldn't say never know, but, you know, there are certain. There's always some commodity that gets a supply squeeze. And people talk about oil and gold and you know, the big headline commodities, but it can come from anywhere. It can be cattle. In 2024, cocoa was up 300%.

Speaker B: It's now, I remember now.

Speaker A: Yeah, it's now brought a lot of that down. But I mean, just who's talking about cocoa aside from Cocoa Puffs and chocolate that you eat and all of a sudden 300%. I mean, that was one of the Best investments, uh, he could have had in 24. So, you know, next five years, I think, I kind of think gold still has some legs, that it's been interrupted, but there's so many, uh, dislocations going on, weakness in the dollar. Uh, we'll see what happens. Now, if interest rates keep going up, that would be a headwind. And then industrial metals, uh, so that's not one that's not getting talked about. But I would, I would say, and that's kind of why we advocate broad commodities, is if you can find a way to sort of gauge what is in low, you know, what's relatively scarce on the supply demand spectrum, um, then you can benefit from those things like cocoa and cattle when they, they do arise. And that's kind of what we do in our, or that is what we do in our broad commodity strategy. SDCI so is, you know, I don't know what it's going to be two years, three years from now, but I know, and we're happy to go into this more at some point, but we think there's a market signal when things go into short supply. And that's kind of what we rely on to, uh, allocate. This episode is brought to you by Palmolive.

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Speaker C: Stock your fridge now.

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Speaker C: Or a sweet vanilla smooth caramel maybe? Or white chocolate mocha? Whichever you choose, delicious coffee awaits. Find Starbucks Frappuccino drinks wherever you buy your groceries. John, what would you, what do you say against the common pushback that, um, being long commodities is being short human ingenuity.

Speaker A: Interesting. Uh, just that commodities are the input to the first input to the global economy. So, um, yeah, ah, I, I think it's, it's.

Speaker C: There's.

Speaker A: I'm not going to discount human ingenuity, but that's one driver. That's one thing in your portfolio. Um, it's not a constant, you know, I mean, for the last 15 since the financial crisis, if you just sat in Q. Q. Q, you'd be, you know, you know, but uh, it's not always a straight up story. It won't always be up. There will be interruptions. Um, I think commodities, what you want is it's just a ballast for your portfolio. If not, um, at different times, a huge driver. So again in the 2000s where equities were flat, it's not like there wasn't human ingenuity going on, but circumstances, all these different things, um, stocks were flat, uh, and commodities were up. So anybody with a commodity allocation, uh, generally did a lot better than ah, a portfolio without it. So I don't think it's ah, a knock against human ingenuity. I think it's just a smart way to keep some diversification in your portfolio.

Speaker B: What about something off the run like uranium? It seems to me like if we're going to build out all of these data centers, we're going to be in space. We're becoming much more energy intensive. We're already very energy intensive. But as they often point out, there are no advanced, civilized, no advanced societies, no advanced civilizations that aren't very, very energy intensive. And it seems to me at some point nuclear is just the obvious answer there. So how about uranium? Where are we with uranium?

Speaker A: Uranium is, uh, yeah, that's an interesting one because we have, I mean there was a lot of resistance to nuclear power for a long time when obviously the safety issues are critical. You have Three Mile island, you have Chernobyl. That lives in the public's imagination for a long time. But I think things have turned, uh, significantly and I think I just read a. We were finally creeping to the point where the majority of the public would favor nuclear power. Uh, industry certainly is behind it because it lowers costs across the board. But if that starts becoming a bigger component of uh, our whole energy menu, then yeah, uranium, uh, uranium benefits from that. And it's always again, um, you know, where, where's the supply coming from? How constrained is it? How, you know, if we pour tons into uranium mining, um, is it suddenly not as scarce as it was before? So, but there will be times, and I think certainly over the next five, 10 years, uranium, you know, we'll see some, we'll see some upside to, to uranium as, as nuclear becomes a more, a larger component again of, of the total, uh, energy infrastructure around the world.

Speaker C: John, I don't think about um, how much do we really actually know of like what we have in the ground on planet Earth? Like we poked a lot of holes to try to find stuff. But like what as a percentage? Like, could there be Crazy amounts of things we don't even know, or we actually, like, have that pretty well mapped.

Speaker A: Uh, you know, uh, I'm probably not the most qualified person. I mean, you probably need a scientist to truly answer a geologist.

Speaker C: Well, you know more than we do, so we'll go with your answer.

Speaker A: But, uh, yeah, I mean, I think you can have surprises. I don't think they're as much as you. I mean, we know there's things in areas where, you know, they're harder to reach or it just, you know, we don't want to take down mountains or, you know, whatever. Um, so there is more out there than is technically available, and it'd be sad if we started stripping that. But could you have a surprise? Um, yeah, you could have some surprises. I mean, we've seen that over the last 20 years where we didn't think there was accessible oil, and suddenly there. There was not just technology, but, yes, new. You know, we find new ways to discover things and all of that, so you can also go deeper and. And this kind of thing. But I don't think that it's, uh, in terms of ease of getting stuff that, you know, I would be surprised by. All of a sudden, we discover a mountain of gold somewhere that, you know, we never found before. We've been looking for it for 5,000 years.

Speaker C: So, uh, just harness that as faroid.

Speaker A: Yeah. Drag it in and we kind of know where the oil is. Um, you know, more or less. Um, I mean, you go into regions where you, you know, we drilled a lot of holes, and now it's time to move on to a new region. And, you know, you can go, oh, there's a little more here than we thought. But. But, you know, the oil industry knows, like, okay, if we, you know, here's where we need to go. I think they've kind of tapped, uh, you know, tapped what's there. So I think generally that's going to be few and far between, but, um, never say never.

Speaker C: I did read that we've only, uh. I think it was like 1 50th the amount of, like, holes drilled into Africa, then kind of the rest of the geography.

Speaker A: Yeah, well, that's. Yeah, that's one area you could have surprise. Harder to. To get in there. And. And, uh. But. But a lot of. Yeah, a lot of commodities coming out of Africa too. And, uh, Guyana is one of the biggest, uh, you know, oil success stories of late, and nobody would have thought that. That 10 years ago. So I think a lot of it is not just necessarily undiscovered but the will to, to go in and um, the, um, the ease versus complexity of getting in somewhere.

Speaker B: It gets important enough, I think we go get it.

Speaker A: Yeah, that's true.

Speaker B: Well, yes, uh, what about rare earth minerals? Are there? It seems like anything we want to do technologically requires some like rare earth minerals. And the US has been quite good at finding them after the fact. But I sort of wonder what's the story there?

Speaker A: Well, I think they must be all in Greenland because that, that's the only thing. Yeah, you know, that's, that's a critical, uh, security challenge. I mean, I, I think there's more here, um, that, you know, I think we're starting to realize we do have the ability, uh, not, well, not just in the United States, but in US interests around the world to, to get it than maybe some of the worst fears. But, you know, China does have a substantial amount of the rare earths. And so I'm saying, I was saying, you know, cooperation probably goes a lot longer or a lot. It would work a lot better for us than, uh, being adversarial. But, um, no, that's, that's critical. And you look at things like, uh, you know, just lithium and cobalt. Um, lithium is one of the best performing co commodities this year, but he's talking about fossil fuels. But I think lithium's up about 45 to 55% depending on the day. And um, yeah, we'll, we'll continue to see that. And we'll continue to see that with other minerals that, uh, are hard to pronounce and most of us have never heard of. So.

Speaker B: Hey, John, we're, we're coming up on time. If folks want to follow along with what you're doing or get in touch. What's the best way of doing that?

Speaker A: Uh, please go to USCF Investments dot com. Uscf, uh, short for United States Commodity Funds. USCF Investments dot com.

Speaker B: That's John Love. He's the president and CEO of USCF Investments. Jt Any final words?

Speaker C: No, sir.

Speaker B: Be good to be good to everybody, folks. Uh, it's summer, uh, vacation here in Los Angeles. Uh, we're going to be taking a break for the next four weeks. Uh, we may be sending some letters from the, uh, Congratulations.

Speaker C: Vacation.

Speaker B: All right, fellas, uh, we'll see everybody on the other side. Uh, until then, have a good break.