People often ask me “why not just buy and hold index trackers?”
In this video, I had a chat with Scott Osheroff, a fund manager who has been living for many years in Asia. We discussed commodities, volatility, index trackers, as well at developments happening in Central Asia, where I have invested capital.
Scott runs a very interesting, free Telegram channel that you can join here.
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Transcript of “Commodities, why NOT buy into Indexes, and Developments in Central Asia.”
LADISLAS MAURICE: Hello, everyone. So today, I’m in Belgrade in Serbia. I’m travelling around Europe. I was going between Budapest and Montenegro. And on the way, I decided to stop in Serbia, and then it happened that Scott Osheroff, with whom I’ve done a few videos, is here in Serbia. So Scott is a fund manager. He’s been living in Asia for over 11 years. Correct?
SCOTT OSHEROFF: Correct.
LADISLAS MAURICE: Cool, fantastic. So we did a few videos together on commodities, on geopolitics, etc. So Scott, what are your thoughts on the latest market developments on, generally, what’s happening in the world?
Thoughts on the current market
SCOTT OSHEROFF: So firstly, it’s good to see you again, I can’t believe it’s been a year since we caught up last time in Turkey. So in regards to the markets, you know I’m heavily invested in the commodity space. So I’ve been watching that space intently. And really over the past 18 months, we’ve had more or less a cyclical correction in an, otherwise, secular bull market, in my opinion, in the commodity space. Is you had rising rate hikes, degree of credit contraction, you’re seeing M2 fall, sort of moving back in line with its historical uptrend. But nonetheless, you’ve gone from a period of outlandishly excess credits to a tighter environment globally. Central banks try and rein in inflation, which, of course, I don’t think is going to work. But nonetheless, they’re raising rates, and you’re seeing the system experience strain.
So with the cyclical downturn, the commodity space has been hammered. But nonetheless, it’s still held up relatively well. So in the past few months, I’ve really been quiet, I’ve been trying to watch the markets not a whole lot, because there hasn’t been a whole lot to focus on in terms of upside. It’s more along the lines of staying put, since I’m happy with what I’m invested in, and the underlying themes for energy, gold, silver, to a degree, but the general commodity space is more or less a hold it and wait through the cycles, since I’m not a trader, I’m a long-term investor. But what’s increasingly interesting to me is that with tighter credit, with M2 falling, with the debt ceiling having sort of been raised indefinitely, if you will, and this flood of debt which is being sold, the question that I have is who’s going to buy it all?
And timing is key, and it’s huge. But it’s difficult to get timing right. So I’m looking at a few scenarios. And one is that in the US, with all this debt being sold–
LADISLAS MAURICE: Sorry, there’s a spider.
SCOTT OSHEROFF: Thanks.
LADISLAS MAURICE: [laughs]
SCOTT OSHEROFF: With all this debt being sold, that you either have rates go crazy, and the tenure is already above 4%. And eventually that breaks something if no one is there to be a buyer of last resort. And then you have a severe credit contraction, and perhaps you have a nasty recession. We’ll see. But otherwise, I think in due course, you probably have the Fed step in and buy this excess debt for sale in some form of yield curve control, whatever that might look like. Of course, the question is timing. Do they keep raising rates throughout the summer? Does debt continue to be sold and rates continue to tick higher, which, long term, benefits the owners of debt if there is some type of yield curve control. Because as rates go up, the US government continues to pay a huge amount of interest. But I don’t know the timing for that.
Alternatively, I guess, similarly, you look at Japan, and Japan’s facing sort of the end of– they’re coming out of the cycle that I think the US is going into. For two decades, more or less, they’ve had some form of yield curve control. Inflation is running hot in Japan, and they’re not raising rates. And the question is, do you destroy the bond market and the economy as a result, or do you destroy your currency? Japan, I think, is going to be a fascinating litmus test over the next few months or whatnot, to see what potentially happens in these Western economies in the future. So that’s sort of how I’m looking at the market.
But nonetheless, in the US, for example, as I mentioned, sorry for being longwinded, but you either have bond yields go crazy, is there’s a selloff in the face of new issuance. And that leads to a credit contraction, some type of credit crisis recession, sort of like the banking crisis we saw a few months ago, but perhaps worse, or you see, in due course, yield curve control. Medium term in the commodity space either I think is wildly bullish. Not to say that it won’t be painful, even though, to a degree, it already has been painful with some corrections in uranium, oil and gas, etc., coal. But if there is that credit contraction, that just means that there’s going to be even less investment in the space over the coming few years. And we already have structural deficits in a whole host of commodities, banks that won’t finance coal mines, etc., etc. Or, you then have some form of yield curve control in the intermediate term, where the dollar gets sacrificed. And if the dollar gets sacrificed, commodities rip.
So I’m bullish regardless. But again, it comes down to timing. So that’s how I’m looking at the world today. And it’s certainly one of uncertainty as we wait to see does the Fed raise rates next month. And it’s July already, but it’s one of wait and see.
Scenarios for commodities
LADISLAS MAURICE: So when you’re playing the commodity space, because you say, either way, it’s bullish for commodities, it’s just a question of timing. What if there is massive credit contraction? Doesn’t this impact your portfolio in terms of the stocks that you own in mining, for example? So not owning explorers that need financing within the next year or etc.? How is this impacting your portfolio construction?
SCOTT OSHEROFF: Yeah, 100%. Because as we know, when it’s risk off, miners that are in the early stage of exploration or whatnot can move towards zero very quickly. Liquidity crisis are interesting. But for my portfolio, really, and when it comes to miners, I have a few precious metals miners, but most of my miners, if you will, are in the uranium space. And probably 70% of my book are allocated to companies that have production or have assets that historically produced. So I have small tail of companies that are on the exploration space, more so in North America. But yeah, it comes down to being risk adjusted, and knowing what you own and being comfortable with it.
On embracing volatility
SCOTT OSHEROFF: But I also am okay with volatility, which a lot of people aren’t. But volatility is where you make money. Volatility and patience and being able to take advantage of it is the key.
LADISLAS MAURICE: And I think this is a skill that people will need to develop over the coming years, potentially decades, is being able to stomach more volatility than we’ve been used to in the past as investors.
SCOTT OSHEROFF: Yeah, 100%. Yeah, I think the days of buying something and holding it for 10 years are completely done. And we’ve talked about this a lot. And maybe I’m biased, because I’ve lived abroad for 11 years, I’ve seen various frontier and emerging markets, middle class has grown, whatnot. But I also question at one point, you’re going to see them sort of get stumped. And you’re seeing it in Europe as well. Well, I guess, if you look at long-term credit growth, we’re at the end of a debt cycle, and, therefore, you’re seeing more inflation as governments try to inflate their debts away. But that ultimately destroys the middle class. So buying consumer goods companies, discretionary companies, they’re all going to get impacted by rising commodity prices.
So I think it’s difficult to just park your money and say, “Huh, there’s a recession every five to seven years, and it’s shallow, and buy the dip.” I think you need to be much more tactical these days.
Why I don’t buy indexes
LADISLAS MAURICE: Yeah. I’m very wary of just buying indexes and just buying and forgetting about them. Like you say, it worked in the past, that doesn’t mean it’s going to work in the future. I prefer to be more active in terms of my portfolio management nowadays. I would rather not be more active. It’s way easier to just buy an index and forget about it and live life. But unfortunately, in the world that we seem to be entering or have already entered, I don’t think this will be a winning strategy anymore to just buy index and then just sit back.
SCOTT OSHEROFF: Agree with you. And I think part of the reason is because, over the past 30 plus years, indexing has become so popular, with ETFs, and all of this and whatnot, that that which becomes easiest that what you should not do. So 20 years ago, you could do it. But now everyone from a 15-year-old with a joint account with their parents to an 85-year-old is in ETFs, because most wealth managers and whatnot, they’re not stock pickers. They’re not doing DD on all these companies. It’s much easier to buy an ETF for oil and gas, an ETF for uranium, or the [SPYs or the QQQs 00:09:30]. Yeah, you definitely need to be much more tactical.
And on that note, if I may, with what I mentioned before was sort of my macro framework, I think that with whatever happens, whichever sort of scenario we go down, if either of the two, there’s always a potential for something else to happen. But I think that you’re definitely going to, see over the next, say, 6 to 12 months this rotation back into value, which we lost track of, if you will, in the markets over the past 6 to 12 months as everyone went for tech. AI has gone crazy. And in my view, I think this is a bear market rally. And you’re seeing managers chase these tech companies, why, I think it’s seven companies that are generating the most of the return. But if you’re a fund manager, and you have to report to your investors, either monthly, or certainly quarterly, you need to be in that which is going up, to be in uranium, coal, copper, things that really haven’t done much over the past few months. It’s difficult depending on your investor base.
So I think that when you do have this correction is, again, credit tightness bites, from PE all the way to the public markets as you’ve got a huge amount of margin in the market. You will see this rotation out of high beta tech into value again, which is, again, as we’ve discussed, not to try and sound like a broken record, but it’s what at least I think is going to be the play for the next decade, if you will, is value.
Market update from Central Asia
LADISLAS MAURICE: Thank you, Scott. Look, everyone these days is talking about the US, Europe, Russia, China, India, the Gulf with everything that’s happening there. Increasingly, Latin America as well. But a part of the world that nobody discusses, apart from Africa, is Central Asia. So you live there most of the year. So what’s happening there? Because if we’re just sitting in Europe or the US, we never hear about Kazakhstan, Uzbekistan, Kyrgyzstan, Turkmenistan. What’s happening in that part of the world these days?
SCOTT OSHEROFF: A lot. But as you said, it’s not widely covered. I have a friend that lives in Almaty, which is the former capital of Kazakhstan. And he likes to say that Almaty is the most beautiful city at the end of the world. It is Central Asia, it’s difficult to get to. But these countries are really commodity countries. They’ve got great demographics, young populations that are growing fast. Again, they’re backstopped by commodities. Uzbekistan, gold, Kazakhstan, a bit of gold, but hydrocarbons. And these countries, of course, are integrated with the global economy, but not to the degree that countries like Vietnam, Bangladesh, India are. So they’re much less correlated with the rest of the world. And therefore, for example, during COVID, Uzbekistan still grew three-tenths of a percent.
I think it’s really the place to be over the next few years, too, for part of one’s allocation, emerging and frontier markets in general. But I look at, and we discussed this in our last video, what I call The New Fertile Crescent, you look at this part of the world, and I think it was Russia announced this past week that, in August, they’re going to launch a BRICS-backed currency, or a BRICS currency backed by gold, at least for some type of clearing mechanism. So that’ll be interesting. But this entire region is integrating, and it’s part of the acceleration of the bifurcation of the world. And this part of the world doesn’t need to do business with Europe, it doesn’t need to do business with America. Central Asia can do business with India, Pakistan, Iran, Turkey, the greater Middle East–
LADISLAS MAURICE: China.
SCOTT OSHEROFF: China, Russia. Exactly. And these countries’ governments play, arguably, they certainly play by different rules, but they play, I’d argue, in a more capitalist way, unlike what you’re seeing in the West. So it’s–
LADISLAS MAURICE: There’s very little ideology in these governments.
SCOTT OSHEROFF: Money.
LADISLAS MAURICE: Yeah.
Astana International Financial Center
SCOTT OSHEROFF: Money and continued prosperity for the population, that’s pretty much it. It’s very easy. Cut and dry. So yeah, I’ve been in Uzbekistan for the past four years, and the country’s absolutely booming. But the question, of course, is how to play it. There’s the Uzbek stock market, which we’re heavily involved in. But I just flew in yesterday from Kazakhstan, and the Astana International Financial Center, I was there in 2018, and it’s on the former grounds of the World Expo. When I was there in May of 2018, there were 12 companies at the Astana International Financial Center. It’s a bit of a challenge. Now there’s at least hundreds, if not thousands.
LADISLAS MAURICE: Wow.
SCOTT OSHEROFF: The Kazakh Stock Exchange in Almaty is basically it still exists, but all the companies more or less have relisted to Astana. And I think that with what’s going on in Russia, there’s an opportunity for Astana not only to become the financial center for greater Central Asia, because it’s connected to Euroclear, Clearstream. You have decent brokers there. And there’s common law.
Investing in Polymeta
But you’re seeing companies that were doing business in Russia that were listed, say, for example, in London. And one of them is Polymetal. And Polymetal is one of the 10 biggest gold producers in the world. They have assets in Russia and Kazakhstan. They actually listed in Astana about two years ago. But because their Russian business is sanctioned, a lot of brokers like Interactive Brokers won’t allow you to trade their stock. So the stocks collapsed. And for reference, production-wise, they produce about 33% of what Newmont Mining produces, but they trade at 3% of the market capitalization.
LADISLAS MAURICE: Wow.
SCOTT OSHEROFF: So huge dislocation. And what they’ve done is, on the 17th of July, they’re delisting from the LSE. They’re going to move their primary listing over to Astana, keep their existing corporate structure though, and, in due course, well, they’ve already ring-fenced the Russian assets. And in due course, I believe the plan is to split the company in two, Russia, Kazakhstan, take the Kazakh assets, keep them listed in Astana, but also dual-list them in, say, London or the Emirates, and then we’ll see what happens with the Russian assets. But nonetheless, there’s huge optionality. And what we’re talking about before, when eventually something, push comes to shove in the bond market, and with this current credit cycle, where eventually I foresee more money printing, and stimulus, gold, that’s probably gold’s time to shine.
Gold and silver has struggled since I think, what, the end of 2021. They’ve been in consolidation, but I’m increasingly getting intrigued by gold and silver again, because everyone’s left them for dead. While a lot of people are going after oil, gas, uranium, no one’s really talking about gold and silver. So when that happens, I look at a company like Polymetal that’s super cheap for a reason. But their all-in sustaining costs are about $1,300 per ounce. And as gold goes higher, when you eventually have that rerating, I think that rerating is going to be vicious. It might take 5 years, it might take 10 years, we’ll see. But it’s an interesting option in the precious metal space.
And as a result of sort of my due diligence into the company and being in Kazakhstan this past week, I definitely see Astana is being a magnet for other companies that do business in Russia, or the general region that are looking for liquidity and a first class jurisdiction for the region.
LADISLAS MAURICE: Why wouldn’t they go to Hong Kong?
SCOTT OSHEROFF: Costs. I think in due course, they will. I mean you have a couple of Russian companies that are listed there. But the question, I guess, is Hong Kong has a certain investor base that is not very global. It’s more regional. And Hong Kong has experienced a whole host of issues, from companies leaving, expats leaving. It’s still a financial center for China to be able to access dollars but, arguably, I think the Emirates would probably be better. Because you think, who understands Central Asia really well? The Chinese understand it to a degree, but the Middle East is–
If you ask a Russian, if you ask anyone from the FSU, you’ve just made $5 million. You can go live anywhere. But nowhere that you really need to go through the struggles of getting a Schengen visa or buying a passport or whatnot, the first place they’re going to probably go buy a property and get residency, correct me if I’m wrong, Dubai.
LADISLAS MAURICE: Yeah.
SCOTT OSHEROFF: And the amount of money that has moved there since the war started is significant. But even before that. And you’ve got an IPO boom in the Emirates. Abu Dhabi is on fire. So it seems like a natural jurisdiction for these companies to at least dual-list. And of course, you have a huge amount of middle eastern capital flooding into Central Asia because, again, Central Asia is an Islamic region.
LADISLAS MAURICE: Fascinating. Cool. So Scott also runs a very interesting Telegram channel called Yurta. There’s a link below. I really encourage people to subscribe to it. It’s completely free. And essentially, as he travels around the world, with a big focus on Asia, he shares some of his thoughts on what he sees on the ground and talks quite a bit about the commodities space as well. Great. So Scott, thank you very much for your time today.
SCOTT OSHEROFF: Great to see you. Take care.
