“Markets are efficient”
No, they are not. If they were, there wouldn’t be bubbles and crashes. Markets can be very inefficient and remain irrational for long periods of time.
We are witnessing such a market
The Strait of Hormuz is under a blockade and very few ships are passing through. Approximately 20–25% of global seaborne oil and 20% of liquefied natural gas (LNG) pass through the Strait of Hormuz. 90% of this is destined for Asia.
Never mind all the destroyed energy infrastructure in the Middle East and Russia/Ukraine.
And yet, markets keep going up. Nobody seems to care. “Trump will TACO.” Even if he did, the disruptions would not resolve quickly.
There is already a dislocation between pricing of paper oil and physical oil in many markets. Some countries are set to run out of jet fuel in just a few weeks.
There will be an impact in the markets. Or maybe there won’t be?
We discuss this in detail with Scott, a fund manager who came to visit me in beautiful Montenegro.
And what if we’re wrong?
Then all good, we can get back into positions and will have lost just a few basis points.
Scott has a very interesting Telegram channel in which he discusses his portfolio and views.
You can also follow him on X
And in case you were wondering where in Montenegro this was filmed: In Durmitor National Park. Lovely hiking. Montenegro is primarily a mountainous country as the name would suggest, though most people associate it with its equally gorgeous Adriatic coastline.
My team and I are on the ground in São Tomé and Príncipe next week
We are going to do in-person diligence on the groundbreaking Sao Tome Citizenship by Investment Program.
Over the course of the week, we will be visiting government officials, local banks, real estate agents and local business leaders to better understand the country as a Plan B and investment destination.
We welcome clients interested in this program to get in touch on WhatsApp, and also let us know about any topics you’d like us to dig into during our stay. We will be releasing content about our experience later in the month.
To a World of Opportunities,
The Wandering Investor.
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Transcript of “Critical Commodity Shortages Incoming – How to Invest in an Energy Crisis”
LADISLAS MAURICE: Hello everyone. Scott and I were hiking here in beautiful Montenegro, and I took my equipment because, typically, when we hang out, we talk about a lot of interesting things and we did. So, we just stopped and we’re now recording a video.
So Scott, you’re a fund manager and we see what’s happening in the world, especially in the Middle East, but the markets don’t seem to care. So, what do you think about that? Why is that and where are we going?
Why are markets not reacting to the Iran War?
SCOTT: Yeah, well, nor does a most of the population around the world because there doesn’t seem to be panic anywhere. I guess just to jump around a bit, when this war started, I I got on the phone with somewhere between 20 and 30 fund managers and professional investors and all of them, except maybe three, had the panic that I had. Everyone else said this will be over at some point, Trump’s going to taco, and I’m just thinking, Iran has all the cards here and I don’t think people realize that they indeed have the upper hand. Hence, we’ve seen Trump get more and more radical with his tweets as he’s trying to jaw bone down the oil market, keep the equity market afloat, because we need to keep funding our deficit. So, God forbid we have a panic in the treasury market, and he really has no out at this point. The only out is to have a Suez moment and walk away with our tail between our legs, which the US doesn’t want to do. So, it’s very much we’re between a rock and a hard place.
Equally, I look at a lot of frontier and emerging market equities, equity indices. None of them are in panic mode and it’s it’s fascinating because when this started, I personally got into a rather sizeable cash position, but you saw a lot of Asian equity markets specifically, tank. And they it was very clear because they’re energy and food importers and they’ve all largely rebounded. What I’ve come to the conclusion of, maybe I’m wrong, is that everyone believes at some point this is going to end. They’re just kicking the can down the road, hoping, which in the investment world, hope is a dangerous game to play. I think that these markets are going to eventually crack, but they’re going to crack when you see panic in the US or Western markets. And for the time being, it’s been slow sailing and who knows if there’s manipulation in the markets, but certainly oils acted funny, especially when you look at Pakistan paying $130 a barrel for oil when Brent is trading at only 110 today. Something just doesn’t smell right and I have no clue how it ends, but I don’t see things ending tomorrow and even if they did, we’re going to have 6 months to a year of getting back to normal. That is going to create a chain of events which probably started around COVID times where I think countries are going to realize increasingly, we do live in a balkanized world, we’re going to have to fight for our own materials and not rely on a global supply chain.
For the time being, it it feels very much as a wait and see type scenario and you know, I tweeted a few weeks ago that uh this feels like a great time to just go on vacation. Hence, my coming to visit you in Montenegro.
Which countries will be most affected by high energy prices?
LADISLAS MAURICE: So, which countries are going to be impacted first? And will the markets actually care?
SCOTT: I think they’ll have to care, but what’s fascinating is every day I look at South Asian currencies because all these countries, so you know, India to a degree, but more, Pakistan, Bangladesh, Sri Lanka, and they all have managed free floats for their currencies and they’re slowly giving away. But even you look at places like Turkey, countries don’t want to adjust their currencies until they have to. So, I think at some point these currencies pop. Sri Lanka is already moving. I think it’s down 3, 4% this year. But if you look at the real economies, they’re suffering. Pakistan and Bangladesh have brownouts, 5 to 8 hours a day. That’s impacting manufacturing and Bangladesh is the second largest textile exporter in the world.
You’re already seeing the shift where people are choosing, do I eat as much as I used to, or do I spend it on petrol? And again, all these countries are subsidizing petrol at the same time. So I think you’re going to start to see it. And just over the weekend, you had news that Pakistan is the first country announcing that that they’re critically low on jet fuel. They’ve got roughly 10 odd days left. I really wonder if it’s the situation of when you start to see countries actually run out of petrol, or their currencies pop, that something like that will be the breaking point where people start to wake up and have a oh my god moment. Because for the time being, no one cares.
Impending jet fuel shortage
LADISLAS MAURICE: Let’s say Pakistan runs out of jet fuel. Will anyone care? Pakistan’s always running out of something. Like sometimes I wonder, are the markets only going to react when the London fund manager gets a flight cancellation for for Capri this summer?
SCOTT: Yeah, well, I guess that’s already happening. Lufthansa has announced 20,000 flight cancellations this summer. So you you can see the writing on the wall. It’s very much like COVID when I was going to Almaty from to to Kazakhstan from Uzbekistan to redo my visa. And you know, a few of us were wearing masks and you could see the writing on the wall that something was something was going to happen. And you could see it just move across Asia, and then it hit Europe. But only really when it hit Europe and into America did the world finally wake up and panic. So, I sort of look at this as a blessing in disguise because I was in Istanbul, the day that the war started. And three days later, I was 45% in cash. And I’m thinking, at some point the world is going to have to wake up to the reality and the markets will wake up. Anyone who can see what’s going on, is we both do, and have raised cash as a result of it, have sort of had a blessing in disguise because the markets didn’t just collapse on day one and keep going down. As people said, I want to be risk off, I want to be in cash. We’ve sort of been floating and it’s given people many chances to see what’s coming, or where we already are, and extrapolate what should end up happening, or what will likely end up happening in the West as well in the East, where it’s starting first with fuel shortages, food shortages, and position accordingly. So, I think at some point people will wake up, but the human condition is a fascinating one, let’s say.
LADISLAS MAURICE: Yeah, even here in Montenegro, we’re starting to see flight cancellations for the summer. Uh Toi, the big German charter company cancelled a bunch of flights from Holland and and from Germany. So, it’s it’s going to hit everywhere. Like you say, it’ll take a while. Even if it ended tomorrow, it’ll take a while to resolve itself. But then again, the markets might never crash. We just just ride through it. I don’t know.
Dislocation between paper pricing and physical pricing of oil
SCOTT: I think once you start to see paper oil reflect the real oil price, that’s when things begin to hit because
LADISLAS MAURICE: Can you talk about that, the difference, the dislocation between paper pricing and actual pricing that some companies and governments are paying out there?
SCOTT: Well, I mean, ultimately, you know, if you’re in Asia right now, most of your oil’s coming from the Middle East. That’s either shutting oil and maybe some of it’s coming through Oman or through Saudi, but that’s a lot more expensive because you have a lot more dollars bidding for fuel barrels of oil. So, you know, jet fuel is over $200 a barrel, now increasingly in the West as well, but it started in Asia, where jet fuel’s that expensive, and it’s unprofitable to to run an airline. So, you have cancellations first, you have calling of flights, you know, I think they were first announced in Vietnam, the Philippines has announced they’ve they’ve got huge diesel shortages and they had rationing for a period. The price of Brent and WTI is not what you’ll be able to actually get physical product at. And that’s the problem is at some point that’s going to converge because the price of real tangible hydrocarbons that you can touch is much more expensive than what’s on the screen.
What sectors will perform well with high oil prices?
LADISLAS MAURICE: So, you’re heavy cash now. If the markets do decide to realize what’s happening, what sectors will you be looking at?
SCOTT: So, what I’m invested in right now is largely base and precious metals companies, more on the exploration side, are companies that just have good assets that in due course will be developed, uh rather than producers. And then, of course, just because there’s value there. I learned a long time ago, at least for myself that mining is a terrible business, and exploration is one thing, but when you’ve got operating assets, usually also in a second or third tier jurisdiction, you have government issues, like what recently happened, I believe, in Burkina Faso, with the the request for a 20-25% stake in Aussie companies gold assets. So governments get involved, you have permitting issues, you have mine collapses, like what happened at Grasberg in Indonesia, petrol shortages, labor strikes. It’s just, it’s very much a situation of what can and probably will go wrong. Typically does in due course. And then you’re really hostage to the commodity price. But right now, I had a few producers and I sold them mainly because sulfuric acid, diesel are going to be constrained, and countries when they run into shortages are not going to prioritize mining, they’re going to prioritize the population. And that’s going to squeeze margins in a big way. And could you imagine a a billion dollar producing asset, the gold miner that has to cut production by 50% because they don’t have enough diesel, or a smelting operation that can’t get sulfuric acid, that’s going to hugely impact margins. So I figured, I’d rather own companies with good assets in the ground at disk- you know, substantial discounts to to NPV.
Sulphuric acid shortage
LADISLAS MAURICE: Can you talk a little bit about the sulfuric acid shortage? Where does it come from and what is the impact going to be? Because that’s something that no one’s really discussing, but it’s huge.
SCOTT: Yeah, I mean, I’m not an expert, and that, but if I’m not mistaking, 50-60% of global sulfuric acid production comes from the Middle East as a byproduct of, you know, sour gas production in, if I’m not mistaking, Qatar, Saudi and in the UAE. Sulfuric acid is needed for mining for processing of copper and other metals, but equally, it’s an input into fertilizer. People don’t realize that your food doesn’t come from whole foods. It comes from the ground, it needs to be fertilized. Because if it wasn’t for for hydrocarbons, we wouldn’t have 8 billion people on the earth. So, when you have a sulfuric acid charge, that’s going to feed into again, not just mining, and in industry, but uh fertilizer, which is going to impact food prices. The problem is that we live in a world we were talking about this earlier, where if you’re under 25, 30 years old, you want to live in a life of instant gratification. You want to be successful now, you want to be rich now, you want to have XYZ now. The food crisis and the fertilizer prices, urea and whatnot have already ticked up. The impact is going to be felt realistically in you know 6 to 9 months at next harvest seasons, or when you don’t have harvest seasons. I read a few weeks ago that Thai farmers are already plowing under their fields. So they’re potentially some of them won’t have a rice crop, and Thailand’s a big rice exporter. Again, not as big as Vietnam, but that’s going to have global implications because you’re talking about a grain that feeds, what? The bottom 70% of the world. It’s a staple. And then if prices go up 50%, 100%, you’re going to have a a global population in calorie deficit. And that partially stems from sulfuric acid, and then of course diesel and the broader crisis.
LADISLAS MAURICE: It has the potential to get really ugly.
SCOTT: Well, we all, of course, hope we’re wrong and hope it doesn’t, but I think we’re, you and I are both very much people that when you see something that has a decent probability of happening, you want to prepare for it. I’d much rather be wrong and take my substantial cash position and roll it back into companies, but for the time being, I feel very comfortable sitting in cash. Equally, you know, having a bit of food stock at home.
LADISLAS MAURICE: I also have abnormally high levels of cash and uh he’s solved it earlier in my stash of physical diesel as well.
Portfolio positioning after the crisis
LADISLAS MAURICE: Coming out of this, what do you think would be a good sector to be positioned in?
SCOTT: So, when we talked during COVID times, my view was that the middle class is going to increasingly disappear. Sure, you’ve got a lot of leverage, people living paycheck to paycheck and have credit card debt, so they’re still consuming. Again, with the balkanization of the world and supply chains breaking down, I increasingly think that we’re still, very few people are positioned is in commodities and not necessarily producers, not necessarily oil, with what’s going on right now, but base metals. And you look at the critical minerals list that have been rolled out over the past three odd years.
LADISLAS MAURICE: Sorry, there is a spider on you.
SCOTT: Thank you. Cool. Um and Europe, Canada
LADISLAS MAURICE: Sorry, there’s spiders.
SCOTT: We’re still filming?
LADISLAS MAURICE: We’re still filming and that’ll go on camera.
SCOTT: You have critical minerals lists that have been rolled out in really the Western world. You know, Europe, Canada, the US. Countries are realizing that they need security over the supply chains. You know, the US can’t produce missiles without relying on China, and that needs to change. One, it’s going to be hugely inflationary. You have a a host of decent, in some cases great deposits, whether it’s, you know, tin, tungsten, um iron ore, copper, gold, etc. in the developed world. In America, Canada, Germany, etc. And there’s no reason these shouldn’t be developed, but typically, we’ve said, let’s not develop them. Let’s go to developing markets and and develop them. A lot of these countries now have critical minerals funds. So they’re saying, we will not only finance in some cases, not be equity partners, but just offer financing, in some cases, be an equity partner, but they’ll fast-track the permitting, because countries realize they need security over of supply. There’s a whole host of, you know, micro and mid cap companies with assets in first world jurisdictions, that I think are completely overlooked right now. Again, coming out of this, the investment to accelerate security of supply, I think is going to be massive. We’re in the early days of it, but Europe is just waking up. So, that’s where I’m really looking to get back into.
Countries least impacted by the Middle East crisis
LADISLAS MAURICE: And which countries will be the least impacted by this?
SCOTT: Countries that’ll be least impacted by this overall crisis, I believe those in the Southern Cone because they have energy, they have food, they’re out of the line of fire. And then uh So, Brazil, Argentina. Correct. Chile, places like that, Colombia. And then Central Asia. I mean, Russia will be perfectly fine, um but Central Asia is largely resilient. Their biggest risk is water. For those countries in Central Asia, Uzbekistan, Kazakhstan, that don’t produce their own hydrocarbons or net importers, uh they’re getting from Russia, so they’re fine. They’re relatively self-sufficient in food. They have a lot of gold in the region, so they should do well. Their currency should appreciate, as they’ve been doing over the past year. Probably the biggest risk to them is importing grains. Not really grapeseed or sunflower, but things like soybeans, which come from Argentina, where again, you’ve already got strikes related to rising diesel prices. So, everyone will be affected, but I think the Southern Cone and Central Asia are, and of course, Canada and the US, which should go without saying, will be relatively well insulated relative to the rest of the world.
Join Scott’s Telegram channel
LADISLAS MAURICE: Obviously, none of this is financial advice, do your own due diligence. Scott has a really interesting Telegram channel that I really recommend you follow. There’s a link below and there’s also Scott’s X/Twitter. Scott, thank you very much for your time today.
SCOTT: Thank you.
LADISLAS MAURICE: Really appreciate it. Make sure to download my free eBook, 12 Mistakes to Avoid When Investing in International Real Estate, which you can find on my website, link below, and feel free to follow me on Instagram @thewanderinvestor. I look forward to hearing from you.
