Darrell Delphen Macro

Why are oil inventories so low, yet crude prices remain relatively tame?

In my view, it’s because the primary price discovery mechanism for oil is no longer the physical cash market—it’s the paper futures market.

When futures trading dominates pricing, the market can become disconnected from physical supply and demand for extended periods. That disconnect can persist until physical inventories become so tight that buyers are forced to compete for actual barrels rather than paper contracts. If that happens, real price discovery could occur very quickly—and likely to the upside.

Either this is one of the biggest disconnects I’ve ever seen between physical fundamentals and market pricing, or the relatively low forward crude futures curve is signaling something more concerning: a much weaker global economy (including China) than most investors currently expect.

Time will tell which explanation is correct, but one of them is.

How I speculate-I love buying cheap real assets that everyone else seems to hate—but the world still can’t live without. Then I hold them for 5–10 years and let time do the work.

Right now, I like copper, coal, oil, and natural gas.

To me, buying undervaluation and selling overvaluation just makes sense. To do this you must be an independent thinker, be able to hold through volatility/cycles, and not care what they herd does. Disclosure, this is not a recommendation. It’s just the way I speculate. 

Central Banks are the biggest force supporting gold prices today.

Many central banks have indicated that gold still represents a smaller percentage of their reserves than their long-term target, so they continue to be steady buyers. That creates a strong underlying source of demand.

The second major driver is government debt.

As deficits continue to grow, governments face rising interest costs. In the U.S., a significant portion of federal individual income tax receipts now goes toward servicing the national debt. If those costs continue to climb, the pressure on the Federal Reserve to monetize the debt by expanding the money supply also increases.

History has shown that inflating away debt reduces its real burden, but it also tends to reduce the purchasing power of the currency.

That is one reason I believe central banks continue accumulating gold. Gold has no counterparty risk, cannot be printed, and has served as a store of value through countless monetary cycles.

Pay attention to what central banks are doing—not just what they're saying.

Energy Update

In the short term, refineries have been flooded with crude oil from trapped tankers released after the Strait of Hormuz reopened. It’s closed again now. While many refineries are running near full capacity, they cannot process all of that crude quickly enough. The result is a temporary glut of crude oil alongside tightening supplies of refined products.

The situation is being compounded by Ukraine’s attacks on Russian refining infrastructure, reducing the availability of refined products from Russia.

Longer term, Strategic Petroleum Reserve SPR inventories remain near historically low levels. There may still be oil in storage, but inventory on paper is not the same as having enough production and refining capacity to meet demand when it matters. At some point, the challenge becomes one of flow, not just supply.

I believe diesel is likely to experience the tightest conditions first due to ongoing shortages of heavier, sour crude from the Middle East, which many refineries are configured to process. If refined product shortages persist, I believe those pressures will eventually be reflected in higher crude oil prices as well.

Time will tell, but I believe the energy market could become much more interesting over the coming months.

“John Hussman”

Nosebleed section. 
Today, 51% of the S&P 500’s market capitalization is made up of companies trading at more than 10 times annual sales. Think about that for a minute.

After Sun Microsystems collapsed more than 90% following the dot-com bubble, CEO Scott McNealy put those valuations into perspective:

“At 10 times revenues, to give you a 10-year payback, I have to pay you 100% of revenues for 10 straight years in dividends. That assumes zero cost of goods sold, zero operating expenses, zero R&D, zero taxes, and zero employees. What were you thinking?”

Buying great businesses is important. Buying them at sensible prices is even more important.

By the way, SpaceX just when public at 100x revenue.

I know everybody is buying them and I know they could go up more, but I would rather look like a fool now than a broke fool later. 

“For four decades, the median market share of precious metals and precious metals-related investments relative to all other asset classes in the U.S. was approximately 2%. Today, it’s just 0.5%. If demand simply returned to its long-term average, it would require 4x more demand than exists today.”
— Rick Rule

Today reminds me of DOT-COM ERA

The market today reminds me of the 2000–2001 dot-com era.

Back then, technology valuations became unsustainably high while value stocks and commodity-related companies became historically inexpensive. Eventually, those extremes reversed.

I believe we're seeing a similar setup today.

For years, exceptionally low interest rates fueled higher valuations for long-duration growth assets. In my opinion, we're now in a long-term environment of rising interest rates. That doesn't mean rates can't decline from time to time—nothing moves in a straight line. Governments may also attempt to suppress rates through monetary expansion or various forms of yield curve control.

If my view is correct, I believe growth stocks could face valuation headwinds over time, while value stocks and commodities may benefit from a long-term rotation.

Time will tell. Cycles have a way of repeating—not exactly, but often with familiar patterns.

This is just my opinion, not investment advice.

The stock market is not the economy.

The top 10% of Americans own approximately 87% of all U.S. stocks and stock mutual funds. The bottom 90% own only about 13%.

Don’t confuse rising asset prices with broad prosperity. They are not the same thing.

The Truth About Interest Rates

Many people believe the Federal Reserve controls interest rates. The truth is, it only has direct control over very short-term interest rates. Longer-term rates are primarily determined by the bond market.

This is one reason the U.S. Treasury has increasingly relied on issuing short-term debt. Financing at the short end of the yield curve has generally been less expensive than locking in long-term borrowing costs.

However, when government debt becomes excessive, bond investors begin demanding higher yields to compensate for inflation risk, currency debasement, and the growing supply of debt. At that point, the market—not the Fed—has the upper hand.

If interest costs continue to consume a larger share of federal tax revenues, policymakers may eventually have little choice but to suppress long-term rates through policies such as yield curve control or other forms of financial repression. The likely consequence? Inflation remains above target, and the purchasing power of the dollar continues to erode over time.

In my opinion, this is where we are headed. That is one reason I believe long-term investors should consider owning reasonably valued real assets such as energy, commodities, productive businesses, and precious metals.

The bond market has the final vote.

Just my opinion. We will see.