“Wall Street focuses on earnings or quarterly earnings per share, adjusted earnings, adjusted EBITDA. All this garbage. And it's garbage because it's all adjusted and it's all in the hands of the wizards called CFOs, chief financial officers, and their departments. It's wizardry, it's not accounting.”
~ Eric Fry, editor of Fry’s Investment Report and The Speculator
TRANSCRIPT:
Joel Bowman:
Welcome to another episode of the Fatal Conceits podcast, a show about money, markets, mobs and manias. I'm your host, Joel Bowman, bringing you today's episode from down here in Buenos Aires in Argentina. Before we get into today's show, a quick reminder to long time listeners and newcomers alike, if you like what you hear during these conversations don't forget to head over to our Substack page, which is at bonnerprivateresearch.substack.com. There you can find hundreds of irreverent articles on everything from high finance to lowly politics and plenty more besides. You'll also see special reports, webinars with Bill's private network of analysts and writers from around the world, and of course plenty more Fatal Conceits podcasts just like this one.
On that note, I'm joined by a long time friend and also a dear friend of the Bonner Private Research family today, Mr. Eric Fry. Thanks for joining us.
Eric Fry:
Hello Joel, welcome to be here.
Joel Bowman:
Yeah. Whereabouts are you by the way? I know you're in California but you kind of dash up and down the coast there.
Eric Fry:
I am at the moment near the Russian River.
Joel Bowman:
Russian River. The other Russian River.
Eric Fry:
Takes on new meaning. Russian River so named because it was founded in a way by Russians, Russian fur traders back in the late 1700s.
Joel Bowman:
Oh I didn't know that.
Eric Fry:
They came as far south as this area from Alaska to hunt sea otters.
Joel Bowman:
And this I'm imagining is what, 100 years or more before it became better known for its delicious grape varietals that now populate the hillsides?
Eric Fry:
Yes. Although, interestingly, in the local graveyard here there are a number of Russian orthodox graves and they date back over 100 years. So there's still a small Russian influence here. Fort Ross is close by and at the outbreak of the Ukrainian invasion, one particular Russian lawmaker demanded that we return Fort Ross to the Russians, which I thought was interesting. Fort Ross is not really a fort, it's just a little place on the pacific.
Joel Bowman:
Well, I guess in a pinch you need all the forts and frontlines you can get maybe.
Eric Fry:
The only thing that Fort Ross has now is access to abalone beds. That's about it.
Joel Bowman:
Oh, okay. Well, I was going to... I hope I'm not betraying any confidence here but I did want to let our dear listeners know that on a private conversation you and I had a couple of weeks ago when we were teeing this up, I don't know if you remember this but I put three questions to you. One was do you listen to podcasts, the second was do you have any interest whatsoever in the world of ever being on a podcast, and then the third was would you like pretty please to appear on the Fatal Conceits podcast. To which you promptly replied no, no, and yes. So just to underscore my gratitude.
Eric Fry:
Actually it was no, no and I guess so.
Joel Bowman:
No, no, and okay if I have to. Yeah, exactly. So Eric... Go ahead.
Eric Fry:
My wife is an avid podcast aficionado, so she'll listen to it.
Joel Bowman:
Oh okay. Well, that'll be one of the three of us who will listen to it then, so that's good. So just for readers and I guess listeners now who I think many of whom would be familiar with your work over the years, particularly the last couple of decades, do you want to just set the scene a little bit, a bit of a Fry origin story, how first of all you came to the investment world up in Wall Street, and then in particular how you got to know Bill and to come and work on The Daily Reckoning and all that?
Eric Fry:
We'll make this very brief because as you well know, my least favorite topic is me. So we're going to rip through this. Went to UCLA, worked in restaurants for a long time, managed the Hard Rock Café in West Hollywood for a while. Eventually self published a financial newsletter and that little seed germinated and became a much larger venture, morphed into full on financial research and institutional research. I moved to New York, produced institutional research there, and that is... So I work with an individual named Jim Grant, who I absolutely idolize, brilliant financial mind, writer. And Bill Bonner was and is a reader of Jim Grant's, and Bill discovered me as it were toiling with Grant. And so he and I began... He hired me, began collaborating on The Daily Reckoning, and have been producing some form of institutional or individual investment research ever since. Including now.
Joel Bowman:
Right, so I'm just thinking back to those Halcion days at the beginning of the turn of the millennium. And I think it was a few years, maybe 2003, 2004 when you came over to work with Bill. Is that about right?
Eric Fry:
It was 2001.
Joel Bowman:
2001, okay. So I wanted to get into this because it was just after Bill had released his then novel idea of this kind of trade of the decade, which of course you'll recall, and I think many of our readers will recall too. If for nothing else that it was a very contrarian play at the time, the trade, a simple pear trade of course was buy gold, sell US equities. Gold had been in an infamous... Pardon the traffic outside my office window here, this is a little South American capital ambiance sound for our listeners.
But gold had been in a bear market for a couple of decades, stocks were high flying and nothing but blue sky ahead of them. Part of your role over that first decade, and you and I wrote together for a good portion of that, was both tracking that, analyzing that, and also explaining a lot of the underlying philosophy behind that to our readers, both at The Daily Reckoning and The Rude Awakening. I'm wondering if the idea of a contrarian mindset for you as an investor, I won't ask about it as an individual, but as an investor is a kind of comfortable place for you to hang out intellectually or if it's something that you have to cultivate actively and consciously?
Eric Fry:
No, it's quite comfortable, but I'll go back first to the trade of the decade from 2001. So it became my trade of the decade by proxy since Bill had already introduced it before I started working with him. But it was a theme that I had already been pursuing and highlighting since '98, '99, 2000 when I was producing the previous institutional research. And I had made recommendations from that era that were gold focused and then more broadly commodity focused that produced some pretty brilliant results during a fairly dead decade. I mean, it was literally a lost decade for stocks. The S&P 500 produced a total return of zero during the early 2000s, the first decade of the 2000s.
Whereas gold itself went up about 400% and many, many gold and commodity related stocks produced 1000%+ returns. So those investment ideas came out of a contrarian perspective per se. I don't really like the word contrarian because it's kind of a loaded word. I mean, a contrarian is sort of like... it feels synonymous with like a curmudgeon, like hates the world and hates whatever's working. It's sort of like you're an Aussie and you're younger than I am, so you probably aren't as familiar with The Addams Family, the TV series sitcom from the '60s, but Morticia Addams used to walk around the house cutting the heads off of roses. That was how she kept the house in proper form.
So a contrarian feels kind of like that to a lot of people. So I'm not that kind of contrarian. It's rather, really looking for opportunities that provide the best risk/reward setup. And a lot of times, so where you have... We call them asymmetrical trades or imbalanced trades. Situations where the upside is significant, downside probably pretty limited. So oftentimes you're going to find those kind of trades in areas where most people aren't looking, or most people don't want to look. And if you go back to the era when I joined Bill, we were... That was the very first infamous tech stock boom, and it had just busted. The dot com era of the late 2000s.
But the tech stock mindset was still all the rage. Everybody wanted to buy these beaten down tech stocks but they just kept getting hammered and hammered and hammered even more, where the real trade you wanted to be in was not that, not then. You wanted to be in other sectors, not just commodities but some of the insurance plays. There were different sectors of the economy that produced some great stocks. So coming, fast forward to the present, I guess about four years ago was making a number of recommendations in renewable energy, in particular in solar. And the way I discussion these ideas now is I apologize for them. I say I'm sorry for them.
[Ed. Note: Learn more about Fry’s Investment Report right here]
Joel Bowman:
Apologize in advance and get out ahead of the trends, right?
Eric Fry:
Yes, I apologize in advance. I'm sorry I'm recommending this. In the case of solar, so talk about solar today is a very different idea. When I was recommending solar stocks four or five years ago, I literally introduced them by saying this has been probably one of the worst industries to ever emerge in the history of capitalism. It has done nothing but impoverish investors for decades.
So there's no automatic reason why the current moment should be different, except that it was different. The economics were changing, the demand structure was changing. Demand was ramping up at an exponential rate while prices were falling. So you didn't necessarily want to buy a solar panel producer but you did want to buy a company like nPhase, which I recommended and has gone up over 1000%. So different moments call for different sort of contrarian views but it's really not contrarian as much as it is just trying to find the opportunity that is mostly ignored.
Joel Bowman:
Right. And I guess that kind of brings us, you mentioned these big cycles, and I want to just put something of a neologism on the menu for our listeners. It was, I think, probably about four years ago, correct me if I'm wrong here, but about four years ago when you and your publisher CEO Brian Hunt coined the term technochasm, or maybe that was a little more recently.
But I remember this kind of represented, because I remember in that first decade everything as you said, it was all about quote unquote "boring opportunities" over in the ag sector and the barbarous relic of big gold and whatnot. To see you developing this theory or identifying this big sort of primary trend with Brian was very interesting because it was almost as if the cycle had come sort of full turn and you had identified at maybe a point of maximum pessimism for growth stocks, a beginning of a very rewarding time for your readers.
Eric Fry:
Right. The technochasm idea is 100% Brian Hunt's, he came up with the term and the structure behind the phenomenon. And it's really, simply stated it is both economic... it's socioeconomic, it's both sociological and it is economic. So the idea being that folks on the right side of technology innovation and development will prosper, those on the wrong side will not. Both from an investment standpoint and from a sociological standpoint from your own lifestyle standpoint.
So that is a great big theme that persists to this day, and dictates a large number of winners and losers. So there are entire industries that are on the wrong side of technochasm and are essentially on life support. They may look fairly robust and they behave in a “robusty” way.
Joel Bowman:
Another neologism.
Eric Fry:
Yes. Unless they adapt they'll perish. On the other side are the innovators. Unlike a lot of tech stock investors, I'm an investor in technology stocks of certain types when the time is right. I'm not a tech stock investor. But a lot of tech stock investors will buy the story, they'll buy the innovative, cool idea without paying much attention to the size of the total addressable market, the competition, see the likelihood that this new technology itself is uniquely vulnerable to obsolescence.
So once you dive into any powerful trend like that one, there's a lot of digging to do to get to the true diamonds, the companies that really have some, as Warren Buffett would put it, a true competitive moat, or at least a good shot at it. And are operating in industries that have a very long runway of growth and then have a very large addressable market. So it's pretty easy to find things you don't like. It's much harder to find companies that really have a shot, to find the next Amazon, the next Netflix or whatever.
Joel Bowman:
Right. And so I guess this goes to you mentioned a few of the things you look for, investible moats or imminent obsolescence would be a couple of the high vis indicators one way or another. Maybe are there any other processes that you go through when screening for individual companies, like I'm just interested in the process that takes you from identifying this big primary trend which may carry out for a decade or even longer, and then getting to the point where you say okay, here is a ticker symbol, here is a price that I'm comfortable with, here's when I'm going to pull the trigger at and here's my short medium term strategy.
Eric Fry:
Okay, well a couple questions are buried in that question. The first one is more on a podcast like this or at conferences or whatever, individual investors, all individuals want something to hang their hat on. What's a thing that you do that I can also do? It took me a very, very, very long time to get to a helpful answer but I have one.
Part of it is that if you are aware of complexity, and financial markets are complex. You're not solving for just a single variable, you're solving for multiple variables. And some of those variables are sociological, just the mood of the market. It's not just raw numbers. Obviously there's an art aspect of this. But if you're aware of a lot of variables and you're aware of complexity it's hard to pull back and say okay, how do I make it less complex? What's the thing that really matters here?
There are two things that really matter for any investment. One, are sales rising? That's one. Two, are insiders buying or selling? So I could not know anything about a balance sheet except... I could know zero about a balance sheet. I could know nothing about an income statement except the top line, which is revenue. The very first number you see. And knowing that, and then looking up where you have to look up the data, are insiders buying or selling, I have a pretty good idea at the extremes, something that a company that's compelling and I have a pretty good idea of a company that's not compelling.
So there is no... Wall Street focuses on earnings or quarterly earnings per share, adjusted earnings, adjusted EBITDA. All this garbage. And it's garbage because it's all adjusted and it's all in the hands of the wizards called CFOs, chief financial officers, and their departments. It's wizardry, it's not accounting.
So if you like wizards then watch Harry Potter, but if you want to make some money on the market, pay attention to revenue, sales. So there is no such thing, does not exist. Never in the history of the planet has a company produced long-term growth and rewards for its shareholder by shrinking its revenues. Sporadically you can have trades in anything, but the long-term success stories are success stories of revenue up, revenue up, revenue up. So that's the first one.
It may seem so obvious that it's kind of moronic, but it's not because many companies, especially in firm companies, will report rising earnings sometimes while their revenues are falling because they're squeezing costs or they paid back debt or whatever. But it's the earnings that matter. Then insider buying and selling. That's a soft metric, it's not something you can really super hard rely on but you can rely on the extremes. If you have fairly heavy insider buying that means something. If you have fairly heavy insider selling that means something. In the middle, not so much. But again, if you want the best opportunities, look at what insiders are buying and when revenues are going up. Period. That means they know something big's coming out of their market, they know, they have an edge. And they're not going to be loading up on their stock if they think they don't have an edge.
[Ed. Note: Learn more Eric Fry’s The Speculator research service, right here]
Joel Bowman:
Right. We had Chris Mayer on this show, a good mutual friend of ours obviously, and he's very big on the behavior and the psychology of the insiders. Presuming of course that they have some finger to the wind with regards to their own particular market. And obviously it's kind of do what I do, not what I say with regards to what they put in their own money.
Eric Fry:
Again, I'm talking about just two things that any investor can look at to start the process. Obviously there are many, many nuances to this analysis, and ultimately earnings matter, profit margins matter, all those things matter. No question about it. But if I only look at those two things, I'm rarely going to go way wrong.
One of the more interesting ones from the short side, I have done and still do a lot of short selling, is if you find situations where insiders are not buying. Maybe they're not selling but they're not buying and the company is borrowing money to buy back stock, that's a sell. That company is a sell. It happens all the time. It's like okay, so if the stock isn't good enough for them to buy with personal money, they're going to keep a liability on a shareholder and buy the stock on their behalf, stock they themselves won't touch. So that's fascinating.
Joel Bowman:
Yeah, and I guess if you were tracking particular companies and you were looking at habits or trends of buying and you saw habitual monthly, quarterly, whatever insiders loading up and then all of a sudden radio silence, that would probably be a bit of a red flag there as well.
So to back up to this idea of the technochasms and just to bring listeners more fully into it, you went out to Atherton, which is maybe not many people know, routinely ranked as the richest zip code in the States. And just to get back to that sociological data point that you mentioned before, that particular zip code is located near some very not well off zip codes within a nine iron from the 20, 30 million dollar houses. Do you want to just sort of contextualize that a little bit, because while I think people kind of intuitively understand like oh okay, yes, if you're Elon Musk and you have a few billion lying around for Twitter or to invest in Tesla or start these things up, that's one thing, but it's a bigger wedge societally as well that I think people, even non-investors would do well to be aware of.
Eric Fry:
Yeah, so not far from Atherton is a town called East Palo Alto, and it's very poor. There are a lot of... It isn't a classic... East Palo Alto is... Well, parts of it... There are homeless encampments everywhere, and there are homeless encampments in Palo Alto, but it is not... that's not what it's about essentially, it's just a poor place. Especially alongside places like Atherton.
So in one of the elementary schools in Southeast Palo Alto, more than half the kids are homeless. They actually go home to a trailer or a tent or whatever. Not only is it right next door to Atherton, but while we were there filming and talking to people, you can look a mile away is Facebook headquarters. It's right there.
And in fact, to their credit the Zuckerbergs are building an elementary school in East Palo Alto. So there's that. But it's just this incredible juxtaposition of really extreme wealth. The wealthiest zip code in the United States, next to one of the poorest zip codes in the United States. The wealth that's in Atherton and obviously up and down Silicon Valley is technology wealth, it's tech wealth, they're on the right side of the technochasm. And the people on the other side, that's folks who isn't necessarily made any wrong decisions, it's just that's where they are. They clean houses or they work in some service industry of some type. Maybe they're running a successful gardening operation, business, but it's not a business that can grow exponentially through the benefit of technology. So the message is not like hey, don't be poor, be rich. The message was to the extent that you have an opportunity, be aware that technology can grow your wealth exponentially and the opposite can't.
Joel Bowman:
Yeah, and it does seem obviously and probably at no other time in history quite like the last 5, maybe 10 years, that that divide is increasing exponentially as the effects of being on the right side of technochasm extrapolate.
Eric Fry:
Yeah, the chasm is widening at an exponential rate. That word exponential is overused but it's mathematically accurate in this case.
Joel Bowman:
In this case, yeah. So I guess one of the questions that a lot of people are thinking about after Q1, and this kind of goes back to mapping on shorter performances for not just individual stocks but certain sectors of the market are grouped together, call them growth stocks. I know that growth and value stocks maybe sort of overused and particular equities maybe flip between one and another. But when we're looking at this big macro trend that you've identified, I guess a lot of people, they look at Q1 and they say goodness, I don't know what the NASDAQ's down year to date at the moment, something like 10%. It was obviously during March, during the March lows, more than double that down. And then of course you've got individual stocks, Netflix and Facebook that were completely routed on individual days even.
I read in a recent article, a quote that I thought was very interesting from you, and this has just got to do with the various headwinds that are in the face of continued growth stocks, continued growth at the moment, and I'll just read this out to you and get your reaction, it's, "The truth is that the amount of innovation and wealth creation that's about to take place cannot be stopped," you write, "not by rising government debt, politics, border walls, inflation or rising interest rates." There's some pretty strong headwinds, but you expect, I guess, this chasm to keep widening and this trend to keep playing out. Is this a temporary pullback in your view, then?
Eric Fry:
Well, that comment applies only to the capitalistic phenomenon of innovation and wealth creation. It does not apply to stock price trajectory. It does not apply to where the stock market is heading. So if you are more, I guess, a student of history than I am, and as you well know there is often a wide disconnect between the pace of innovation and the success, the mantra of success, that those innovations deliver to their investors.
So coming into this year we had a stock market at all time highs, based upon every single applicable valuation metric that anyone has ever used to measure stock market values. It was the highest valuation of all time, based on anything you want to talk about. So you don't hit the most extreme value ever, have it come off 20% and go, "Gee, how come these great innovations aren't producing big stock price gains for us?" It's because it already happened. You already got it. So let the pony take a breather. Feed it some hay. Just hang out and watch it for a bit.
Joel Bowman:
Right.
Eric Fry:
Stocks don't go straight up. And we saw the overall market fall 20 but we saw many individual names fall 50%, 60%, 70%. So that's a good start in terms of cleansing the air and creating a foundation for a new phase of growth in the stock market, as a broad comment. But even then, some of the stocks, it's so remarkable, even after surrendering 80% of their value, they're still trading at whatever. 100 times sales? Something that was unimaginable. Some of these numbers were unimaginable. Let alone they were at 1000 times sales, whatever they were at.
So investors need to keep in mind that yeah, you don't get paid every single day. You're trying to find the best mega trend opportunities. Things that have powerful trends, big restful market, long live, and you're trying to buy stocks in those trends as well as you can. It's always going to be imperfect. And if you do that you're going to make a lot of money but maybe not tomorrow and maybe not next week.
Joel Bowman:
It reminds me again of... to bring up a mutual friend, Chris Mayer again, one of his more... I think his most recent book, 100 Baggers: Stocks That Have Returned 100-1 Gains and How To Find Them. He goes through the last 50 years of these mega successful stocks that have just made pot loads for investors, and it's, as you said, not a straight line. Many of these, including household names like Amazon, like Apple, have been cut in half or worse multiple times along the journey. So yeah, give the pony some hay and check in again next quarter.
Eric Fry:
I used to do, every once and a while in speeches, I had this little gag, I'd say, "Okay, so who wants to be a billionaire? Here's how you do it, here's how you become a billionaire. You find a stock that falls 20% every four years." It's some number, I can't remember exactly, but it's roughly like this. Falls 35% every six years and every 14 years produces a gain of zero. I mean, it goes 14 years fans or produces a gain of zero. So who wants to do that? And of course it sounds miserable. But the stock is Berkshire Hathaway.
Joel Bowman:
Yeah.
Eric Fry:
Berkshire Hathaway, I can't remember, 12, 13, 14 years producing a zero return. It had multiple 20, 30, 40% setbacks during its history.
Joel Bowman:
Yeah I feel like those guys did all right out of this whole sort of investing game. And that's interesting, it brings us to where I kind of wanted to get to talking about old school investing and old school tried and tested ideas. It does seem you've been writing a little bit more recently about another idea that dovetails with something that we're working on over at Bonner Private Research, and that is our trade of the decade, generally long old school energy, short the US dollar. And with all of the geopolitical backdrop, the inflationary backdrop, the fed being in the headline every other week, this is something that you've written quite a bit about lately and this strikes me as it's a little bit of a return to a cycle that has been unloved during the big run-up of EVs and whatnot and now people are cycling back to very unsexy, old oil. What was the catalyst that drove you back into the arms of the hydrocarbon sector?
Eric Fry:
I don't know if Bill stole my idea or if we both came up with it at the same time. I started writing about buying oil stocks in November, and to my point earlier in this podcast I had the lead sentence or paragraph for that first recommendation was I realize most folks don't want to buy an oil stock, I get it. I don't even want to recommend an oil stock. But I have to.
Joel Bowman:
Imagine how I feel...
Eric Fry:
So I recommended oil stocks. Those trades obviously have done really, really well. And I'm still in the process of recommending additional ones. To the point is it the trade of a decade, I don't know. What I know about... there's two or three things about the oil market that are fascinating and immovable. One is that it takes a very long time to bring new production online. Anywhere from if you've already got an existing shell operation, it attaches somewhere and you're just drilling a new platform, okay you can get that thing running in less than a year. But talking about discovery to production is 10 years best case, and it can be much longer.
So it is the ultimate inelastic market. You can't just produce new oil if demand is there. So for a decade now, global oil companies have been under investing in new production. There's a company called Rystad that tracks it and I think the peak investment was $800 billion in exploration and production, or exploration investment globally in 2014. That number fell to 300 billion. 800 to 300.
Anecdotally we know that's true from comments on dozens of conference calls from oil stock CEOs and CFOs. They are afraid to invest large sums in new production. So that's a multiyear trend that it's coming home to roost now. Our current global supply is constricted due to underinvestment for many, many years now.
At the same time, the EV story, while absolutely authentic and powerful and real is widely misunderstood. Yes, EVs will take a larger share every single year from internal combustion vehicles. And yes, solar, wind, et cetera, coupled with energy storage will take a larger share of the power generation market. But, and it's a gigantic but, those activities are oil intensive.
Joel Bowman:
Yeah. I've got a quote from you here in another column that you had. You write renewable energy is not oil free energy. I just kind of underlined there. And I think that's a dynamic that a lot of people miss when they're talking about solar, wind, EV, they fail to incorporate all of the very highly oil intensive processes that are involved in either manufacturing the blades for the solar panels or the mining process or the distribution process or the storage. These are high energy intensive processes, and we're not powering them by sunshine and wind at present. So we have to go through that to get there.
Eric Fry:
There are very few exceptions to that. The other, and probably an even more important point, this is two points. The second one is that while the EVs share of the global auto market is going to be growing year by year by year, the pie itself is growing. So the number of vehicles of any kind is going to be growing year after year after year.
So that means that in absolute terms, the number of internal combustion vehicles on the road won't peak until at least 10 years from now. Obviously those are estimates, but the estimates run anywhere from 10 years out to 20 years out. It could be 2040 before internal combustion vehicle crude oil consumption peaks. No matter what EVs do. So you don't get there overnight.
I mean, I think even under the most radical, aggressive assumptions about EV adoption, you're still looking at peak oil six, seven years out. I don't even think that's plausible, but okay, it's an estimate. But even if that's true, that suggests automobiles.
Joel Bowman:
Well, that certainly bodes well for our trade of the decade, which is doing quite well early on but-
Eric Fry:
That's a trade of the decade because to some great extent the supply is not entirely baked in the cake. I mean, US oil companies will try to ramp up production, everyone will try. But it's pretty much baked in the cake. In very, very round numbers the US is not capable of ramping more than a million or two barrels a day over the near term. But we're talking about a demand that would exceed that. Not in the US but globally, globally demand is probably already exceeding supply by a million or two million barrels a day, and no one else is growing production. Unless there's some addition coming out of OPEC, but I don't know where it's going to come from and we still aren't back to pre-COVID levels of demand from aviation, from trucking. In Asia, a lot of the Asian economies are still well below pre-COVID levels of crude oil consumption.
So if you just return to that and then add in incremental growth, demand could be anywhere from three to six million barrels a day above supply. And that's off of a 100 million barrel a day base, so that's about what the world consumes. It could easily go to 105, 106 with supply sitting there at 101. Obviously that situation can't persist forever because you can't buy barrels that you don't have, so prices go up.
Joel Bowman:
Interesting that you mention 2014 as the high water mark for global investment in exploration. Obviously just happens to be... I'm sure listeners are recognizing the coincidence that that just happens to be the last peak in price of oil. It was 80 bucks, or whatever it was in 2014. So just attract sentiment and then you have whatever we've had, six, eight years of under-investment and under-capitalization in that industry, which is part of that whole thesis. What do you make of-
Eric Fry:
I thought it was because that's when Bitcoin launched. I figured they stopped investing in oil and gas and just bought Bitcoin then.
Joel Bowman:
Yeah, well Bitcoin is a highly oil intensive mining operation that needs to be supported. So I'm wondering just obviously the kind of other piece of this puzzle, which is a geopolitical piece but where we have and you've written also extensively about oil companies pulling out of Russia. At present it's not so much a big deal I think as your friend Brian Hunt said a few people in Moscow can't watch Squid Games and Netflix makes their exit, but it is a big deal when the western mages are beating a hasty exit and leaving not just decades' worth of capital intensive work and infrastructure and labor and intellectual property and whatnot behind, but also billions, tens, hundreds of billions, who knows, of oil that they won't be drilling anytime in the near future and oil that may very well not but available, at least not without significant strings attached to either the United States or various countries across the European continent who are heavily reliant on gas or oil to keep the lights on and to have their homes heated.
So how much do you think that plays into... I mean, obviously a lot's been made of the quote unquote "Putin price hike" and blaming all of the inflationary pressures in the US on big bad Vlad across the way, but how much of it actually do you think does play in and how much of it, as you mentioned before, do you think was already baked in the cake, both as far as under-investment-
Eric Fry:
It's funny, we hadn't even mentioned Russia in the context of the oil trade of the decade.
Joel Bowman:
Oh yeah, that.
Eric Fry:
That's because when both Bill and I, apparently, conceived this idea, Russia wasn't yet the pariah it has become. So Russia definitely matters, it matters a lot to the equation. I think we, as I wrote, I think the oil market was already poised for a move to $100 a barrel and I was writing it when it was 60 a barrel. It was already poised for that move without anything happening in Ukraine or Russia.
So now, maybe floor is higher, but the issue is twofold. One is that yeah, Russian oil will still come to market. Somebody will buy it at some discounted price. But those supply chains need to shift. And we've learned a little bit about what that looks like, how messy it could be and how much time it takes for supply chains to shift.
So I don't know if China and India, for example, can sop up all the Russian oil that they... in lieu of buying it from somewhere else. But when you're talking about western benchmark prices, meaning Brent Crude in London and West Texas Intermediate here, WTI crude, those oil prices I'm talking about. And those prices are going to go higher because of a supply chain shift and also because of scarcity.
So there's something called a Urals blend. That's Russian oil. And it used to be, meaning early this year, a spread between Urals oil and Brent oil was about a buck a barrel, like nothing. And now that spread is -25 to -30 dollars a barrel. That's how much cheaper Russian oil than world oil. So that tells you right there what's happening on the ground. There is a buyer's strike.
So that's the first problem. The second problem is more serious. When western technology departs, a lot of industries struggle. So when Venezuela said, "We don't need you anymore," Venezuela's production plummeted. It didn't have the new technology, didn't have the parts, didn't have this, didn't have that. And Russia is also very reliant on western technology and western supplies to maintain both the production and the health of their fields.
Joel Bowman:
Human capital experts on the ground, all those companies that have since high tailed it out of there are leaving long shadows.
Eric Fry:
Right. And Russian production was already in decline. I mean, they were operating on aging fields in a lot of places so without the means to invest in sustaining and rejuvenating production, I think could fall fairly precipitously.
Joel Bowman:
And this kind of gets to this idea, I mean from another angle but this bifurcation of the global economy, whether we're talking about obviously energy is largely a catalyzing agent here, but even when we talk about financial sanctions and so forth, where it almost feels like, and I've seen a few other commentators, I'm not the first to make this point, but it does seem like there is this kind of resurgence of Cold War geopolitical bifurcation where you've referred to it, something of a similar trend, I think, as this trend toward deglobalization, where we have economies that were once open for business, open to lowering trades, lowering tariffs rather, and being more internationally cooperative, now sort of retreat back to their corner and deglobalize, essentially. What do you make of the potential ways that individuals, let's say in the United States and the west, are going to see that manifest itself in maybe just their everyday lives? And then we could talk about the markets maybe after that.
Eric Fry:
Yeah. Well, so I'll say this first in case Bill tries to steal this idea also. I've been writing about bubbles for almost two years. The new made in America brand and I also gave a little acronym, MNIC, it was Made in America or Not Made in China. And I have been suggesting this would become a powerful investment mega trend. I believe that as adamantly today as I did a year and a half ago.
And we're seeing develop and mature and fan out across every industry. And now, with this Russian invasion and this instantaneous boycott of an entire superpower, that that just reinforces the idea of trade will deglobalize. There's going to be a messy divorce coming. For you old-timers in the crowd it will be as bad as Richard Burton and Liz Taylor.
Joel Bowman:
Oh, don't say it.
Eric Fry:
For the younger people in the crowd, let me see, give me somebody... Who had a messy divorce recently?
Joel Bowman:
Yeah, I'm going to be of zero help to you there. Brad Pitt and Angelina Jolie, that's as far back as I can go.
Eric Fry:
Kanye and Kim or something.
Joel Bowman:
Kanye and Kim, oh my god. Wait, are you breaking news to me right now, have they split?
Eric Fry:
Are they still married?
Joel Bowman:
Oh I have no idea.
Eric Fry:
Kim is with Pete Davidson, you know from Saturday Night Live. I can't keep up with these youngsters, Joel, you know that.
Joel Bowman:
Maybe they had a Will and Jada type arrangement where it was no exclusive or something. Maybe that's a cancelable statement, we're going to get booted off the air or slapped in the face online.
Eric Fry:
Anyway, so the de-globalization is something that will affect all industries. I'll give you one perfect example. So Intel, the giant American chip company, has announced a few months ago it was going to begin with an initial investment of $40 billion to build new fabs, new semiconductor foundries in Arizona, here in the US, and in Europe. And investors have been very, very nonplussed by this idea. They did all this major investment, becoming a manufacturer and blah blah blah, and why don't you just do it the way Nvidia does it? Why don't you just design the chips and outsource to Taiwan Semiconductor? It's like, huh. Taiwan Semiconductor. What is it about that name, I wonder?
Joel Bowman:
As a former resident of Taiwan I can...
Eric Fry:
Yeah. So even if, and I do assume that Taiwan will remain independent for quite some time, but even if it does, what Ukraine has showed us is that you can never be too sure. So it takes a long time to design chips into new technology. How enthusiastic are various technology companies going to be about oh yeah, we're using this chip from Nvidia that's manufactured in Taiwan. That should be fine, right? Maybe. Maybe not. So not so shockingly, about two weeks ago Nvidia said, "Huh, you know what, maybe we're going to contract with Intel to build some of our chips." For the first time ever. Build them here, or build them in the US or build them in Europe.
So it isn't that the supply chain itself will automatically rupture, it's just now everyone knows about the threat. Everyone knows the risk. You can't say fool me twice. I think the pressure will be overwhelming on CEOs, nervous CEOs to de-globalize. Because if they don't, and the supply chain breaks down, even in an innocent way. If just a tsunami or something, it disrupts production somewhere. All right, well you should have known Mr. CEO that you can't build a business this way anymore, it's not how it works. So I think the pressure is pretty overwhelming to bring it home or as you said not made in China. I think it's going to be coming back to South America, North America, Europe, primarily.
Joel Bowman:
Yeah. It does kind of-
Eric Fry:
That's an opportunity. A very big one with legs.
Joel Bowman:
Yeah. It does kind of seem like the conversation before and after everybody knew that there was a gun at the wedding, let's say. It's the kind of thing you can't... Wanted to mention really quickly, and I'll put these links in the show notes for people who want to follow on with your work and they can go over to our Substack page again at bonnerprivateresearch.substack.com, and have a look for Fry's Investment Report, and The Speculator. And again, we'll have links to both of those in there where Eric fleshes out all of the trends, theories, macro analysis, et cetera that we've spoken about here and then in speculator drills into it a lot more with some more technical trading for those of you who are more advanced investors. But there's plenty of info over there. And Eric, I'm hoping that we get to catch up sometime in the near future now that we're returning to something like normalcy. Maybe we can hang out in the Russian River sometime soon.
Eric Fry:
Sounds good, sounds good.
Joel Bowman:
Okay, thanks Eric, great to talk to you mate. Cheers.
Joel Bowman and Eric Fry on the (New) Made In America