Over the past 2 years we have been very much focused on expanding our global network of investors, economists, analysts and industry experts we regularly touch base with so that we can drive better portfolio outcomes for our clients. Whilst we conduct our own independent research across all asset classes and investments, it’s important we get a pulse check on markets by engaging as many different market participants as possible. This helps us cross check our own thesis but can also provide a new or competing perspective.
Our colleague Gaurav Singla recently attended the Goehring & Rozencwajg Investor Day in New York city. G&R is a fundamental research firm focused exclusively on contrarian natural resource investments with a team with over 49 years of combined resource experience. Several of the themes that were discussed weren’t new to us and we are in fact already exposed to these themes in our Multi-Asset and Equity strategies. Below are GS’ key takeaways from the conference and for those interested in the presentation slides please get in touch.
Grains investment landscape
Though all commodity markets remain cheap relative to other asset classes, grain markets relative value to all other commodities remains at one of the cheapest over the last 30-years. However, the market remains at an inflection point, ready to start a bull market as;
(1) U.S dollar reserve currency status remains in jeopardy potentially causing a recalibration higher for U.S.priced commodity assets.
(2) The age of Indian consumerism from positive demographic trends is about to take over as the dominant buyer for most commodities (while China’s demand sun is setting for commodities, Artificial Intelligence (AI) and Quantum Computing will delay the day of reckoning for now).
(3) The convergence of the 220-year reduced solar output cycle, the 89-year Gleissberg cycle and the 60-year sea surface temperature cycle all portend record weather volatility ahead.
(4) Brazil Amazon deforestation offers huge risks to future production potential e.g. escalating animal diseases will keep meat protein supply and demand in great flux leading to alternative protein options gaining greater traction, however, big climate flashpoint risks for the next few growing seasons due to a likely neutral/weak La Nina Central Pacific SST’s leading to a possible major 1 in 50 to 1 in 100 year drought in the U.S.Midwest and an escalating multi-year drought continuing for Brazil/North Brazil/Russia.
(5) Overall commodity inflation cycle still remains intact and should last at least into the mid-2030’s.
Opportunities: Given major challenges from historic weather volatility, escalating geopolitical chaos, monetary transition uncertainty and parabolic increases in environmental regulations, finding solutions that make agriculture more efficient, more transparent and more resilient should provide good returns for investors with areas of focus including;
(1) Efficiency – increasing productivity using Al/Quantum Computing.
(2) Resilience – doing more with less biologicals – company example Meristem (global leader in delivering live, in-field biologicals through the patented BIO-CAPSULE Technology platform, helping significantly reduce waste in crop input systems through improved supply chain efficiency and advanced concentrates).
(3) Transparency – how supply is produced (smarter markets) – company example Abaxx Technologies (develops and deploys technologies that unlock latent value in global markets with products that make communication, trade, and transactions easier and more secure).
Uranium – an emerging mega trend
The war in Ukraine and the resulting energy crisis, and the data center/AI proliferation have led to a huge revival in nuclear energy (several Mag 7 companies have announced nuclear deals in last few weeks including Amazon signing SMR deal with X-energy, Google inking a deal with Kairos Power to purchase electricity from multiple reactors that would be built through 2035 and Microsoft has signed a power deal with Constellation Energy to help resurrect a unit of the Three Mile Island nuclear plant in Pennsylvania). As a result, the nuclear industry is building momentum, supported by shifting public sentiment and growing enthusiasm from governments and financial institutions.
SMR – what is it and how can it change the nuclear energy landscape? Small Modular Reactors (SMRs) are an advanced kind of nuclear reactor with a smaller physical footprint and faster build times than traditional reactors, allowing them to be built closer to the grid and come online sooner.
Technically, a traditional third-generation nuclear reactor consists of a nuclear fuel level surrounded in a pool of water (serves to take the heat off during the nuclear reactions that are taking place as the uranium atoms split apart and is also circulated to use in the heat exchange), however, with the nuclear reactor getting heated to ~500 degrees Celsius and given water boils at 100 degree Celsius, the only way to keep the water intact is by having it under huge amounts of pressure and cycling it very consistently and in order to handle 200 atmospheres of pressure with radioactive steam the reactor needs to have incredibly thick steel pipes, precise joint fittings and high specification valves to be fully tolerant to handle the pressures which not only creates a huge amount of material weight but also increases material cost.
However, a LMM Sodium SMR swaps out the water with molten sodium (sodium melts at 300 degrees Celsius and goes from a solid form to a molten liquid form, taking off all of the heat off the reactor without ever boiling, thus not requiring to keep it under pressure and reducing bill of materials by ~90% i.e to generate a kilowatt hour in a SMR vs a third-generation reactor it will require ~90% less cost of materials). Additionally, in terms of energy ROI i.e how many units of energy go in to create the diffusible unit on the other side, an SMR is 1 to 180 vs third-generation nuclear reactor at 1 to 100 and hydrocarbon fuels (oil and natural gas) at 1 to 30.
U.S. macro picture
Key points:
(1) The U.S. economy remains strong with healthy private sector (both corporations and households) balance sheets (households have paid out mortgages and corporations despite having a lot of debt have de-leveraged from Debt-to-EBITDA perspective as inflation led to revenues increasing) with nominal growth in economy continuing driven by strong job market and forward guidance on income growth (all job earnings are growing at least +4% y/y and over the past 1.5 years every major union that has been on a strike i.e United Auto workers, pilots and air cabin crew, and port workers have received at least +10% y/y increase in their wages every single year for the next 4-years).
(2) Despite the view of Fed being behind cutting rates (Fed is worried more about economy and employment vs medium term inflation and thus this resulted in financial conditions never being tight enough), inflation is still running ahead of the target and could move higher potentially due to an energy shock (war in the Middle East), potentially forcing Fed to raise rates.
Our view: We continue to hold the view, that bonds are at this stage more of a trading instrument vs a genuine defensive asset as the threat of inflation (and therefore higher yields) remains a risk. The risk is the U.S. economy continues to remain strong, reckless fiscal spending remains a key policy of both political parties and inflation doesn’t come back to the target range (every time a bond investor buys a coupon of 4-4.5% at auctions they are basically making an implicit assumption that the inflation is going be average 2-3% over the next 5-years or more). Massive fiscal imbalances, core inflation, and still bulging Fed’s balance sheet leave limited room for Treasury/Fed to maneuver in event of supply shocks/deeper downturn in our view.
