Jeff Currie on the 'Volatility Trap' Keeping Commodity Prices So High

Joe Weisenthal (0:10)

Hello, and welcome to another episode of the Odd Lots Podcast. I'm Joe Weisenthal.

Tracy Alloway (0:16)

And I'm Tracy Alloway.

Joe Weisenthal (0:18)

Tracy, we got the latest inflation data this morning. We're recording this on April 12th. And it was interesting. I mean, it showed there's some easing perhaps in sort of core goods, core inflation on that side.

But the headline, which of course includes energy and food continuing to move higher, at least as of March.

Tracy Alloway (0:40)

Yeah, that's certainly right. And last month would have captured the worst of the energy spikes. So a lot of commodities prices have come down ever so slightly, but it does feel like there's just generally a lot of angst and concern about what's happening with commodity prices at the moment. And I have to say, I just realized, the last time we spoke to our guest, it was also CPI day. And we started out the discussion basically in exactly the same way.

Joe Weisenthal (1:06)

Okay, so in a year from now, we're gonna be like, oh, there's some good news here, but oil is at 300

But yes, oil and other food-related commodities, energy, natural gas is very expensive. There is, of course, I think two dimensions. One is like pure price, and then the other is availability. Because as we've been talking about with some recent guests, including Pierre Andurand, like those have become two separate things. Also, Zoltan, like there's this fracturing of global commodity supply chains we're seeing.

Tracy Alloway (1:32)

Absolutely right. And even financial exposure to commodities, because you might make a lot of money at the moment, but you're not necessarily guaranteed to take delivery. There seems to be a chasm opening up between financial commodities exposure versus the physical.

Joe Weisenthal (1:47)

And we saw that very dramatically with Nickel and some of the dislocations there. Well, no more intro. I want to get right into our guest because we've had him on twice before. And I would say of all the people we've talked to, he's probably called this commodity cycle, maybe it's a super cycle, as well or better than anyone. We are going to be speaking with Jeff Currie. He's at Goldman. He's the global head of commodities research. We had him last on in middle of October and he said there was more pain ahead in this commodity super cycle. And that has proven clearly to be true.

Jeff, thank you so much for coming back on Odd Lots.

Jeffrey Currie (2:23)

Great, it's a pleasure to be here. I didn't realize it was CPI week last time.

Joe Weisenthal (2:28)

Well, let's just start it off like really simple. Like is there, you know, in the middle of October, you said there was still more pain ahead. That clearly proved to be true. Let's start really general.

Is there more pain ahead?

Jeffrey Currie (2:42)

It's a different kind of pain. We like to argue we're entering a volatility trap where higher vol discourages investment, which then reinforces higher vol.

And to think about what ends a super cycle, there's only one thing that can end a super cycle, investment. You gotta grow supply and deep bottleneck the system so that you can accommodate more demand growth on a forward-going basis. And that's how you ended the 70s, it's how you ended the 2000s, and that's how we're gonna end this one. But at this point right now, investment, whether it's investment through capital markets, through banking, in the commodity markets themselves, it's all declining right now in an environment in which it needs capital more than ever. So it's like to say we're in the early ending still. Maybe it's the second or third ending of the super cycle, but we're just getting going now.

Tracy Alloway (3:36)

Well, why don't we just jump into that point then? Because this is something that has come up quite a lot on recent episodes, this capital investment point.

What is it in your opinion that's holding back that investment? And when would we perhaps expect that to change as higher prices start to incentivize more producers?

Jeffrey Currie (3:57)

Well, this one is a little bit different than the other cycles, but why don't we start with the other cycles and then talk about how this one is different? And the way this one is different is through ESG and banking regulation following the financial crisis in 08-09. So let's go back to the 1960s. You had the nifty 50, that was your new economy booming along, absorbing much of the capital from the old economy and starving the old economy of the capital that needed to grow the supply base, which set you up for a very tight supply environment when you got the big uptick in demand off the great society in the late 60s and the early 70s. Similar dynamic that happened in the 2000s as well as today. You think about in the 2000s, you had the dot-com boom.