When a commodity trading guru like Dwight Anderson, founder of the iconic Ospraie Management, has something to say on the market outlook, people tend to listen, especially when he’s consigning the last great commodity bull run to the dustbin of history and buying gold and farmland for the next crisis.
Anderson is the former Tiger Cub, whose Ospraie Management at one time ran the world’s biggest commodity hedge fund, with close to $4 billion at the peak. In what’s billed as a MasterClass of commodity investing, Dwight granted Real Vision a rare ‘one-on-one’ interview. Hosted by macro heavyweight Dan Tapiero, the former Tiger, Duquesne and SAC industry veteran, the interview showcases the factors influencing markets across the commodities spectrum through the perspective of a commodity trading giant.
Below we present a highlight clip of some of Anderson’s key insights, but we urge readers to see the full interview, not just for the astonishing market insights, but to hear Anderson lift the lid on his incredible backstory in the hedge fund business. Dwight relives his early days at Tiger, guided by Julian Robertson and explains why he partnered with Paul Tudor Jones, who would go on to seed Ospraie.
Here is a summary od Dwight Anderson’s key talking points:
The China Driven Bull Market Can’t be Recreated
It is the sheer scale of the last commodity bull market that will probably again never be repeated, as Anderson said the massive tailwind from China from 2003 through 2009, combined with the overly stimulative backdrop created a cocktail of conditions that had never been seen before.
“And probably, from an aggregate of variables, we won’t see again, in that the pace and scale of China’s growth and how that could be so unfettered, there’s no other economy, both of size and of flexibility, where I can see that being possible,” he said. “We’ve had bull markets over the centuries, and always have, but I’m talking the scale of where crude went from sub-10 at the end of last decade to 150.”
While India does have a large population and provides hope for the future, Anderson said it could never recreate the scale and pace that would drive the volume growth which China was able to, without huge changes to the way the government and corporations work together within the legal system.
Buy Gold for Protection from Central Bank Policy Environment
Practically everyone these days has a view on gold at present and although Dwight is pretty torn on price expectations – he’s not short on the yellow metal, which is going to deliver some important advantages when the next crisis comes.
“Gold is a Tier 1. It’s a level one asset for banks. So they can actually pay you in a negative interest rate environment to hold that, because they can turn around and monetize that. That’s not true for platinum or silver. So when a negative central bank interest rate environment is, I think it’s incredibly difficult for you to be short gold.“
“I struggle with what the proper paradigm is for gold, and that we would not be short it in absolute basis here,” Anderson said. “And I believe that it will keep its purchasing power, but in real terms, is that a strong dollar environment? In that case, gold is 1,000 or 1,200 or whatever. Or is it the paper currencies have no value and its 2,000? I am not convinced of either one at the moment.“
“I’d probably be more convinced that there is value in platinum group metals relative to gold. You take a look at a $260 discount of platinum versus gold, and that’s something that, over the next four or five years, I don’t think is sustainable. But I also don’t think that’s something that is correctable the next 18 months. Platinum is in surplus, and it lacks a lot of the monetary advantages that gold has. In Europe and Switzerland, the VAT for gold is zero. If you take physical delivery of platinum, you have to pay a VAT in the gains.”
Buy the Farm to Avoid a Crisis
While we have previously discussed the plight of the US farming sector, with astounding increases in debt and the erosion of farmland values, Anderson sees more than just value here.
“I think farming, in terms of the productive side of the industry, is still an incredibly under-appreciated asset and business in that you’ve got land where every single year, on average, you’re going to grow more. You maintain your water table, your soil, the nutrients there, and I get productivity growth every year. That is awesome. Every other one of the productive businesses, you produce less every year.“
“It’s hardest to get real pricing power in agriculture, because you actually are growing productivity per year, versus the decline rates in the others. But as an asset to own for currency protection, inflation protection, just a general income, yes, yield, farming is phenomenal.”
“Now, I think there’s going to be changes in the industry as farming size gets larger in the United States, and customers take advantage of our transportation network and the information systems and larger farmers to disintermediate some of the merchants. So the Cargills and ADMs of the world are going to have to close or reinvent some of their businesses as some of it goes more directly from farm to effective table, or at least the manufacturing plant. So there’s elements of the infrastructure logistics curve that I worry about, but farming? No. And in the US, we’re blessed with a lot of advantages for that.”
How Electric Cars Will End Up Supporting the Next Oil Bull Market
Among his big picture observations, Anderson’s appearance was packed with trading ideas, including a short term trading opportunity on natural gas and a contrarian view that the move to electric vehicles could actually support crude prices towards the end of this decade and into the next, with expectations of EV inroads to the auto industry would put the brakes on planned additional oil supply.
“So that EV side is going to be something that is really going to affect demand growth in crude next decade, and I actually think it could have the odd effect of keeping crude oil prices higher for longer at the tail end of this decade into early next. Because the huge projects that have to be sanctioned that really change the supply and demand, the 100 to 500,000 barrels per day, are ultra deep, deep oil sands, Arctic, and they are many billions of dollars and many years’ lead time. So by the end of this decade, when the oil executives are taking a look and they’re going, holy cow, and they’re starting to see electrical vehicles become more competitive outright economically, and start to gain share.”
“And that that will affect the demand growth the middle of next decade. I think they might not sanction some of the large oil projects. The largest, the longest lead time, but also the biggest size and capacity, because of concerns over what pricing will be then. So I think the oddity, actually, is that, at the tail end of this decade to early next, the penetration rate of electrical vehicles I think could lead to higher crude prices, potentially, rather than lower, until that demand really catches up middle to late next decade.”
Tapiero tested the logic that if we won’t see another bull market on the scale of the last one, did that mean we can’t be in a bull market right now and asked if crude could ever get back to $150. Anderson fired back that there was a difference between a 15-fold move and a tripling.
“So can we go to 150? Sure. You give me the right accent in Saudi Arabia. No problem. If it’s something that is driven by the economic cycle as opposed to a supply shock, the answer is, I don’t see that happening in the next 15, 20 years, in that with what’s going on for the productivity growth of crude, how you’ve expanded so many different geologic basins, and also some of the other things that have gone on to moderate demand growth, in that it would be a supply shock that could get there. It wouldn’t be demand-driven like it was last time.”
For anyone dabbling in commodities and in particular energy, it’s well worth hearing Anderson’s views on the collapse in capex in the oil sector, suggesting that unless prices get back to at least the mid 60s, we won’t be seeing the production growth out of the US needed to help the world balance and meet demand growth.
“So in a world where you’re looking at prices a year out are not even $50, and you’ve had capex of the major public companies fall by 65% over the last two and 1/2 years, there is a lag time where Shell, their Stones project is just coming on the Gulf of Mexico. That was approved four years ago, and that’s one of the most recent approvals.”
“So of the major approvals of formal investment decisions, from ’07 to ’13, we averaged over 40 a year. In 2014, we were under 15. Last year, we were under 10. And so those are the projects to come on in ’18 to ’19, and they’re not going to come on. And so that gap of the supply growth through the crash of capex is something you’re going to need decently higher prices. And adjust that whole– it took forever for the supply decisions to come on over the last two and 1/2 years, and now it’s going to take forever from a commodity trader’s perspective for that supply to come back.”
Watch the full interview on Real Vision
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