Zoltan strikes again
Premium subscribers will soon have another note from Credit Suisse child prodigy Zoltan Pozsar to savor, but Izabella Kaminska, the FT’s former Alphaville editor, offered a few snippets and commentary before taking her child to the school this morning in Europe. I’ve included his full article below, followed by an overview of the top names in our system at Thursday’s close, which include wheat, oil and other commodities.
Written by Izabella Kaminska from The blind spot
“You can print money, but not oil to heat or wheat to eat.”
There’s a new report from Zoltan Pozsar of Credit Suisse… and it starts out by saying:
… you can print money, but not oil to heat or wheat to eat.
I’m so glad because this fairly obvious point seems to have been completely missed by economists and analysts for unknown reasons.
They also don’t seem to understand this just because the commodity market doesn’t match the scale of the bond or stock market, that doesn’t mean it’s not significantly more important to the global economy than anything else.
The way I explain it is that commodities are like the oxygen the body needs to stay alive. The lifeblood is all the other financial stuff.
You can donate a lot of blood and still live. But it doesn’t take a huge oxygen deficit to kill you.
Back to Zoltan (before Zerohedge and everyone is on the report). Or should I say Z̶oltan and Z̶erohedge. (Although I just noticed that crossing out the Z makes it look like the Azov Battalion symbol, so that’s not good either. We’ll have to pick Soltan and Serohedge).
The key point is that Soltan sticks to his case saying that this is a paradigm shifting moment for finance.
And on this point that other economists don’t seem to understand (emphasis mine):
Central banks are good at dampening demand, not stimulating supply. Energy and raw materials are needed for almost everything, Russia exports everything, and contrary to 1973, it is not only the price of oil, but the price of everything that is exploding. After lying dormant for decades, fourth prize money is back with a vengeance – the par, base and forex-linked silver prices are dormant at the moment, but the price level is about to become very volatile and the market is trying to price the silver future (OIS ), i.e. the number of interest rate hikes and the FOMC adjusting the level of terminal rates (r*) in response to the new price level regime induced by the war and sanctions
When it comes to raw materials, Soltan has definitely done their homework. A really important point concerns the important role of shipping in maintaining the global price balance. If the goods are oxygen, the vessels are the blood vessels that carry oxygen through the system:
Previously, shipping was aimed at minimizing the time needed to get products from producers to consumers. The time spent at sea is a function of the sea routes, and different sea routes correspond to different types of ships. In the case of oil, for example, the three main types of vessels are VLCC, Suezmax and Aframax vessels. VLCCs (Very Large Crude Carriers) carry 2 million barrels and are used for long-haul travel. There are about 800 VLCCs in the world. Suezmax refers to tankers capable of crossing the Suez Canal in a loaded state. Suezmax tankers carry 1 million barrels on long-haul voyages. There are 700. Aframax ships are “fast boats” by comparison, carrying 600,000 barrels on short-haul trips. There are approximately 600 Aframax carriers worldwide. All of this detail is important to know when the flow of oil – and in particular, the flow of Russian oil – is disrupted. If you trade STIR and care about money market reform, you should also follow “oil flow reform” (reform due to sanctions, not SEC rules). The VLCCs and the LLoR of the banks are interdependent. Here’s how: Oil from Russia (Urals) is loaded onto Aframax carriers at the port of Primorsk or the port of Ust Luga and then shipped on short shuttles to Hamburg and Rotterdam. But if Europe boycotts Russian oil, Russia will have to ship its oil to Asia through much less efficient routes. Oil has to be pumped out, oilfields don’t like to be turned off and on, and there are no new pipelines to Asia. Storage capacity can accommodate excess production in Russia for a while, but when storage facilities fill up, the oil will have to be moved. Without pipelines, the only way to get Russian oil to China will be through ships, and that’s where things get tricky: it’s not profitable to ship crude on long-haul trips on Aframax carriers. If Europe no longer wants Russian oil and Russian oil needs an outlet, and that outlet is a buyer in China (see here), China will need more VLCC carriers to get oil from Primorsk and Ust Luga.
I’ll come back to the meaning of the larger grade after I’ve raced through school. But the key observation Soltan makes about the expedition is that the above prepares us for the creation of a powerful blood clot in the system:
Worse still, it is not only the time to market that is getting worse, but we are also finding ourselves with a shortage of ships and a corresponding increase in ocean freight rates: consider that we are still using the same number of Aframax vessels than before, but now as links in a longer chain of intermediation (the STS crude transfer bit), and we now also need 80 VLCCs to get the oil to the end consumer in China. 80 VLCCs are essentially the product of the new, longer shipping routes to China: the logic is that instead of taking around a week to get the oil to consumers, the oil will now take at least 120 days (two months plus two months = four months) to transport, and therefore 1.3 million barrels per day (i.e. 75% of the load of a VLCC) times 120 days on a 2 million-barrel ship, i.e. 78 VLCCs in permanent use!
The 80 VLCCs that the world will soon run out of represent about 10% of the global VLCC capacity, which includes 50 VLCCs that are Iranian Flagged Vessels (NIOCs) that are currently used for floating storage, the diversion of Russian crude oil will therefore consume more than 10% of global VLCC capacity.
And this feeds into funding because it means that trade funding will have to cover 4 months instead of 60 days:
There are implications for financing markets and parallels with financing markets: as the example above shows, oil transports will take four months to finance instead of two weeks, and as oil prices are on the rise, it will take more money to fill the VLCCs – which means more notional borrowing for much longer terms.
Our gut tells us that as inflation and commodity price volatility drive up demand for credit in the commodity world, so too will banks’ LCLoRs and banks’ willingness and ability to respond to credit needs of the commodity world will decline. In 2019, y/n repo rates increased because banks came to LCLoR and stopped lending reserves. In 2022, term credit to commodity traders may dry up as QT will soon begin in an environment where banks’ LCLoR needs are increasing, not decreasing. History never repeats itself, but it rhymes…
Which is to say, it’s not just that rates will go up, it’s that some trade routes won’t receive any funding. At least not in dollars.
I’ll come back with more comments on what he says about other markets in the next episode.
[End of Izabella Kaminska’s post]
Wheat, Oil and Other Commodities Dominate Our Top Names
In an article earlier this month (Sanctioning Ourselves), I mentioned how the big names in our system reflected the impact of Russia’s invasion of Ukraine and subsequent US-led sanctions against Russia:
As regular readers know, our system does not consider the macro image when selecting its main names. Instead, it gauges stock and options market sentiment to gauge which stocks are likely to perform best over the next six months. Nonetheless, this bottom-up approach paints a clear macro picture when you look at our most recent top ten.
Our top 10 was then heavily weighted towards industrial commodities, and so was our top at Thursday’s close. In addition to our two big names in technology, Tesla, Inc. (NASDAQ: TSLA) and Nvidia, Inc. (NASDAQ: NVDA), the rest of our top ten falls into the following categories.
- Steel: Cleveland-Cliffs, Inc. (NYSE: CLF), and United States Steel Corp. (NYSE:X)
- Agricultural products : Teucrium Wheat Bottoms (ARCA:WEAT) and Teucrium Soy Fund (ARCA:SOYB)
- Fertilizer: CF Industries Holdings, Inc. (NYSE:CF)
- Oil and Gas: Direction Daily S&P Oil & Gas Exp. & Prod. Bull 2X (ARCA:GUSH), Occidental Petroleum Corp. (NYSE: OXY), and United States Petroleum Fund (ARCA: USO).
Screenshot via wallet armor on 03/31/2022.
As always, we suggest readers buying one of our big names consider coverage just in case we end up getting it wrong. You can use our website or our iPhone app to search for optimal hedges on all the names above.
This article was submitted by an external contributor and may not represent the views and opinions of Benzinga.