Revenge of the Old Economy

Captain Obvious here: many of the things that happened in markets during 2020-2021 were not sustainable.

Zoom Video at 125x sales. Companies with no products going public for billions. Actual humans wearing ARK/Cathie Wood merchandise out socially like their showing allegiance to a sports franchise.

With the S&P down 23% YTD, the last nine months have normalized much of the lunatic behavior. A "90% club" has been created of previously hot stocks that have fallen 90%.

Yesterday, we got another "nature is healing" moment.

Exxon Mobil passed Facebook (err ... Meta Platforms) in market cap for the first time since 2016.

I'm old enough to remember when Zoom passed Exxon in market cap for a brief period in 2020.

This feels like something worth paying attention too. Oil is generally thought of as the "Old Economy" but its been making a serious comeback, and there's a chance the comeback might only be getting started.

Energy is the best performing sector in the S&P this year and it's only one with a positive return.

Jeff Currie, head of commodities research at Goldman Sachs, made the case for a commodities super cycle this week.

His main point was Covid created a catalyst for a commodities boom. In his words:

"Covid shifted macro-economic policy away from financial stability (which started during the Financial Crisis) and more to social need. And once policy begins to shift to social need (i.e disadvantaged groups) you create more commodity demand. Lower income groups consume the lions share of food, fuel, and capital goods. So if you have policy shift to lower income groups, you’ll get more volume and demand."

He also had the quote, “rich guys can’t create inflation – there’s simply not enough of them. Only the worlds low income groups can do that because they have the volume."

Whether he's correct or not will only be proven true or false over time. The obvious hurdle for the energy complex is clearly the large number of critics, or the "ESG problem".

Currie pointed to one commodity, copper, that will play a critical part in the de-carbonization story. If we want to reduce carbon emissions, electrification is needed and the only commodity that can conduct electricity is copper. Electric vehicles, batteries for energy storage, solar and wind power all run on copper.

Per S&P Global, an EV requires 2.5 times as much copper as an internal combustion engine. S&P also forecasts copper demand nearly doubling to 50 million metric tons by 2035. To put that in perspective, that's more than all the copper that was consumed in the world between 1900 and 2021.

To be fair, if you pay a consulting firm enough money, they'll tell you anything you want to hear. But even if those numbers are overstating things, the direction of demand seems very obvious ... up!

And that's only copper. Future demand for lithium, nickel, and other vital raw materials could follow a similar demand trajectory.

From an investing standpoint, many of these commodity related companies had been "priced for death" trading at free cash flow yields of 30% or more.

The combination of undervaluation, underappreciation, and a onslaught of demand may create the revenge of the old economy over the next decade.