Interview: Oil/Macro/Geopolitics/Investing Discussion with Paul Sankey.
First time interview with Paul Sankey. This was a wide-ranging conversation about the current tumultuous Macro and Geopolitical environment, with EXTENSIVE Show Notes on Tariffs & Current Events.
First time interview with Paul Sankey. This was a wide-ranging conversation about the current tumultuous Macro and Geopolitical environment, with extensive Show Notes on Tariffs & Current Events.
Sankey Research offers a research product that covers global energy and commodities, and this was one of Paul’s weekly Sankey Strategy Sessions for his institutional research clients. I am honored to be his guest this week.
The Show Notes are extensive this time, so please treat this piece as a read-along Thread to accompany the Interview. It has been a frenetic two weeks of news flow, so I am taking this opportunity to collate my various thoughts here and make this piece as comprehensive and up-to-date as possible.
Here is the interview, recorded on the Thursday afternoon, 4/17/25:
Show Notes:
1:00 Background / How I Got Into Finance
6:45 Oil Discussion
I have been selling rallies in Oil (primarily via XOP) since April, 2022 when I wrote this piece:
I voiced my concerns early on that Saudi Arabia’s Unilateral Cuts would put them in a bind and that the Fed would likely win the battle against OPEC+:
My warnings became more strident about true Geopolitical Risk in Oil being to the DOWNSIDE given Saudi’s Unilateral Cuts with NO EXIT STRATEGY:
I have had a consistent view that a Q1’25 Negative Surprise for Oil would be heightened with a Trump election.
This first tweet was from April, one year ago:
Unfortunately, I don’t think we are out of the woods yet on Oil — despite the recent dramatic decline into the high-$50’/low-$60’s.
I don’t think Oil can see a sustainable Bull Market until Saudi Spare Capacity is fully absorbed — especially given the prospect of an imminent Iran deal, Tariff-driven Demand Destruction, non-OPEC+ sources coming on-line in 2H’25, and potentially 6 months for US Shale cutbacks to materialize in lower US Production.
One thing that is Structurally concerning for Oil is China’s long-term substitution of Oil with Coal due to its “Malacca Dilemma” and Geopolitical insecurity over Oil dependency.
Here are two past pieces that delve into these issues as well as a recent comment by my friend Lakshmi Sreekumar about China’s Coal Substitution:
China is very concerned about its Malacca Dilemma, and its various “Malacca Hedges” have failed:
We didn’t talk about this in the interview, but what would change my mind and make me think we can enter a sustainable Oil Bull Market would be if the following occurred:
Saudi’s and OPEC+ are maxed out on Spare Capacity
Permian Basin peaks (this will likely happen in the next 1-3 years)
We emerge out of a Recession/Slowdown with the Fed at our backs instead of in our faces
Until that happens, I’m likely to continue to fade faux Geopolitical Risk rallies.
13:30 Geopolitical/Tariff Discussion
I mentioned how Economic Statecraft is dominating EVERYTHING right now and trumping Economic Policy.
ICYMI, please listen to KAOS THEORY 9 with Michael Every:
I believe the primary goal of the Trump 2.0 Tariff Policies is to stymie the incessant flow of goods from China’s Runaway Assembly Line and to close off all “Escape Valves” and Transshipment Loopholes:
4/16/25:
4/1725:
The Faux Globalization of the last 25 years has NOT been based on Comparative Advantages between nations:
I have been speaking to Retailer CEO friends, and here are some summary thoughts from such a discussion on 4/10/25:
Businesses relocating their Supply Chains outside of China need to be careful about choosing the right countries, because I see “China-aligned” countries at risk of getting shut out as well:
I believe the Trump 2.0 Playbook will be to negotiate deals with other major countries (Canada, Mexico, Japan, South Korea, Taiwan, and hopefully the EU) and then negotiate with China as a bloc.
I believe that most of the punitive Reciprocal Tariffs (Short Term Negotiation Tools) for other countries will be mutually negotiated down, but I think there will be lasting “Long Term Incentive Modifier” Tariffs that may persist to encourage Re-Shoring:
Consensus opinion seems to be that China has a far higher Relative Pain Threshold than the US. I am not so sure:
I believe the Chinese people of today are the not the same as the mostly rural peasant populace of the 1960s and 1970s that endured Mao’s notorious “Great Leap Forward.” Xi backed down after the 2022 COVID-Lockdown Uprisings. I believe Xi is paranoid about losing power:
Youth Unemployment is already soaring, and Xi has to be worried about Tariffs causing even worse Unemployment from its Runaway Assembly Line sputtering:
I think the Current Trajectory of the US, propelled by a fake Vodka Red Bull Economy, is unsustainable. Whereas reasonable people can agree to disagree on the method by which to change course, most people would agree that it needs to be changed.
ICYMI, I wrote this piece several weeks ago to describe how I see the Trump 2.0 Playbook plans to chart a new course:
I believe that the reason why Trump 2.0 is attacking all vectors at once is due to the political reality of Midterms becoming the front-and-center issue in 6-9 months time; therefore, this was a calculated attempt to administer all the bitter medicine upfront, to be soon followed up by the full court press of market-friendly policies like Deregulation and Taxes:
Remember the ‘80-’84 Reagan GOP experience:
Reagan inherited a brutal Recession in ‘81-’82, lost some seats during Midterms, but managed to turn the narrative and markets around to win a landslide in ‘84.
I am optimistic that the end result of this chaos will be a more Anti-Fragile US/North American Supply Chain:
That said, I think it will be important for Trump 2.0 to provide China an off-ramp to enter into substantive negotiations, because “Saving Face” is everything in the Chinese culture:
Negotiations are clouded by deliberate “Chinese State Media” Misinformation, and one wonders whether the chaotic messaging from Trump 2.0 is a way to “Fight Fire With Fire” (had to get in an obligatory Metallica reference!):
Information Warfare is just one of many attack vectors of China’s Unrestricted Warfare on the US over the last 25 years. If you don’t know this term, you must learn it.
Have a listen to KAOS THEORY 5:
28:00 How Do I Position Amidst This Chaos?
Since transitioning from active Hedge Fund Management to Family Office Investor in 2019, I don’t trade as actively as before. In 2023, I “opened the kimono” on how I do Asset Allocation across Asset Classes now as a Family Office Investor:
When I allocate to outside managers, I take great care in trying to identify strategies/investment niches that are not only Orthogonal to general markets but also Orthogonal to each other:
Because my Trading Account is now a much smaller slice of my overall Asset Allocation, I can afford to run a super-concentrated book of Idiosyncratic names; because I have no LPs to worry about, I can stomach significant Mark-to-Market Volatility as long as I am confident that it won’t lead to Permanent Capital Impairment.
I have always been an Alpha Hunter my entire investing career, so I have never carried Passive Beta in my portfolio. Here are some pieces I have written about Alpha vs. Beta:
That said, despite my best efforts at finding Uncorrelated Alpha, I recognize that there is always the risk of “Hidden Beta” especially in a world drowned by ETFs, and I will try to mitigate if it makes sense as an asymmetric trade in its own right.
Again, we didn’t get to cover the importance of Exit Strategies in the interview, but this piece will explain why I prefer “Current Pay” strategies and Event-Driven strategies over “Greater Fool” strategies:
30:00 CLO Equity Opportunities in a period of Credit Tumult
I like CLO Equity Closed End Funds (CEFs) for one part of my Passive Income/“Current Pay” Barbell, with T-Bills comprising the other part. I use a small part of the Positive Carry from this barbell to fund various Hedges, which is what I call my “Macro Capital Structure Arb” setup in my Kimono piece:
Although these CLO Equity CEFs can have a lot of Mark-to-Market Volatility, they represent “Short Duration Equity Risk” — offering Equity-like returns that get paid out every month without Permanent Risk of Impairment.
I’ve written at length about these products and why I like them relative to other “Current Pay” Yield Vehicles. CLOs, by dint of their Reinvestment Periods and Positive Asset/Liability Mismatches, offer resilient opportunities to capitalize on Credit Volatility.
There’s always a lot of FUD around CLOs because the acronym reminds people of the CDOs that blew up during 2008. They are NOT the same:
That does not exempt them from Mark-to-Market Volatility, and many people can’t handle that. I don’t mind the Mark-to-Market Volatility because it serves both as an “early warning signal” and provides trading opportunities given the daily liquidity.
Unfortunately, the ETF-ication of America (what I refer to as the “Passive Virus”) makes everything correlated in the end. This chart below is a perfect example of this — notice how the Leveraged Loan ETF price action in BKLN looks exactly like the price action of its High-Beta cousin, the QQQ ETF in recent weeks:
36:00 Event-Driven Example of MBI
Aside from “Current Pay” Strategies, I also like Idiosyncratic Event-Driven names whose final Value Realization comes from an explicit Event, versus the “Greater Fool.” I touched very briefly on one such concentrated name I own, but rather than go into it here, I offer this detailed writeup:
As with CLO Equity CEFs, even Event-Driven names can exhibit a huge amount of “Hidden Beta” as shown by the drawdown this year. That said, this is also the name that paid out $8/share in a Special Dividend on a $6/share stock back in 2023, and I believe that its current value at less than 30% of Adjusted Book Value once again makes this extremely asymmetric to the upside. I believe its drawdown was exacerbated due to hot money flows stemming from inclusion in various Regional Banking and Insurance ETFs.
Because I’m primarily concerned about Permanent Capital Impairment, I actually think of Mark-to-Market Volatility as Opportunities in these types of names rather than real “Risk” of Permanent Capital Impairment.
41:00 End of the USD?
We ended our brief digression to the world of Micro and went back to the world of Macro and focused on the USD.
All I read in the news these days is the “End of US Exceptionalism, the End of the USD, the End of the UST” — not only I am much more sanguine than the hyperventilators, I am fading that thesis because I think Rate Differentials are going to trump the Trump Animus pressure on the USD soon:
Here’s the Economist Contrary Indicator:
Some context is in order.
I believe the USD is experiencing FX Weakness due largely to Trump Animus as well as other Macro/Cyclical factors — one of which is Low Oil prices. Yes, there is real fear of a Structural exodus out of USD and USD-Denominated Assets, but I think that fear is extremely overblown.
Some Big Picture context is required first, and when you look at the 50+ year chart of the USD, you begin to realize how ludicrous these recent USD Hyperventilations sound:
The last time I had to field and debate so much “End of USD Hyperventilation” was mid-2021, amidst another CYCLICAL bout of USD Weakness:
I had a contrarian thesis then as I do now.
In 2021, I coined the term “USD Wrecking Ball” in this contrarian piece that stated that the Oil Bull Market that started in early 2021 would lead to an aggressive Fed, which would lead to widening Rate Differentials between the US and Rest of World (RoW), which would lead to a Strong USD — the USD Wrecking Ball:
It’s a USD Wrecking Ball, because most of the world’s commodities (especially Oil) are denominated in USD, and a world of Strong Oil and Strong USD (as a result of Strong Oil) serves as a Double-Whammy for countries that are naturally Short Oil (like China).
Last year, as I saw Pusillanimous Powell’s knees wobble based on his verbiage, I began to worry about a Premature Pivot and that the USD might begin to Weaken.
I wrote these two pieces:
In my “Pickleball” piece, I wrote about how in the same way that Strong Oil in 2021 led to a Strong USD in 2022, a Trump win in 2024 could produce a Q1’25 Negative Surprise in Oil that could in turn lead to a subsequently Weaker USD (the USD Pickleball).
I noted that Low Oil by itself is a necessary but insufficient condition for sustainably Lower Rates and Weaker USD:
Starting in February of this year, however, I began to think that the rest of the Trump 2.0 Playbook just might present the rest of of the “sufficient conditions” for sustainably Lower Rates and Weaker USD:
Not only does Demand Destruction from High Tariffs likely swamp the other Inflationary effects of upward price shocks…
…but Low Oil will now play the reverse role it played in 2021, making the USD Wrecking Ball into the USD Pickleball.
There is no question that there is COVID-like Tariff-frontrunning happening right now, while “deer in the headlights” Retailers let their Safety Stocks run down as they freeze new inbound shipments until there is more Tariff clarity.
The markets are very confused right now:
There will be some whipsaw noise, but I believe when the dust settles, Tariffs + the rest of the Trump 2.0 Playbook (including Low Oil) will be NET DEFLATIONARY.
47:30 China vs. Taiwan
We talked briefly about whether Tariff pressures might push China to invade Taiwan in a Kinetic Escalation; once again, I offered a contrarian take.
I explained the dynamics between the KMT and DPP, and why a Bloodless Coup/Peaceful Reunification Risk is the “Gray Rhino” Risk (a risk that is well-known but discounted) that the West needs to worry about much more:
To me, this is a much bigger risk, and it would be a Geopolitical DISASTER for the West to cede the First Island Chain to the CCP. This would be a much bigger risk of loss of USD Hegemony than any of the other risks people are focusing on, imho.
52:30 “Death of the USD” is Premature
I co-authored a paper entitled “USD Primacy In An Era of Economic Warfare” in 2023 that I co-presented at West Point:
In this paper, we examined the history of the Eurodollar market and the origins of USD Hegemony, which is ultimately based upon many pillars of National Power.
Ultimately, I think the “End of US Exceptionalism / End of USD Hegemony” Hyperventilation is just that.
It is based on an erroneous conflation of FX Strength (or lack thereof) with FX Adoption (or lack thereof) and an equally erroneous conflation of Cyclical FX Weakness with Structural Loss of FX Adoption.
From our paper:
When the Pax Brittania Liberal World Order (LWO) ended, the USD took over as Global Reserve Currency because the US was an upstart that offered tremendous advantages over Great Britain in all domains of National Power.
While the current LWO is shifting, it is not subject to collapse precisely because there is no equivalent upstart that can claim dominance over the US in anywhere close to all domains of National Power.
Check out Michael Every’s “Balance of Power” triangles from his Geopolitical treatise, "The World in 2030", which we talked about in KAOS THEORY 9:
USD Hegemony mirrors US National Power Hegemony, and there is no close contender, certainly not CNY nor EUR.
From our West Point Paper:
My “Amazon Credit Mental Model” is useful:
Of course, the depth and liquidity of the UST Bond Market is of paramount importance, and there simply is no other Sovereign Bond Market under the sun that can come close to matching it.
Debt/GDP is just one factor in determining Sovereign Creditworthiness; as I stated in my "Asteroid Field" piece:
57:00 Gold Hysteria is emblematic of the Trump Animus / “End of US” Fear
However, I argue that the Fiat “Pandora’s Box,” once opened, can never be contained without extreme Austerity (that no government on earth will be willing to stomach).
The Gold Bug’s dream is a return to a Hard Money standard, but be careful what you wish for if you have gotten accustomed to Fiat-enabled GDP Growth. From my piece above:
Gold and BTC are both Supply Inelastic “Elephant In A Mousehole” Assets, which can be phenomenal trading vehicles, but too illiquid to replace USTs as modern-day Reserve Assets. There currently is no real alternative to USTs.
1:00:00 Pusillanimous Powell to PARSIMONIOUS Powell?!?
The USD has already overshot its Fundamentals due to Trump Animus/ “End of USD” Fears, and I believe Widening Rate Differentials between the US and RoW will eventually put a floor in USD and make it STRENGTHEN again.
Further exacerbating these Rate Differentials is the fact that formerly Pusillanimous Powell mysteriously morphed into PARSIMONIOUS POWELL last week, even as the ECB cut:
Could a Bear Flattener be coming given that the ECB is cutting and Powell is holding firm?
I’m no fan of Trump bullying Powell to cut, but Powell’s newfound intransigence to cut at a time of great Economic uncertainty in contrast to his heretofore eagerness to cut when nothing previously justified cuts smacks of a highly politicized Fed to me:
Whether it is a political decision or not, Powell always seems to be behind the curve.
My Contrarian Thesis:
Falling USD/UST is mainly caused by Trump Animus and misplaced fear of a Structural exodus out of the USD, but I see no Fiat alternatives and you can’t buy goods or borrow money with Gold, nor can a world driven by Fiat-enabled Credit Growth be put back into a Hard Money bottle.
My Contrarian Macro Trades (Hedges):
1. Long USD expressed through USDCNH
2. Long USTs, expressed through TLT Call Spreads
1:04:00 Conclusion with Parting Thoughts on Oil
Both Paul and I agree that we are not of the woods on Oil and that 2H’25 balances look bad.
Saudis are the only player that can offset lower prices with more volumes (remember that Oil Revenues = Price x Volumes), and I worry about the COVID market share war.
Low Oil kills multiple birds with one BIG ASS STONE:
Paul thinks Oil could rally in the next few weeks despite worse balances in 2H’25, but we didn’t get into why.
With that, thank for reading this long missive. Enjoy the rest of your weekend!
Extremely appreciative for the kindness of your reply . Is there a private way I can send you a message ? Thanks
Excellent interview with Paul . Question regarding ECC , you mentioned you hedge this vehicle , can you share do you hedge it dollar for dollar , are the hedges permanent or are you just using your own market timing ? It appears that the equity falls as much or more than the high dividend . Does one have to believe that we are at a market low to invest in ECC ? Thank you in advance
Keith Rudman