Weak Demand and the Return to “Normal” Illusion — Live with Paul Hodges

Published on
February 20th, 2021
Duration
67 minutes

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Weak Demand and the Return to “Normal” Illusion — Live with Paul Hodges

Live ·
Featuring Paul Hodges and Max Wiethe

Published on: February 20th, 2021 • Duration: 67 minutes

Paul Hodges of The pH Report and New Normal Consulting returns to Real Vision to update viewers on the health of the global economy and what that means for financial markets. Hodges and his team see big changes on the horizon and, through their analysis of the chemical industry, auto market, and technology sector, see a return to the “old normal” as being highly unlikely. In this interview with Max Wiethe, Hodges highlights the important data leading him to believe that post-COVID the world will look very different as demand patterns shift, reshoring continues, and momentum for “the green recovery” grows. An excerpt from the most recent edition of The pH Report looking at the auto market can be found here: https://www.realvision.com/issues/auto-markets-shaken-by-covid-and-evs. To access Hodges’ charts, please use this link: https://rvtv.io/3bvZXqA.

Comments

Transcript

  • AW
    Andrew W.
    23 February 2021 @ 02:02
    This interview seems to have been more motivated by Hodges's policy preferences than reality. As per Dylan Grice (https://themarket.ch/meinung/the-stage-is-set-for-a-bull-market-in-oil-ld.3561) -$20B E&P Capex reductions after covid -"According to Bloomberg, which in its annual Electric Vehicle Outlook summary projects that Electric Vehicles (EVs) will only make up around 8% of the total fleet of passenger cars by 2030. Bloomberg expect the number of cars to rise from today’s 1.2 billion vehicles to 1.4 billion, but only for 110 m of them to be EVs. So the number of oil-consuming Internal Combustion Engine (ICE) vehicles on the road by then will still be around 1.3 bn, which is a forecast rise of around 0.7% per year. Moreover, while passenger vehicles contribute around 60% of the global demand for crude oil, the rest comes from heavy duty vehicles, aviation and the petrochemicals industry for which there are as yet, few alternatives." -The transition is going to take considerably longer than people think. There are billions of people who would like to drive if they could. Countries like India and Brazil aren't going to pay $30k for EV batteries when they could pay $3k for ICEs. Meanwhile, people will listen to this interview and believe that oil is already dead. The reality is that all the ESG divestment from oil is starving the industry of capital and this was already a problem pre-covid. The number of ICEs that will be on the road will increase in the 2020s and so it's unlikely that oil consumption has peaked. -Carbon reduction is a Prisoner's Dilemma. Why would any one country reduce their emissions without assurance that other countries will also do so? China plans to be carbon-neutral by 2060. I don't know anyone who actually changes their carbon consumption out of environmental concern. I don't think there will be a eureka moment as Hodges thinks. Dylan Grice is simply more believable to me than Paul Hodges.
    • PH
      Paul H. | Contributor
      23 February 2021 @ 11:54
      Thanks for the comment, Andrew. We are great fans of Bloomberg NEV and Dylan Grice, but happen to disagree with their conclusions for the reasons set out in our latest auto Report - which is available through RV at https://www.realvision.com/issues/auto-markets-shaken-by-covid-and-evs . All I'd add is that this is one of our calls where we have a very high confidence level.
    • LS
      Lemony S.
      24 February 2021 @ 18:07
      As I indicate above, it is a good short to medium term trade, not a real or meaningful industry if you analyze it in itself (it is a political sideshow for the self righteous westerner consumers who assuage their guilt by acting like it doesn't create more carbon emissions). When the current lying regimes collapse, so will lies like this one.
    • AW
      Andrew W.
      24 February 2021 @ 19:47
      Thanks for sharing your report Paul. Nobody can argue with the numbers. However, I don't think using 2020 numbers or mandates set by govts today are useful to extrapolate anything. And you also need to consider that the last decade has been a relatively bad time for EM, and that the 2020s may look more like the 2000s as the dollar cycle turns. I think countries like the UK which are mandating EVs only by 2030 are going to backstep on this once they see the costs. I remember when UK had a plan for 33% wind power by 2020, about 15 years ago. This of course never happened, not even close. Governments make up dream plans all the time. The suburbanization of EM countries like Brazil and even the exodus of cities in DM will have to choose if they want EVs or ICEs, and as a suburbanite I have no plan of giving up my personal vehicle in preference of robo-taxis and most people I know feel the same unless they live in urban cores in which case they don't own cars anyway. This has to be weighed against the backdrop that everyone is already writing off oil for dead and causing under-investment in a commodity that will still be needed. With that said, I still think a pair trade of long copper long oil (and probably also long nickel) is the best way to play this, as you come out ahead regardless of which extreme happens. Long uranium as well if you want to further push the green hedge, but the uranium trade is already good in the absence of ESG fundamentals.
  • FP
    Fram P.
    23 February 2021 @ 09:35
    Max great to the point Paul great thought provoking info
    • PH
      Paul H. | Contributor
      24 February 2021 @ 18:26
      Thanks, Tokyo!
  • EC
    Earl C.
    24 February 2021 @ 06:27
    Super discussion! One question I have on the EV topic is the role that electric utility companies will have in the future cash flows resulting from the operational cost recharging the many batteries?
    • LS
      Lemony S.
      24 February 2021 @ 17:54
      EV is a great trade but it's such a false future it's funny. Almost everything about it is a fraud (it is subsidized, commercialized, not "clean", etc) as is the lefty agenda that pushes it = that's their deal.
    • PH
      Paul H. | Contributor
      24 February 2021 @ 18:25
      Thanks, Earl. There are a number of ways that charging can take place, and I suspect the answer will be different business models in different places. One is the battery swapping model I mentioned, which is already developing in China. This gives a lower purchase price for the vehicle, and gives the manufacturer an annuity stream to cover the cost of charging and battery upgrades. I personally like this model because it encourages adoption and enables the manufacturer to develop a service-related portfolio. But the oil companies such as BP and Shell are clearly more attracted to a model based on opening up charging networks. And, of course, they have an existing network of service stations which they can repurpose. It also makes more sense to establish a smaller number of fast-charging hubs, than to try and do this everywhere. Then there are corporates in the delivery business, who can probably manage their own recharging - as many do already. They know how many miles each truck/van drives every day, so they aren't worried about range issues, and they can conveniently recharge vehicles overnight. Then there is the ordinary householder who can recharge overnight if they have a garage, or plug into a lampost if their local authority offers this service. This is already very common in European cities and doesn't require much extra infrastructure as the lampost is already wired up. One thing that I think is also becoming clear is that the current drive for increased battery range is a red herring. The number of people who actually want to regularly drive 500 miles a day is very limited - range seems to be the classic marketing mistake of confusing a feature with a benefit!
  • DJ
    Daniel J.
    23 February 2021 @ 01:34
    So where is the electricity going to come from for all these EVs? Wouldn't you have to double the size of the power grid to make this happen? Where's all that construction? Who's got the permits to put windmills on every mountaintop? What happens if there's another snowstorm in Texas and the power goes out for several days? California promises all EVs by 2030 or something--and they already have electricity shortages and rolling blackouts. EVs will never grow beyond a niche market unless there is a massive buildout of the electricity grid, and that will take 50+ years to accomplish.
    • DJ
      Daniel J.
      23 February 2021 @ 01:58
      The financial play on this is to go long on copper--I mean really really long on copper because electric motors require a lot of copper wire. To retrofit the billion vehicles with electric motors is to exhaust the world's copper supply many times over. Forget about gold. Forget about bitcoin. If EVs are in our near future then copper is the only asset worth holding.
    • AW
      Andrew W.
      23 February 2021 @ 02:06
      I like long copper, long oil as my favorite pairs trade for the exact arguments you make. There's so much structural underinvestment in oil right now setting up for the 2020s that one or the other, or both, must do multiples.
    • PB
      PHILLIP B.
      23 February 2021 @ 03:41
      Gonna need more nuke plants. I hear that thorium seems to be a choice for some countries. If not for charging vehicles, we'll need the nuke plants for summer air conditioning.
    • PH
      Paul H. | Contributor
      23 February 2021 @ 12:00
      As I was saying on the call, the answer to the charging issue will be to repurpose current service stations for battery swapping, as is already happening in China. The van/truck market is also an easy target, ad companies understand the savings to be made from moving to EVs, and can easily charge the vehicles overnight in the depot. Both Ford and GM are already targeting this market. There's more detail in our auto market Report available via RV https://www.realvision.com/issues/auto-markets-shaken-by-covid-and-evs
    • LS
      Lemony S.
      24 February 2021 @ 18:09
      Correct, the better plays because of the realities I describe above are front running the uranium (and perhaps copper) markets to capitalize on the narrative and hype, before the frank reality sets in that this "green" xyz was always a political lie.
  • TT
    Tokyo T.
    24 February 2021 @ 10:28
    Paul is a real gentlemen and one of the best strategic minds. He brings tremendous value in all interviews with a cheeky laugh. Well played Sir.
  • SR
    Samhit R.
    23 February 2021 @ 07:10
    Paul's audio is really bad.
    • JH
      Jon H.
      23 February 2021 @ 18:29
      Yes, I hope he gets a better microphone soon! I struggled to hear him now and then.
  • SS
    Soo S.
    23 February 2021 @ 07:14
    Hi. When do the transcripts normally become available after the interview is uploaded?
    • MW
      Max W. | Real Vision
      23 February 2021 @ 13:51
      Usually a day.
  • MC
    Michael C.
    23 February 2021 @ 04:10
    Would like to review the dataset Paul used to make his statement that is Tesla is getting left behind by the big boys (traditional OEMs).
    • PH
      Paul H. | Contributor
      23 February 2021 @ 12:00
      Hi Michael Thanks for your comment. The easiest place to start would be to download our latest Auto market report which is available through RV at https://www.realvision.com/issues/auto-markets-shaken-by-covid-and-evs. I hope this helps Paul
  • mk
    munira k.
    22 February 2021 @ 21:59
    So sobering! Thank u so much Mr Wiethe. Invaluable!
    • mk
      munira k.
      22 February 2021 @ 22:00
      Typo meant Paul! Thanks Paul. And Max!
    • MW
      Max W. | Real Vision
      22 February 2021 @ 22:56
      Haha. Paul deserves more thanks than me here for sure.
    • PH
      Paul H. | Contributor
      23 February 2021 @ 11:59
      Many thanks!
  • SS
    Stephen S.
    22 February 2021 @ 22:48
    I realized the question I sent regarding US Treasuries was actually in regards to something Micheal Rodgers had said, sorry got these two confused. Paul still gave a nice answer though.
    • PH
      Paul H. | Contributor
      23 February 2021 @ 11:59
      Thanks!
  • JM
    John M.
    23 February 2021 @ 01:06
    IMO it makes more sense to figure out how we can retrofit existing vehicles to run on electricity (or maybe hydrogen) rather than dispose of them. We currently have about 1 billion vehicles on the roads.
    • AW
      Andrew W.
      23 February 2021 @ 02:07
      Not going to happen. Those vehicles will use oil until they're recycled. That's just the economics of it.
    • PB
      PHILLIP B.
      23 February 2021 @ 03:40
      Mr. Hodges references auto supply chain problems. Obviously, these supply chain problems may be limited to the near term (12-18 months). This said, there is a limited period of time that auto manufacturers are required to make available parts once a model is discontinued. I think it's about 10 years. Get a catalytic converter ripped off on a 2005 Prius and it's $2,500 repair for a car that has a resale value of maybe $4k. Such a car gets sold for parts. Likewise for fender benders. A fender bender on a 2005 Prius on the front end is an end-of-life event for the vehicle. I don't expect a large industry for retro fitting. Rather, I'd submit that because there are so many fewer parts for electric-powered vehicles, and the lifetime cost of ownership is about half of that for ICE vehicles, we'll see a roll-off of the ICE over time, at some natural rate, with replacements of these with newer vehicles.
  • RL
    Ruby L.
    23 February 2021 @ 02:28
    One of the most informative sessions and please have him back!