Myrmikan Research: AI Debt Failure Will Prompt Another Wave of Fed Bailouts

Nothing like a good dose of history to help understand the present.

I just started Tomorrow’s Gold (I have a rule: after a book is recommended three times, I read it!) and found this humorous, having only recently read the above.

Podcast/Video

The AI Boom Is Creating a Financial System We Haven’t Seen Before (Paul Kedrosky Explains)

This was the best articulation of the danger of high multiples/valuations I’ve heard.

At high valuations, failure is overdetermined in a statistical sense, meaning that there are so many ways to fail, all of which are low likelihood—maybe 5% at most—that when you combine them all and turn it around and say, given 20 different ways this could fail because we’re at this precipice, it’s high valuations and everything else... an overdetermined system tells you that... there’s greater than a 60% chance of failure.

So what looks not particularly risky or unpredictable is actually highly predictable because, as you say, when your PE is 70... failure is overdetermined. Lots of ways things can go bad because the market increasingly looks at it and says, ‘How can this thing continue to outperform expectations?’ And the answer is, whoops, it can’t. And it starts pointing around. And the same thing is true in this AI moment.

I’ve been pointing lately to the incredible and unprecedented cash inflows into Taiwanese and Chinese chip manufacturers, with what looks like a tsunami of supply in early 2028. And you know this is a boom-bust industry. So once you lock in supply, my friend, prices are going to zero. Why? Because I’ve got to cover my fixed costs. So this stuff is all going out the door.

Quote

“When you find a winner, people will say you are wrong. When you hold a winner, people will say you are stupid. When you get rich from a winner, people will say you got lucky.”

-Ian Cassel (whose new book is now on my to-read list).

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Tweet

More on this below.

Charts

I’m annoyed I missed this! It was a perfect “KOL delisting” set-up.

FM: iShares Frontier and Select EM ETF, was delisted after its final trading session on January 6, 2025. Trading was suspended before the market opened on January 7, and shareholders received the liquidation distribution of $27.23 per share on January 9, 2025

A quick backtest….

Something I’m Pondering

I’m pondering how market cap weighting became the optimal way to allocate capital passively. Yes, it is incredibly efficient and is hard to beat, yet it reminds me of the same arguments made for “just-in-time supply chains.” Can’t beat them until something breaks; then resilience/redundancy is everything.

Take EEM, where it’s comical that it has 1,226 holdings yet allocates 27.61% to three companies…

This doesn’t mean I want to take the other side of market cap weighting; I want to go long in a smarter, passive way. My favourite approach is Meb Faber’s shareholder yield. As I went over in my recent piece, I see little opportunity cost and a fat margin of safety in shareholder yield, as it has outperformed and is what I plan to benchmark my portfolio against moving forward.

What’s even more impressive is that EYLD sits on a forward PE of 9x, while SPY is 20x and QQQ is 22.5x.

My view is that the above performance gap will continue to widen for years to come.

Hope you all have a great week!

Cheers,

Ferg

P.S. I really enjoyed putting together this piece, which is really a continuation of what I started with Hugo’s Portfolio: 60/40 for the next Decade.

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Ferg

P.S This was the Horizon Kinetics commentary that touched on the perceived risks to exchange operators model (page 25).

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Ferg

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Some great charts in here: JPMorgan Asia Q3 2026

Podcast/Video

For anyone interested in what’s going on in Indonesia, this was worth a watch: Something weird is happening in Indonesia…

Even if it’s just the start of the video, Indonesia’s top corruption prosecutor got caught with 74 kg of gold bars and $26 million in cash in one of his properties.

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Quote

You can’t have an easy life and a great character. Show me a trust fund kid who inherited a bunch of money, and I’ll show you someone mentally tortured.

Having stuff isn’t fun; earning stuff is fun.

-Jimmy Carr

I’m slowly building out a folder of parenting quotes for myself.

Tweet

Twitter/X is still awesome for niche info trackers and sentiment.

Both T5 and T7 (7.8 mtpa LNG trains) appear to be offline: T5 since 12th August and T7 has been dark since 20 August. Which isn’t the ramp up the EU is hoping for.

Charts

Talking of the EU; Germany is pulling the equivalent of a trader removing a stop loss on a trade going against them and hoping things turn around before they get margin called… Germany Prepares to Intervene in Storage Crisis (h/t Daniel)

However, many acknowledged that immediate intervention was still unlikely and that THE (Trading Hub Europe) would wait to see how the situation develops. THE’s willingness to wait even longer before acting left some questioning “what they even think they can do so late in the game”, with another calling it “another car crash of an energy policy decision”.

Yes, a warm winter could bail them out, but the probabilities aren’t in their favour: Can a ‘super’ El Niño bail out Europe’s gas market this winter?

Super El Niño effects aren’t clean-cut either, with late winter cold snaps, wind droughts and high-magnitude US hurricanes all variables to throw in the mix: How Super El Niño Hits Power Markets: Analyst Reaction | Switched On

Something I’m Pondering

I’m pondering how much long-term alpha you can capture by hunting for mergers that draw fierce opposition from customers (especially in deeply cyclical consolidated sectors).

Take subsea EPCI, where I see a SURF duopoly between Technip and Saipem7 (once the merger closes, with the EU citing concerns that the merger could increase concentration in the subsea umbilicals, risers and flowlines (SURF) market).

The oil majors all oppose it as they are well aware of the pricing power that will come with the merger.

The decision is a blow to oil majors such as Exxon Mobil, Brazil’s Petrobras and France’s TotalEnergies that ‌opposed the merger, arguing against it in filings to CADE.

The oil majors criticised the merger, as they fear the resulting new firm, to be called Saipem7, would have a strong enough position to impose additional costs, delay projects, and pressure some clients into exclusive long-term contracts.

Hope you all have a great week!

Cheers,

Ferg

P.S. I really enjoyed putting together this piece, which is really a continuation of what I started with Hugo’s Portfolio: 60/40 for the next Decade.

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I’ll close this for questions on Saturday 29th.

Cheers,

Ferg

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The US railroads make for an interesting case study, as the bubble was epic even by today’s AI standards.

The sector consolidated over the next century and ultimately was reduced to four companies, three of which are publicly tradable (Berkshire bought BNSF in 2010).

Consolidation/mergers over the decades created pricing power, and rail rates increased dramatically from the early 2000s on.

The equities benefited, with all being large multi-baggers, despite minimal multiple expansion. All three bought back over half their float, as the very nature of the railroad business meant the high returns weren’t competed away.

Consolidation of Banks

Globally, banks are another sector that has seen massive consolidation and solid performance over the last few years. Yes its the whole “Too Big to Fail” and creation of Oligopolies (Myth of Capitalism was a fantastic book) which you can complain about or simply choose to share in the profits…

European banks are a similar story, with the sector really gaining traction in the last two years. A trade I largely missed except for UBS ( Too Big to Fail/F#%k it up).

The Greek bank consolidation/implosion is one of my favourite charts, and the survivors have been great performers.

While I see developed banks continuing to put up solid returns, emerging market banks are where I believe the real asymmetry is, due to the outsized effect of currency tailwinds on their business model, i.e. “Violence both ways”, as I’ll go over later.

Where does Shareholder Yield fit in?

When you find a company at a low valuation with a high shareholder yield (dividends + buybacks + debt pay-down), the key question is how sustainable is that yield?

I just went over railroads, so I’ll use tobacco as another classic case study of a sustained shareholder yield and the returns it can produce.

Companies rarely hang around the above sweet spot, as valuations rise to a point where buybacks become value-destructive. I’d use Walmart as the current example, buying back stock at as high as 45x forward PE…

Maintaining margins and multiples is no easy feat either.

This is going to be especially difficult, as I see a siege being laid on a number of sectors with elevated profit margins and multiples.

Inflation the multiple killer

Austerity is dead, default isn’t an option, and the only real variable now is the rate of change in inflating the US debt away.

Multiples are a bet on the future. Inflation lifts the cost of waiting for returns, which compresses multiples.

The first casualty of sustained inflation is valuations. Once you get valuations depressed, yes. The effect of inflation on nominal cash flows, overwhelms any further downward pressure on valuations. And, you finally get stocks doing well. For example, people want to say Weimar or Argentina. That’s what happened in those cases. But, unless we get to that situation, you can say pretty conclusively that rising inflation, anywhere above 2%, has historically not been a positive for stocks, until you get to the point where inflation has peaked out and starts falling.

-John Hussman

AI disruption

While inflation compresses multiples by lifting the cost of waiting for returns, the acceleration of AI capabilities raises the possibility they never arrive. That is, unless companies can prove durable moats, i.e. network effects, etc.

The software ETF (IGV) has been a gauge for how investors feel about the security of software cashflows as AI capabilities increase.

China the margin killer

“When China enters a room, profits walk out.”

-Louis Vincent Gave

@AngelicaOung’s Tweet explaining the Chinese profit-killing tenancy is pure gold, and one every investor should internalise if China enters the room….

Combining Shareholder Yield & Consolidation

Since creating Hugo’s Portfolio and building it out, I’ve become increasingly enamoured with the idea of Shareholder yield, especially when combined with cheap, capital-starved and consolidated industries (ideally cyclical ones).

I’ve only recently come across Meb Faber’s work on Shareholder Yield and recommended in my last piece that you take the time to read: Shareholder Yield: A Better Approach to Dividend Investing (May 12, 2013).

It’s not just theory either, as Meb launched five Shareholder Yield ETFs, which have done extremely well.

Meb’s first is the SYLD Cambria Shareholder Yield ETF, which invests in US equities.

The Cambria Shareholder Yield ETF (SYLD) employs a quantitative algorithm to select approximately 100 companies with the best combined rank of dividend payments and net stock buybacks, which are the key components of shareholder yield. The ETF also screens for value and quality factors, including low financial leverage.

It’s been an outstanding performer.

How did SYLD perform relative to this large universe of dividend and buyback funds?

SYLD outperformed all of them - every single one

Since 2020 SYLD has kept up the SPY despite being equal weight.

More impressive is that it managed this with only a 2% allocation to Information Tech!

Reading through SYLD holdings, I only recognised a few companies, which are all weighted ~1% compared to SPY, where you have 20% in three companies and 37% in the top ten, which is really one trade/theme in AI.

Shareholder yield protects your portfolio by rotating out sectors where shareholder returns start to fade, unlike market-cap-weighted, which has no such limitations.

Or as Mike Green stated;

“The S&P is a growth-tilted, momentum-chasing active strategy.”

Which, for me, is the last way I want my money allocated in this market.

My New Income Hurdle Rate

I always like to have a “hurdle rate” by which I benchmark new positions, and when I wrote The Position of F#@K You, it was the Global Dividend Aristocrats (WDIV) as my no-brainer income ETF hurdle rate.

The S&P Global Dividend Aristocrats is designed to measure the performance of the highest dividend yielding companies within the S&P Global Broad Market Index (BMI) that have followed a policy of increasing or stable dividends for at least 10 consecutive years.

Global Dividend Aristocrats has now lost its crown…

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2026 Eye on the Market midyear energy update -Michael Cembalest

Absolutely packed with great charts… Here are a few bangers.

Podcast/Video

Loved this interview: Everything in Resources Is Cheap Rob Mullin

I’m a massive fan of “the cashflow pig…”

Quote

I’m not intellectually convinced that one-man, one-vote is the best. We practice it because that’s what the British bequeathed us, and we haven’t really found a need to challenge that. But I’m convinced, personally, that we would have a better system if we gave every man over the age of 40 who has a family two votes because he’s likely to be more careful, voting also for his children.

He is more likely to vote in a serious way than a capricious young man under 30. But we haven’t found it necessary yet. If it became necessary, we should do it. At the same time, once a person gets beyond 65, then it is a problem. Between the ages of 40 and 60 is ideal, and at 60 they should go back to one vote, but that will be difficult to arrange.

-Lee Kuan Yew, April 1994 Foreign Affairs interview

Tweet/Notes

Multiples are similar to implied volatility on options: if you get direction and other variables spot on, yet get either of these two wrong (i.e., multiple contraction or vol crush), you get slaughtered regardless.

This was a good illustration of the numbers.

Charts

So, the first casualty of sustained inflation is valuations. Once you get valuations depressed, yes. The effect of inflation on nominal cash flows overwhelms any further downward pressure on valuations.

-John Hussman

You can see this with the Dow: in 1965 it sported a trailing PE of 18.1x; by 1979 the trailing PE was 6.7x.

Something I’m Pondering

I’m pondering how all we ever hear is EV as a percentage of sales (never fleet). When you break it down by % of fleet, EVs are currently ~7% of the global fleet, of which 2/3 are BEV, and 1/3 are PHEV; i.e. 95.4% of the global passenger fleet still has a combustion engine.

Hope you all have a great week!

Cheers,

Ferg

P.S. I’ve taken the paywall off this deep dive on Almonds with Martin Tavella of Somar Capital. It’s a fascinating little sector in which I couldn’t help but draw parallels to other cyclical sectors I’ve dug into. An almond tree takes five years to reach full maturity, leading to periods of oversupply and underinvestment, creating supply constraints, where we find ourselves today.

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A brilliant piece: A Shifting Global Currency Landscape -Louis-Vincent Gave, Romain Metivet (Gavekal Research)

There is no longer, at the global level, a currency that fulfills all three functions, and there will likely not be one for a very long time. There are today three currencies linked by sluices, and history dictates the order of division.

• The medium of exchange is splitting. The US dollar retains financial circulation, debt, foreign exchange, and stablecoins. The renminbi is slowly taking over the payment for goods, because a currency backed by the world’s factory is more than sufficient to pay for goods.

• The store of value is abandoning the US dollar; it is returning to gold.

• The unit of account, the stickiest, remains American; it is the last bastion. Which is why the battle over AI billing could prove very important.

None of this is bullish for long-dated bonds, or for the US dollar. This new set-up is bullish for gold. But most of all, it might be very bullish Hong Kong assets.

Podcast/Video

No one breaks down rates/Fed set-up better: Jeffrey Gundlach: So Much Said, So Little Heard.

This was insightful from Lyn on the rate hikes.

Quote

“In economics things take longer to happen than you think they will, and then happen faster than you thought they could”

-Rudiger Dornbusch

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Tweets

I enjoyed Robotti’s Q2 letter and why he sees offshore energy as the real asset opportunity today.

Charts

Yes, I dug into this topic in Volatility is the new normal, but it still amazes me that the Germans are sitting on their hands while their gas storage is tracking 4.5% below the historic low of the last 10 years.

Something I’m Pondering

I’m pondering this section of Robotti’s Letter and, in particular, the suffering through consolidation, exits and recapitalisations section.

I went through the consolidation across four subsectors (EPCI, offshore drillers, casing & tubing and seismic) of oil services in The Resilience Pivot.

The “suffering” in this sector has been immense when you consider that the four subsectors have consolidated from ~137 companies to 24 publicly listed survivors, an 82.5% reduction.

• Subsea EPCI: 41 starting entities → 5 listed survivors

• Offshore drillers: 35 starting entities → 7 listed survivors

• Casing/tubing: 35 starting entities → 8 listed survivors

• Marine seismic: 26 starting entities → 4 listed survivors

Hope you all have a great week!

Cheers,

Ferg

P.S. For Hugos Portfolio I enjoyed the section in Horizon Kinetics Q2 commentary on the US Exchanges and whether the beatings the companies have taken are warranted.

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The past few months have felt similar, with a friend stating, “I’m always one Trump Tweet away from getting wrecked on any energy positions,” god forbid you use leverage (unless, you’re willing to pay Trump $100k/month for faster access).

It feels like a decent chunk of retail that invested/traded energy has thrown in the towel or, simply put, energy in the too-hard basket.

Markets love nothing more than to use a combination of volatility and time to wash the majority out, then make them chase, only to return to volatility and time to wash them out again.

“The main purpose of the stock market is to make fools of as many men as possible.”

-Bernard Baruch

The trading houses are like pigs in mud in this environment.

Shell posts best quarterly profit in four years as Iran war boosts oil and gas prices.

It marks Shell’s best quarterly result since the second quarter of 2022, when the company reported earnings of $11.47 billion as oil and gas prices surged in the wake of Russia’s full-scale invasion of Ukraine.

“Volatility is the new normal,” -Shell CEO Wael Sawan.

Shell is firing on all cylinders, with adjusted earnings up 50% on integrated gas, 42% on upstream, and 53% on products (with trading results mixed into the three…)

Glencore’s trading arm wasn’t far behind, hitting its annual target in the first half of the year.

Glencore Scores Huge Trading Profits as War Upends Markets

Based on its first-half performance, the company is already within touching distance of the top end of its annual earnings goal, which is set at $3.5 billion.

The trading business made $2.9 billion last year and a record haul of $6.4 billion in 2022 after Russia’s invasion of Ukraine. Still, the company gave no updated guidance on its full-year performance.

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A big source of volatility coming down the pipeline.

Yes, I’m a broken record on this, but the EU gas refill has now fallen off the lower bound of the past 10 years. It is decelerating every passing day, which is a big deal since historically July and August were months that pushed the most gas into EU storage.

The two main factors causing this deceleration are:

• Asian buyers being forced to replace Qatari volumes with Force Majeure extended to October, which I’ll go over.

• Storage displacement: The EU heatwave has ramped cooling demand combined with weak hydro and nuclear (France Shuts Off More Nuclear Power as Heat Builds Across Europe) pushed more gas into power generation, reducing volumes available for injection.

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It’ll be fine arguments…

The most convincing counterargument (other than hoping for a mild winter) I’ve come across is the one presented below: EU gas demand is down ~18% over the last 5 years, so you don’t need the same level of storage.

On the surface, this sounds logical if you ignore how the energy mix has changed and what makes up that -18% demand reduction.

Flaws I see with this argument.

That -18% demand figure

That 18% reduction in demand is roughly half industrial demand destruction (plus renewable switching) and half household demand reduction, which is highly dependent on winter temperature, i.e that reduction will disappear in a cold winter (>60% of winter gas consumption derives from households, and peak winter consumption can be 2x real-time supply for short periods, hence why storage draws are essential!)

The energy mix has changed

The EU energy mix has changed over this period with the removal of 210TWH of coal generation (36% German), 65TWH of nuclear generation (100% German), -21GW coal capacity (48% German), and the loss of 134 bcm of Russian Gas. In the additions column, you have +244 TWH of solar and +107 TWH of wind generation (of which solar doesn’t show up in the winter and can experience Dunkelflaute, i.e. wind droughts).

Or to visualise it, you are comparing that higher plateau of dispatchable base load (2019-2022) to a new weather-dependent system.

It’s not only the baseload resiliency that’s been slipping over time; the last time gas storage was 100% heading into winter 2023, winter 2024 was 95%, 2025 winter was 82%, and this winter looks on a 70-73% trajectory.

Only an EU Bureaucrat could fail to understand that when you remove gas pipelines, reactors and coal plants, which all provide winter baseload, and replace them with solar, which goes on leave during the coldest winter months, you are left with a system reliant on wind, LNG imports, gas storage, cross-border electricity imports and woollen blankets…

LNG as a % of winter heating demand

This brings me to the key flaw in the earlier Tweet: comparing an energy system that used to be reliant on 12.5% LNG consumption in the winter to one that can now exceed a third of winter demand is obviously a recipe for disaster.

The problem with averages

Lastly, using an average conceals the extremes, or to illustrate via a banger from Howard Marks:

“Never forget the six-foot-tall man who drowned crossing the stream that was five feet deep on average.”

Energy systems should be designed around resilience, and plan for the worst thing that can happen to ensure the system can handle it. What the EU and, in particular, Germany has is a system that hopes for the best. As if you have a cold winter, a wind drought, little to no solar, and low gas storage, you are the 10-foot hole in the middle of Mark’s river…

Germany is the one to watch.

Talking of averages, the vast majority of European countries have sufficient gas storage; it’s just Germany, the Netherlands, and Belgium that are in deep shit here.

Germany is the EU’s largest gas consumer at ~24%, and more than half of winter consumption must be via storage withdrawals and LNG imports…

Germany is also the EU’s largest coal consumer (51% lignite +49% hard coal) at roughly a third of EU consumption, which is facing constraints with low river levels: Rhine River Shipping Stalls as Water Level Hits Record Low, which directly impacts the hard coal plants, which are barge-dependent (Lignite plants are unaffected due to being at mine mouth).

Storage is no longer a winter cushion; it’s essential for Germany, yet they are tracking a full -4.5% below the 10-year historic low and slowing.

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• JM: PGM market report (May 2026)

• WPIC Platinum Essentials (June 2026)

This section caught my attention; declining above-ground stocks combined with steeply declining mine life across most of the PGM majors…

Podcast/Video

Some great platinum insights: Henk de Hoop - The Big Picture on Platinum

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Quote

“The projected 2025 deficit of 966 koz will draw stocks down to 2,160 koz, which will cover a mere three months of global platinum demand.”

-WPIC Platinum Quarterly Q1 2025

“The platinum market is forecast to be in a deficit of 297 koz during 2026f, reducing above-ground stocks to under three months of demand.”

-WPIC Platinum Quarterly Q1 2026

The WPIC might as well state the industry is hand-to-mouth (bar China) at this point…

Tweet/Notes

Yes, the below is referencing gold, but it’s even more extreme for PGMs, as China doesn’t have any PGM ETFs/ETCs (they used to have one in Hong Kong, but it was closed).

WPIC: Developments in the China Platinum Market

Physical platinum investment demand is growing rapidly in China while western platinum ETFs are being drained.

Charts

Since I wrote about it here, nothing much has changed. China continues to hoover up physical platinum globally. This is a great website where you can track Chinese premiums for gold, silver, platinum, and palladium.

Something I’m Pondering

I’m pondering how much of global above-ground stocks China now controls?

The only real expert tackling this topic (here) was Dr David Davis, who pegged it at ~80% in December 2023 (he unfortunately passed away in 2024).

The Chinese were already well on their way to cornering it before the launch of GFEX contracts at the end of last which have only accelerated the “one-way valve” I went over here.

What’s worse is when I try to dig into this further (via Claude Research), it just points to some PGM tourist in Bali who’s currently battling jetlag…

Or via meme…

Jokes aside, I’m happy having a decent chunk of my portfolio tied up in this theme and am tempted to add here…

Hope you all have a great week!

Cheers,

Ferg

P.S. Both companies’ trading arms are firing on all cylinders…

Glencore Scores Huge Trading Profits as War Upends Markets

Shell posts best quarterly profit in four years as Iran war boosts oil and gas prices.

“Volatility is the new normal”

-Wael Sawan (Shell CEO)

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Ferg

P.S this was the article on Asian credit bureaus I couldn’t remember: The toll booths of lending

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Ferg

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This piece was excellent!

The Second Derivative: Why No One Understands the AI Boom

The market is pricing AI as a technology cycle when its actual anatomy is that of a credit-driven real estate cycle - which is precisely why the 2008 mechanics apply - and the two break for entirely different reasons.

Technology cycles are driven by innovation and adoption; their risks are obsolescence and competition; they live or die on whether the product is wanted, and they can de-rate slowly as the future is repriced.

Real estate cycles are mechanical: leverage, hard assets, occupancy - debt-financed construction at scale, commercial leases disguised as take-or-pay contracts, and long construction lags that guarantee supply arrives after demand has turned. Walk down the AI build-out and every feature is a property development in disguise: a data center on entitled land, financed with debt against the structure and leased to tenants on take-or-pay terms. This is not a software business that happens to own servers. It is a real estate business that happens to compute.

Real estate cycles break the same way every single time. Not when demand collapses - it rarely does - but when the rate of demand growth decelerates against the fixed supply the boom has just finished building. The second derivative again, in the one asset class where it has been studied for a century.

The hyperscaler has, in economic substance, extended a concentrated infrastructure credit facility to tenants with no independent operating income. If those tenants default, the backlog evaporates into non-cash impairments, leaving the corporate balance sheet to absorb the fixed costs of customized, rapidly depreciating capital assets.

Podcast/Video

Rebuilding Resilience with James Aitken

I started my recent piece with a quote from the interview.

“The way the European Union advances is one dramatic crisis at a time”

Quote

I forget where I first heard it, but someone once said on here, “being able to pass on an investment and then get in after it’s gone up 100% is a superpower”.

-Citrini

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Tweet

This Tweet was an eye-opener (the Chinese aren’t just winning on price).

But the real genius isn't even that.

A French guy shows up and says, "Our laws require professional annual inspections for any AC over 2 kg of refrigerant—hundreds of euros a pop." The Chinese vendor flips the manual to the back and points to a line: Refrigerant, 1.99 kg. Just under, no inspection needed.

Then a German chimes in: "We have nighttime noise laws here—anything over 36 decibels is a disturbance, and the cops will fine you." The Chinese vendor cranks the machine to max, shoves a decibel meter right up to the air vent, and it flashes a number: 35.

Charts

I knew there was often a lag, but 5 years is crazy…

I remember coming across this Soros chart a long time ago.

Something I’m Pondering

When writing my latest piece on Koyfin & AI, I landed back on this brilliant blog: Inversion and The Power of Avoiding Stupidity.

Charlie Munger is famous for his quote “All I want to know is where I’m going to die, so I’ll never go there.” That thinking was inspired by the German mathematician Carl Gustav Jacob Jacobi, famous for some work on elliptic functions that I’ll never understand. Jacobi often solved difficult problems by following a simple strategy: “man muss immer umkehren” (or loosely translated, “invert, always invert.”)

Using that mental model:

“All I want to know is where the big areas of underperformance in the market will likely be longer term, so I’ll never go there.”

My guess at the biggest risk to many companies’ margins and multiples over the next, say, 5 years is:

• Chinese competitors attacking margins (Solar, EVs, HVAC, rockets and AI).

• AI disruption attacking multiples in tech/capital light businesses’ ability to project cash flows longer term (the higher the multiple, the more backloaded the valuation).

• Higher structural inflation: if inflation runs hot, you don’t go straight to Weimar or Zimbabwe…

So, the first casualty of sustained inflation is valuations. Once you get valuations depressed, yes. The effect of inflation on nominal cash flows, overwhelms any further downward pressure on valuations. And, you finally get stocks doing well.

-John Hussman

Hope you all have a great weekend!

Cheers,

Ferg

P.S. We have been up in Zabljak in Montenegro (reminds me a lot of Queenstown in New Zealand).

Below that was my gift from Mia’s cousins, which translates to: ‘When the internet goes down, open it and reset yourself’ (first reset wasn’t successful; all I got was a cracking headache…)

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I’ll close this for questions on Wednesday 29th.

Cheers,

Ferg

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The addition of Claude has been a game-changer for my research; that said, I can’t think of a deadlier combo than hanging out in an echo chamber on social media, then turning to a sycophantic AI to mirror your views and reinforce your blind spots (confirmation bias on steroids).

For fun, I asked Claude, Gemini, Z.ai and Grok: “Graph the most sycophantic AI models currently in a bar chart”

Then watched them all throw each other under the bus...

Lesson 1: Combat sycophancy by using AI to argue against your ideas/investments.

“Invert, always invert.”

Charlie Munger’s favourite mental model and an essential one for dealing with AI

My favourite use of Claude is getting it to prepare a detailed short thesis for me by listing things that have tripped me up in the past (or red-team an idea if non-investment).

Then expand on its strongest arguments in the short thesis.

To throw another Munger quote in:

“I never allow myself to hold an opinion on anything that I don’t know the other side’s argument better than they do.”

Using Claude’s research function with two searches can give you a decent understanding of the most compelling argument against owning the company/asset.

It’s also a fantastic tool to use to attack assumptions you held without ever checking the data.

Here is a recent example when I was building Hugo’s Portfolio and working through Exchange operators. I liked the look of CME Group yet passed, as I had assumed it would fare poorly in a yield curve control environment, which I believe is a distinct possibility in the US.

So I ran a Claude Research report with:

I’ve excluded CME Group Inc due to a third of its revenue being in interest rate derivatives, which would be seriously hurt if the US were to implement yield curve control at some point in the future.

Claude shot this thesis down with a real-world precedent in Japan’s YCC era.

“The real-world precedent the thesis relies on (Japan’s YCC era) shows the opposite of the feared outcome: rate-derivative activity held up and then hit multi-decade records as the peg was tested and unwound. The YCC-based exclusion is therefore overthought.”

Similarly, my favourite outcomes of my Claude short thesis are when the conclusion is that it isn’t compelling, or consider long/short if you do plan to put the short on; i.e., Claude is doing its best to talk me out of the short.

Lesson 2: AI’s a smart but hungover intern.

It’s amazing, but it can also make absolutely basic mistakes that compound if you don’t catch them.

It reminds me of my corporate days when I’d get sent an intricate 40-tab Excel model, yet the final numbers were a bit off, and I’d have to go through all 40 tabs to find the error.

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Lesson 3: Need a net to catch assumptions, estimates and extrapolations.

This is an extension of the sycophantic point in replacing the hungover intern with an ambitious investment banker who will create a model to please you/justify anything.

Leaning on any number of assumptions and estimates.

Fact-checking with Perplexity is still my go-to way to combat this, since Perplexity provides links/sources for every statement and has been quite effective at calling out some of Claude’s assumptions. Use Perplexity to try to narrow data sources where possible, i.e only use SEC data/FRED data, etc.

Lesson 4: Use Claude to simplify and visualise data.

This is where Claude Opus 4.8 and Fable 5 excel at graphing and visualising data.

Following a research report, simply request (Claude will never do it first; it has to provide the report before processing it to create the graph/visualisation).

• Graph this

• Interactive graph

• Visualise this

• Explain it to me like I’m ten (analogies where possible)

The ability to teach yourself complex things quickly has been a game-changer for me.

Or simply visualise things in a way that makes them easy to understand, i.e. you can read an essay on the consolidation history of oil services, or you can have it broken down to consolidation family trees as I did in The Resilience Pivot.

New ways I’m using Koyfin and useful tips for Perplexity

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“The way the European Union advances is one dramatic crisis at a time”

-James Aitken (timestamp)

Hope is not a strategy, yet it appears to be the European Union’s energy policy, which reminds me of SoftBank’s slides (packed with optimism and short on numbers).

I won’t rehash this piece, but the quick summary is:

• Qatar accounts for ~25% of Asian LNG under fixed-destination contracts (89% of Qatar’s 81 Mt went to Asia in 2025), while Qatar accounts for only ~8% of EU LNG.

• With Ras Laffan still largely offline (recent extension of force majeure to early September for Edison), the stage is set for Asian LNG (JKM) and EU LNG (TTF) to enter a bidding war over US LNG with ‘destination flexible contracts’ as Asia enters peak cooling and the EU needs to catch up on gas storage.

Dutch TTF Natural gas and Japan/Korea Market (JKM) have remained ~50% above pre-war levels since the war began, and with the recent spike, JKM is now close to double pre-war levels.

This is important, as destination‑flexible LNG cargoes can and do get diverted mid‑voyage toward the highest bidder (see the above green line; JKM has traded at a premium to TTF throughout this war, bar a short period at the start).

Asian buyers don’t look likely to ease up with Qatar extending force majeure and one of their LNG carriers taking a drone hit while they have already drawn down LNG stocks.

This recent increase in demand has been driven by growing LNG restocking requirements in China and resilient demand across South Asia, particularly in India, Pinto told Euronews.

BCA Research has a great dashboard which breaks down the transits by vessel types, and you can see LNG tankers were steadily picking up in June before the recent attacks ground them to a complete halt.

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The EU’s “Hope for the Best” Strategy

“Our view is that market participants are holding onto the expectation of a gradual resumption of LNG exports from the Middle East over the summer. This would ease prices and free up additional global LNG supply, allowing Europe to secure cargoes at lower prices in September and October, and potentially even during the winter,” Pinto said.

Or via meme

EU is now tracking 2021 storage levels while Asia continues to outbid EU buyers.

EU LNG imports were 57% US LNG in 2025, while US LNG is only ~8% of Asian LNG (remembering the majority of US LNG is destination-flexible).

In short, since the Asian market lost its fixed-destination LNG contracts (Qatar), they are grabbing all the flexible-destination US LNG it can (and burning more coal).

This doesn’t bode well for the EU playing catch-up like in 2018.

Gas storage is the EU’s ‘seasonal battery’, covering between a quarter and a third of consumption. Similar to charging an EV at night when electricity rates are off-peak, the EU looks to refill its gas storage during the summer months when LNG is cheaper due to low demand.

There is no mandate to force buying* other than EU storage targets which have been lowered from 90%, to 80% and now 70% for some members.

*Italys MASE decree which is best described as socialising the negative spread, so you get front-loaded, price-insensitive buying and has Italy sitting at comfortable storage levels.

Compounding the issue, renewables are increasing system fragility in the winter months.

Take Germany: in June 2025, solar accounted for 27% of electricity generation, while in peak winter in January 2026, it was 3.38%. Wind is not very seasonal but also has periods of ‘Dunkelflaute’: Germany’s stretch of weak wind output is set to drag on into 2026. The balance has to come from a mix of LNG, coal, and increasingly imports (from which countries like Norway are facing their own low hydropower issues).

Lastly EU Banning Russian Gas

EU Commission clarifies all Russian LNG trade is banned from 2027 for EU operators.

• April 25, 2026: Ban on short-term Russian LNG contracts (Removed ~2% of the total EU gas imports).

• June 17, 2026: Ban on short-term Russian pipeline gas contracts (Removed <1% of total EU gas imports).

• January 1, 2027: Ban on long-term Russian LNG contracts (removes an estimated ~4.7% of the total EU gas imports).

• September 30, 2027, ban on long-term Russian pipeline contracts (remove an estimated ~5% of the total EU gas imports).

The big reductions are on January 1st 2027, and September 30th 2027, which I’d expect to get pushed out.

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China’s Back Buying

The Chinese stepping back from both crude and LNG imports was the single biggest reason energy prices were more contained than many (including myself) had thought.

China is the most flexible major LNG buyer in the world, and roughly 45% of its LNG imports are short-run substitutable (via pipeline gas, domestic production, coal-fired switching, and storage drawdown to absorb the loss).

With that said, China’s absence from the LNG market has been short-lived, even with JKM LNG prices still elevated to the tune of ~50% (June) to ~90% as of today; they are back buying.

This may be partly due to limited gas storage (~50 days of average demand).

Storage levels were around 46% at the end of May, below the five-year seasonal average, and are expected to fall further by end-June, Katayama said. “This leaves China with a relatively thin inventory buffer ahead of July and August, supporting continued spot LNG purchases.”

Hot weather is the key driver of demand.

While I don’t see us revisiting the crazy price levels of 2022 (unless Ras Laffan takes more ballistic missiles), I can easily see us revisiting late 2021 LNG pricing ($30-50MMBTU) in the October -December period (unless Europe gets a warm winter).

Positioning to profit off all of this?

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The $69 Billion Mirage: How an Accounting Rule Inflated S&P 500’s Q1 Earnings by 12%

A massive chunk of this quarter’s blockbuster “growth” didn’t come from selling more software, shipping more microchips, or delivering more packages. Instead, it came from an accounting rule that forced massive, illiquid “paper gains” onto the income statements of tech giants.

In Q1 2026 alone, just three companies—Alphabet, Amazon, and Nvidia—reported a staggering $69.2 billion in non-operating windfall under their Other Income and Expenses (OI&E) lines. When you run the macro numbers, this single accounting phenomenon artificially inflated the entire S&P 500’s quarterly earnings by about 12%.

Podcast/Video

Massive Liquidity Shock Coming; Brace For ‘Wrecking Ball’ Warns Economist | Michael Howell

What happened on March 2nd was a surprise. You can see China has turned off the money tap. That is extraordinary. Why they did that is baffling, but there is probably a decent reason, and that decent reason is that it was when the Iran tensions blew up. Now, what is China doing here? In our view, they are deliberately trying to slow the economy to reduce oil demand.

-Michael Howell (Timestamp)

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Quote

I find it incredibly simple: If you wait at a bus stop long enough, you’re guaranteed to catch a bus, but if you run from bus stop to bus stop, you may never catch a bus.

-Howard Marks

I thought of this quote when reading takes on Terry Smiths letter (struggling value fund pivoting to growth).

Or if you want one of the most stunning charts of sticking to a strategy through brutal volatility look at trend-follower Bill Dunn (Dunn Capitals) drawdowns!

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When you have AI/Tech companies valued at hundreds of billions, or even trillions, with high growth assumptions, losing entire markets to ‘sovereignty concerns’ becomes consequential very quickly.

$84 billion per year in external capital requirements…

The average analyst estimate assumes it will (nearly) double earnings every year for 5 straight years.

Charts

I love these historic industry consolidation charts.

My latest piece broke down four subsector consolidations within Oil services (Offshore drillers, Subsea EPCI, Tubing & Casing and Seismic Contractors).

All of which have had a similarly rough time as the offshore drillers below.

Something I’m Pondering

I’m pondering the margin of safety you can achieve via stress testing a high shareholder yield.

A company telling you they intend to buyback 40% of their float by 2030 of which you can use some really bearish assumptions and still end up around 20%, seems highly asymmetric, especially when the “average analyst” expects the companies earnings to go nowhere.

Shells is my favourite example of this currently which I’ve gone over here and doubled down here.

Hope you are all having a great week!

Cheers,

Ferg

P.S. As a tourist in many commodities, I’m always looking to bring on the veterans, especially when I’m questioning my read on the sector. Matt Warder and Joe Aldina are those two veterans who have forgotten more than I’ll ever know about coal. So it was good fun bringing them both on to discuss how they view the setup for thermal and met coal here.

For this week’s “Where in Montenegro am I?”, it’s a little village in Kotor Bay chasing these two around.

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I do my best to combat these shortcomings by positioning where the investment outlook is largely baked in at this point.

Polymarket has odds of 61% that Hormuz Traffic will be back to normal by 31st July*

You’ve got to give it to Trump for managing market expectations;

“It” has worked every time…

While those of us (like me) who dabble outside AI/Semi’s have been left channelling our best Ron Burgundy.

Adding to the embarrassment is that I’m heavily long emerging markets, yet since I don’t own TSMC, SK Hynix and Samsung, so I’m also in the hole on my EM holdings (while coal was my favourite play heading into this war, I’ve got nothing to show for the below outperformance.

Playing a Messy Reopening

My take (remembering the disclaimer) is that the worst is behind us, mainly because there are too many constraints on Trump to allow a full-blown re-escalation.

• SPR drawdown approaching critical levels

• US Munitions drawdown: Last Rounds? Status of Key Munitions at the Iran War Ceasefire

• US Munitions replenishment: China sanctions 10 U.S. defense companies in tit-for-tat response to Pentagon’s Chinese military list (June 22nd 2026)

• US Midterms approaching

Not that my view matters at all…

One of the first lessons my mentor Brad taught me.

“It’s the expression of the view that matters, not the view itself.”

The best expressions today are those that work with the current outlook while giving you optionality as things get even messier. Shell, being a recent example, in it does just fine with LNG and Brent prices here, while any further uplift is gravy (as I edit this, a Qatari LNG carrier just took a direct drone hit…)

Engineering, procurement, construction and installation (EPCI) companies operate under a similar setup; there is no undoing the effects of a second energy crisis in four years, and countries are now set on improving energy resilience. Plus, if more stuff gets blown up in the Middle East, it just gets added to their backlogs…

No going back…

We are not going back to a world where countries are comfortable with a large percentage of their oil, LNG, or fertiliser being ‘just-in-time’ transits through the Hormuz Strait.

Resiliency Trend

This trend will see policymakers looking to boost resilience via:

• Stockpiling: Why the Next Billion Barrels of Oil Demand Could Come From Storage.

• De-risk/diversify/boost domestic oil & gas/LNG

• Coal (Asia’s quick fix).

• Nuclear (world’s long-term fix)

• Renewables (medium/long term fix, especially solar, for Asia & Middle East)

• Battery storage (buffer renewables’ intermittency)

• EV/Hybrids (Boost domestic resiliency if a net oil importer).

De-risk/diversify/boost domestic oil & gas will heavily benefit oil services as a whole, with EPCI arguably one of the best-positioned.

Engineering, Procurement, Construction and Installation

EPCI is one of the deepest pockets of value in oil services following heavy consolidation; the surviving companies have cornered their respective niches and built substantial backlogs, which will continue to grow with the resiliency tailwind.

Extreme Consolidation

The oil services sub-sector I’ve spilled the most digital ink on is offshore drillers, where I continue to like the outlook (Driller utilisation is on target to hit 90% in 2027).

This can be summarised as a brutal game of survival of the fittest…

EPCI Consolidation

Subsea EPCI has arguably had it just as tough as offshore drillers, with a third of the companies still in restructuring/private hands. Vantris is hanging on for dear life, and Saipem effectively went bust in 2022 via a massive recapitalisation (of which I had the pleasure of partaking).

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Building energy resilience is set to take the baton from Net Zero.

Why the Next Billion Barrels of Oil Demand Could Come From Storage

Many countries, especially in the Asia Pacific, are looking to build new reserve capacity to boost their energy security and never again be caught off-guard by a massive supply disruption like the one triggered by the closure of the most important oil and LNG chokepoint.

From India to Australia, energy importers are looking to expand capacity to hold crude and fuel reserves to be better prepared for the next energy crisis, which, in this fragmented geopolitical situation, is a matter of when, rather than if.

India needs to move from ad hoc crisis response to strategic oil stockpiling: analysts.

India needs to urgently fortify its energy security by transitioning from an ad hoc crisis response to a strategy of sovereign crude oil stockpiling, thereby guarding against future disruptions in global oil supply chains, think tanks and advisory agencies said.

While the country has initiated efforts toward building Strategic Petroleum Reserves, the existing storage capacities are quite insufficient and must be augmented to serve as a true macroeconomic shield, they added.

Podcast/Video

I got a lot out of this discussion between Louis-Vincent Gave and Anatole Kaletsky: The Ceasefire And Mad Markets.

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Quote

China’s AI playbook: kill OpenAI and Anthropic with great free models. Make it free. Then use cheap electricity to export compute as well. Currently, the blocker is the chip, but Huawei will catch up soon. Imagine a world where instead of paying hundreds of billions to OpenAI and Anthropic, you pay almost zero to similar level of intelligence with cheap, cheap inference. What’s gonna happen?

-Xiaoyin Qu

Rather than opine about Chinese LLM’s I downloaded GLM-5.2 and dropped the same queries in Claudes Opus 4.8.

Opus 4.8 clearly still has the edge I’d say GLM-5.2 is a close second.

The question is how much you’re willing to pay for that edge? 5x more for Opus, 12x more for Fable 5? The below companies have already made their decision.

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Stephen Stapczynski is a great follow for LNG/energy news.

This QatarEnergy notice was interesting as it suggests they’re set to miss the entire Asian cooling period, against early reports that Ras Laffan could be at full capacity by mid-August.

Charts

This chart illustrates that the EU storage issue has been cumulative, following two winters of insufficient storage refills. Europe is at its lowest gas storage in 15 years

Something I’m Pondering

I’m pondering where China’s energy demand will land this year (we will only know with hindsight).

A lesson from the last few years has been to be careful about drawing conclusions from China’s low-growth years, when coal utilisation as a percentage of generation dropped only to roar back the following year (2021 and 2023). That said, current Chinese consumption data isn’t very encouraging.

As mentioned in last week’s Ferg’s Finds (China Has a Powerful New Oil Price Weapon), Chinese oil demand has proven to be surprisingly flexible.

If 2023 is anything to go by (similar to coal), the rebound can be substantial.

Hope you are all having a great week!

Cheers,

Ferg

P.S. Today I was lucky to have Martin Tavella of Somar Capital walk me through his thesis on the almond market and how he’s playing it. It’s a fascinating little sector in which I couldn’t help but draw parallels to other cyclical sectors I’ve dug into. An almond tree takes five years to reach full maturity, leading to periods of oversupply and underinvestment, creating supply constraints, where we find ourselves today.

We are in Ada Bojana, Montenegro (on the border with Albania) for the week, enjoying the beach and seafood restaurants along the estuary.

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