EXECUTIVE SUMMARY

• April’s inflation print settled last week’s argument for us: at 3.8 per cent and energy-driven, the shock has arrived in the data rather than the headlines. Wednesday’s thirty-year auction cleared above five per cent for the first time since 2007.
• The comforting reflex — that America has plenty of energy — answers a question nobody is asking. Energy is one input, and merely the most visible one.
• The binding constraint is quieter: sulphur, industrial chemicals, ammonia, copper cathode. Almost none is made at scale in the West, and most passes, at one or two removes, through China.
• Reindustrialisation is plausible as politics and dubious as arithmetic. The wage bill, the bond market and the latest ISM print each argue against a painless restoration.
• Our regime read remains Reflation. Real-asset equities still trade as though the world has finished needing them. We respectfully disagree, and the portfolios reflect it.

The comforting half-truth

It has become almost distasteful, in certain circles, to point out that America has more energy than it can reasonably use. The United States is the largest oil producer on the planet, sits on a sea of recoverable gas, and exports LNG to three continents. Stand far enough back and it looks like the rare advanced economy whose strategic position has improved since 2010.

This is true. It is also mostly beside the point. A modern industrial economy is not a generator. Energy is one input; it happens to be the one people can see, which is why it dominates the discourse. Oil keeps the engine running. Oil does not build the engine.

What builds the engine is a long list of unfashionable goods that even interested observers could not, on demand, define: copper cathode and high-purity nickel, ammonia and sulphuric acid, electrical steel, ball bearings, machine tools, the obscure chemistry that turns a rock into a refined metal. Almost none of it is produced at scale in the West.

The quiet gear

If you wish to understand modern supply chains, do not begin with the part that is on television. Begin with the part nobody bothers to mention.

Take sulphur. No presidential candidate has, to our knowledge, made a speech about it. Yet the sulphuric acid derived from it is what allows miners to dissolve copper out of rock and farmers to fix nitrogen into soil. China refines roughly forty-five per cent of the world’s industrial chemicals, and much of the sulphur it processes arrives through the Strait of Hormuz. Disrupt the strait — as has been the case since the end of February — and the first consequence is not a higher pump price in California.

The consequence is that the Democratic Republic of the Congo, which produces some seventy per cent of the world’s cobalt, finds it has the rocks but not the soap with which to wash the metal out of them. Chile slows. Indonesia slows. Zambia slows.

Figure 1: The Quiet Gear

Nations short of a critical input do not behave like polite suppliers; they behave like governments. They protect their farmers first, then their factories, then their strategic industries. Whatever remains is sold abroad. That sequence is already visible: China has restricted exports of refined products, and the Brent crack spread — refiner profitability, in plain terms — rose 176 per cent in the first quarter. The Gulf accounts for around a third of global urea exports, and urea now trades some fifty per cent above pre-war levels. This is not only a battery problem. It is a bread problem.

None of which is news to commodity specialists. The Dallas Fed’s March modelling put the central scenario at WTI averaging $98 and global growth 2.9 percentage points lower, annualised, in the second quarter. Its subsequent working paper is blunter still: an outage running two quarters takes WTI to $132 by July; three quarters, $167 by October.

Figure 2: The Price of Patience

The IEA expects the market for critical-transition minerals to rise from $320bn in 2022 to $770bn by 2040. The direction of travel is no longer in dispute. The interesting question is whether the last twelve months of price action reflects that shift or merely anticipates it. We suspect the latter.

The arithmetic of slogans

The Western political response has settled into three limbs, each of which sounds responsible and none of which survives a calculator.

That America can simply switch the old factories back on forgets why they switched off: they lost the competition thirty years ago to plants that have spent the interval automating. Reopening Akron in 2026 to compete with Shenzhen in 2026 is not industrial policy; it is nostalgia in a high-vis vest. That domestic production is morally correct regardless of cost survives until one notices that many American households are presently using consumer credit to buy imported goods; replace those goods at domestic wages and the same households cannot afford them. The bumper sticker survives. The household budget does not. And that the thing can be rebuilt at any cost, with whatever cocktail of stimulus and tariff is required, meets March’s ISM: a headline of 52.7 above the expansion line, paired with a prices index of 78.3 — a configuration which has historically presaged stagflation rather than renaissance.

The cure is not free. Financed by taxation it is politically impossible; by issuance, improbable at present yields; by the printing press, it produces the very inflation it was meant to cure.

Beneath the cloud

Here the prevailing investing reflex is most clearly mispriced. For a decade, capital has been trained to chase abstraction — software, platforms, the various species of business that look weightless on a balance sheet. This has produced a strange flattening of the imagination, in which the physical world feels like an appendage to the real, by which we mean the digital, economy.

It is the other way around. A data centre is a building full of copper, transformers, cooling pipes and concrete, drinking electricity at a rate that would have embarrassed a mid-century steelworks; TSMC’s first Arizona fab alone requires the daily power of roughly a hundred thousand homes. The cloud, to coin a phrase, is bolted to the ground.

The companies positioned to benefit are not the ones investors have been congratulating. They are Weyerhaeuser, applying lidar and machine learning to forests it has owned for a century. They are the hard-tech founders forty-five minutes south of Austin building what they openly call an American Shenzhen — Dynamo’s ten-thousand-pound-payload drones, Terran printing houses out of dirt, Bedrock’s autonomous excavators. They are Oklo, which in March announced a reactor to make the medical isotopes America currently imports. No one of them solves the West’s industrial problem. All of them will earn more than the consensus expects by the time the consensus notices.

Hard truths in hard goods

The orthodoxy of seventy years was abundance: cheap energy, labour, freight and money. Portfolios were built on the assumption it would persist, and for a long time they were right. That world is not coming back.

America is better placed than Europe, than most of Asia, than the producing nations of Africa. That is true, and it is not the same as being unaffected. Relative advantage is not immunity, and the gap between ‘fine’ and ‘less harmed than the others’ is precisely where a thoughtful allocation has to operate.

The shortages are already in the cake. You cannot wish them out, slogan them out, or print them out. You can only own the things the world will be obliged to come back for.

This document is a market commentary intended for professional advisers and institutional investors. It does not constitute investment advice, an offer to buy or sell any security, or a recommendation. Views expressed are those of the author at the time of writing and are subject to change without notice. Past performance is not a reliable indicator of future returns; the value of investments may fall as well as rise. Investors should consult their financial adviser before acting on any view contained herein.