Growth in Undervalued Trends

Since China joined the World Trade Organization (WTO), emerging markets, and even less affluent nations like India, have served as the primary contributors to global GDP growth. This robust growth has occurred even in the absence of financial inclusion for hundreds of millions of people.

Globally, 1.7 billion adults lack access to the banking system, yet two-thirds of them own a mobile phone that could facilitate their access to financial services. With the ongoing digital transformation and the increasing ease of global exchange of goods and services through Bitcoin and decentralized exchanges using stablecoins, financial inclusion in the global economy is on the brink of becoming widespread and frictionless.

Enormous long-term opportunities exist in Bitcoin, along with related digital applications, and we are actively investing in this overarching secular trend. With enhanced financial inclusion, upward economic mobility, and robust overseas GDP growth expectations are poised to exceed to the upside.

In the coming decade, emerging market economies are likely to accelerate their GDP growth as a percentage of total global growth, with projections indicating that emerging markets will contribute to 70% of all global growth. The widespread financial inclusion and access to global trade for hundreds of millions of citizens, previously unattainable, are expected to accelerate economic activity in emerging markets in ways that many may not have considered.

For instance, real GDP growth is unattainable without a corresponding increase in fossil fuel consumption, especially in countries entering high-growth and consumption phases like emerging markets. The demand for oil, natural gas, uranium, and coal from burgeoning economies in the next decade will be insatiable.

Given a decade of underinvestment in global energy, producers with long-lived reserves are likely to reap substantial benefits. We have significant exposure to well-positioned producers, providing a nicely non-correlated complement to digital assets.

Both the Brazilian and Indian stock markets are breaking out, and a secular trend of strong GDP growth in these regions, combined with attractively priced investments, presents lucrative opportunities. Brazil boasts the world’s cheapest stock market and is rich in natural resources, which bodes extremely well for the country in a decade marked by resource scarcity for other nations.

Argentina, Brazil’s neighbor, recently elected Javier Milei, who is in the process of dismantling the Argentine central bank responsible for significant inflation and damage to the economy.

Milei advocates for free market competition for money and plans to utilize U.S. dollars to stabilize the Argentine economy, supporting the use of bitcoin and stablecoins for trade, savings, and settlement. Tens of millions of citizens in South America are poised to experience significant increases in their standards of living, propelling economic activity in the region, along with growth in fossil fuel consumption and adoption of digital assets that most aren’t thinking about in the west.

A Race for Oil Reserves

Meanwhile, there is an enormous geological race to secure oil reserves in the ground as new oil discoveries are costly and difficult. Since 2016, the Permian in West Texas has accounted for 100% of United States shale oil growth, and it’s all we have left to keep the economy well-greased, and it is starting to run up against its peak pumping capacity.

Chevron, Exxon, and Occidental Petroleum have engaged in deals totaling $132 billion in just the last few months. All three companies are aware of the importance and have a sense of urgency in securing reserves.

Occidental’s purchase of CrownRock, while the smaller transaction of the three, is the most interesting for learnings.

President and CEO, Vicki Hollub, of Occidental flew out to Omaha before the deal was announced on a Sunday to meet Warren Buffett (Occidental’s largest shareholder). Clearly, Hollub wanted to run the numbers by Warren Buffett, and get pre-approval from their largest shareholder before any deal was made public.

This is what is interesting. Hollub got the stamp of approval from Buffett to buy CrownRock, but it is the terms of the deal that raise an eyebrow. Of the $12 billion dollar price tag for CrownRock, Occidental plans on using $10 billion of debt to consummate the deal.

The only reasons why one would want to leverage a deal like this primarily with debt over equity and cash given the volatile price of oil is a) the equity is too cheap to issue B) oil is scarce and will be worth far more than interest on the debt and C) one believes the Federal Reserve will have to print more dollars and ease policy at some point which inflates the debt away and devalues the dollar more.

With 84% of this deal getting consummated with debt, it speaks volumes on overall market dynamics, beyond that of just this deal. I literally think I am the only money manager alive that has figured out Buffett not only understands how energy CAPEX cycles affect overall market dynamics, but it’s one of the ways he gets strategically invested given his multi-year holding periods.

Too many people believe Buffett is bearish because of his $157 billion in short-term T-bills. This is too myopic of a view. Buffett is extremely bullish on energy (which makes him bearish on other assets), and it’s where all his big allocations have gone over the last several years.

Berkshire’s subsidiary, Berkshire Energy, is the largest energy company in the United States. Besides Buffett’s big oil allocations, Berkshire Energy has been plowing 10s of billions into energy projects.

Like us, Buffett knows if you’re extremely bullish on energy dynamics, you’re then bearish on assets that need tons of time to justify their high valuations.
The price-to-earnings on a 10yr Treasury bond is 26x for income that does not increase. The earnings yield on the S&P 500 tech sector is under 3% and has a price-to-earnings ratio of 30x. “Wonderful” businesses (high ROIC and competitive advantages) like Apple are in nosebleed territory.

Those valuations only occur at the end of energy underinvestment cycles. We’re not constructive on duration assets with high multiples, but we are extremely constructive on the undervalued areas of energy, digital assets, silver, and exposure to undervalued overseas trends that are just beginning to break out.