20260312 Mining, Excavation, and Blasting

1. First, watch a video from MS featuring Andrew Sheets (Global FICC Head) and Martijn Rats (Commodities Research Head), which covers some basic knowledge:

Fragile supply and demand: The world consumes about 100 million barrels of crude oil daily, with roughly 60 million barrels in the shipping market. Of these, 20 million barrels (about one-third) must pass through the Strait of Hormuz.

Martijn emphasizes that the crude oil market is very sensitive. Historically, a daily supply-demand imbalance of 2 to 3 million barrels (such as the crash in 2008 or the 2022 expectations of supply cuts from Russia) can trigger sharp oil price swings. Therefore, a potential daily supply cut of 20 million barrels is an enormous figure, even twice the scale of the largest oil crisis in history (the Suez Canal crisis in the 1950s).

Existing global contingency plans are “a drop in the bucket”—if the Strait is blocked, the market will attempt self-rescue, but this gap cannot be filled. Even if we combine all the most optimistic alternatives: Saudi Arabia’s backup pipelines (adding about 4 million barrels/day), UAE pipelines (about 0.5 million barrels/day), lifting sanctions on other countries, and extremely aggressive releases from strategic petroleum reserves (SPR)—even reaching a record 2 million barrels/day—the maximum global alternative supply would only be about 7 million barrels/day. This leaves a massive shortfall of up to 13 million barrels/day that cannot be addressed.

The market will have to rely on “extremely high oil prices” to restore balance. Since supply cannot fill the gap, the only solution is demand destruction. To achieve this, oil prices must surge to historically rare extreme levels (e.g., $130 or higher). Because crude oil consumption is directly linked to diesel (freight), jet fuel (aviation), and petrochemical products, this forced demand destruction would essentially deal a heavy blow to the global economy (GDP).

2. Recently, private credit markets have gained attention again. OFR issued a brief concluding that although private credit funds are generally not highly leveraged and banks have sufficient collateral, their large size and complex LP capital call mechanisms pose risks that cannot be ignored.

The size of private credit (PC) exceeded $1.6 trillion by the end of 2024, surpassing traditional syndicated loans and high-yield corporate bonds markets. Counterparty risk mainly propagates through two channels: one is the borrowing institutions receiving debt financing from private credit funds; the other is limited partners (LPs) providing equity capital and promising future injections.

Based on multiple data sources, the total lending exposure of banks and non-bank institutions to private credit entities (including BDCs) is roughly between $410 billion and $540 billion. Most private credit funds have very low leverage, with a median leverage ratio (total assets/net assets) around 1.0, meaning almost no leverage is used. However, tail risks exist: the top 5% of extreme funds have leverage ratios exceeding 3.5, contributing about $81 billion in borrowing.

U.S. domestic financial institutions (G-SIBs and commercial banks) provide about 80% of the funding to private credit funds. The two are highly interconnected, but based on Fed Y-14 data, underwriting standards remain conservative: up to 86% of loans are secured by first or second liens, mostly floating-rate loans.

Unfunded capital commitments from LPs total around $300 billion, with pension funds accounting for about $100 billion. In a prolonged market downturn, underlying portfolio loan defaults could reduce cash distributions from private credit funds. This cash flow reduction, combined with ongoing capital calls, might force leveraged LPs to sell liquid assets like stocks or bonds in the open market to meet obligations, potentially triggering broader financial contagion.

Notes (Unfunded Capital Commitments): The portion of promised capital that you have committed but haven’t transferred yet is called “unfunded capital commitments.” Capital calls refer to the process of demanding that you provide the funds now.

Notes (Liens): If the borrower goes bankrupt and assets are sold, the lien determines who has the first right to the proceeds.

3. Gundlach’s updated views:

Inflation cannot be suppressed, the dollar is about to peak, and expensive U.S. growth stocks should be replaced with non-U.S. assets and physical commodities.

Regarding interest rates, he believes the Fed is essentially being led by the two-year U.S. Treasury. Considering recent inflation and oil prices, he is certain that this month’s meeting will not cut rates and warns against touching the 30-year Treasury, calling it a duration trap.

On inflation and commodities, he thinks the Fed’s 2% inflation target is already broken. Oil prices can easily jump due to geopolitical events, pushing upcoming inflation data to around 3.5%. Therefore, he advocates holding a 15% position in physical assets as a hedge, with 10% in gold, since global central banks are aggressively buying it as a core holding. He also criticizes “Bitcoin as an old man’s asset,” claiming gold is more resilient. The remaining 5% can be in broad commodity indices, but currently, the crowded trade suggests waiting for a bubble to deflate before entering.

Finally, on cross-asset rotation, he is extremely bearish on the dollar, expecting it to break below a decade-long support level this year. Regarding stocks, he dislikes the current market’s cap-weighted and momentum-driven style, urging a switch to equal-weight and value stocks. More importantly, the price-to-book ratio of U.S. stocks has reached 5.3, while overseas markets are around 2.2. He strongly recommends buying European and emerging market equities—once the dollar weakens, investors can benefit from valuation recovery and a dollar appreciation “Davis double”—gaining from both stock and currency appreciation.

Image: Disdain for BTC as an old man’s asset