Revenge from the real world actually hurts

In 2017 I travelled around Japan with Fat Tail Research’s former compliance officer. In Tokyo we played one of those immersive virtual reality games.

The goggles made you think you’re inside the game itself. And motion detectors tracked your physical movements, allowing the game’s environment to reflect them.

It was still early days for the technology. So the gameplay wasn’t terribly creative. We had to shoot each other. And dodge behind walls as strangely slow bullets flew toward us.

Shooting and moving was straight forward. The trouble lay in reloading. You had to flick the gun upwards. A bit like tossing a pancake.

That’s where things went terribly wrong. The goggles interfered with my spatial awareness.

While trying to reload I whacked myself in the nose with the point of the gun.

Three times.

There was blood everywhere. But I was so engrossed in the game I didn’t notice. Just kept soldiering on through the fog of war.

When they finally pulled the goggles off me, I had amassed quite an audience of Japanese people.

It was terribly embarrassing. The only upside was that my wife was safe at home on the far side of Japan. Safe from sharing my embarrassment.

But that didn’t last long.

Last year, virtual reality games had advanced enough to make them far more convenient. Our hotel in Hokkaido had a set of goggles. And so I found myself facing off against three little Japanese children in another shoot-out on the hotel’s dance floor.

During the general melee I absolutely flattened one of the kids. And I don’t mean his virtual reality persona either.

Although, I’ll never forget how virtual reality goggles display a child soldier lying on the floor at your feet.

‘The goggles have a blind spot,’ I told my wife as she apologised to the parents and everyone watching…

We’re going back to the same hotel next week to visit my sister-in-law, who works there. I’m not playing anything virtual this time. Just going skiing.

What could go wrong?

But I have learned my lesson. When you least expect it, the real world can dominate the virtual. And it actually hurts.

Investors had better learn from my mistakes too. Yesterday, many learned the hard way.

The real world still trounces the
digital every now and then

As I write this, financial markets are responding to the latest round of violence in the Middle East. A reminder that the real world can whack the digital one on the nose. And unlike when your computer crashes, the pain is real, not emotional.

The Iranians are trying to close the Strait of Hormuz, upending the oil trade. Suddenly the real world is more important than what your digital contracts for oil delivery might say.

Insurance companies pulled their contracts on shipping in the Strait as the real world hammered into their theoretical mathematical risk models.

Brits working from home in Dubai discovered that the impact of very real missiles can trounce jurisdictional tax arbitrage.

China is discovering that the oil market isn’t as fungible as it may seem in theory as a major supplier goes missing.

But that’s just one days’ action in which the real world invaded our computer screens to dish out a dose of reality.

Over the past few months, software stocks have been tumbling. This is after dramatic outperformance for many years.

It turns out that producing virtual goods makes you easy to replace. Especially in the age of AI.

Real tangible stuff, meanwhile, has been rocketing in value. Silver and gold are the chart toppers at the moment. While bitcoin, known as digital gold, crashes.

The commodity company BHP just became the most valuable company on the Australian Stock Exchange. Its shares have been flying as the copper price surges.

BHP edged out Commonwealth Bank – a company that deals in virtual products known as loans and bank accounts.

The bank also just discovered rather a lot of mortgage fraud on its books. Apparently AI makes it easy to fake documents supporting loan applications. Especially in the digital realm.

As long-time subscribers will know from my narrowly aborted PhD research, Australian bankers and mortgage brokers didn’t need AI to falsify such documents. They just needed a scapegoat.

But back to physical reality teaching us a lesson.

Belgium just seized a Russian ‘shadow fleet’ oil tanker in the North Sea. A reminder that physical possession is nine tenths of the law. Especially far enough offshore.

Cuba is being starved of oil, making ideology cold comfort.

And the global gas market is about to be split by another logistical mess.

To sum up, the virtual world is getting a trouncing by the physical. A reminder that the real world matters.

And investors are discovering that they can only ignore the real, tangible world at their peril. Because when it bites, it doesn’t just bark.

But is this the beginning of something bigger? Or just another brief but painful reminder that there is still a real world out there in our virtual working-from-home economy?

Commodity cycles last for years

It’s easy to understand why. Unlike a software company, bank or cryptocurrency, it takes a long time and a lot of money to build a real mine.

This delay and cost creates a mismatch between price and supply. You don’t know what the price of a commodity will be by the time you are actually producing it.

And not many investors are willing to lock up their capital for a decade to fund a mine without knowing whether it’ll even be profitable. Heck, the ore might not even be there!

The commodity industry inevitably gets supply wrong. The only question is by what margin and in which direction – a glut or a shortage?

That’s not a criticism. It’s just the nature of the physical world. Unlike a digital song that can be played by everyone on the planet at the same time, a commodity can only be in one place at one time. And it’s hard to get at in the first place.

During many years of investor dollars flooding into get-rich-quick schemes in the digital world, the real world was starved of capital. The money it needs to actually finance and fund real world projects. Not just bid up a newly launched crypto.

That has set up a shortage in countless real resources. Things like uranium, copper, silver and much more.

If you accept that, the big question is how quickly new investment flooding into the sector might ‘fix’ the shortages. How quickly can supply catch up with demand?

The answer is that it’ll take a decade. During which time prices of commodities will have to spike in order to deliver the cash needed to fund more mines.

In the meantime, those few commodity stocks that have secured supply during the dearth of projects will profit very handsomely indeed.

Which ones? Find out here.