The Great Rotation Playbook — Theme 1: The Energy Backbone
A Manual for Investing in the 3D World (Part One)
This report builds on “The Great Rotation: The Case for Intelligent Investing 3D.”
The investment landscape is undergoing a shift. For two decades, the market has been defined by the ascendancy of the “2D World” — the realm of screens, software, and digital engagement. Capital flooded into assets that offer near-infinite scalability and zero marginal costs, driving valuations of technology mega-caps to perfection. This era of digital abundance, however, is colliding with a new reality: the resurgence of the “3D World.”
As Generative AI accelerates the commoditization of code and content, unleashing a deflationary supply shock on the digital economy, the physical world is entering an era of structural scarcity. You cannot “prompt” a copper mine into existence. You cannot “generate” baseload power with an algorithm. The 3D world, governed by physics, geology, and thermodynamics, is facing a supply cliff after a decade of chronic underinvestment.
The opportunity for investors lies in this disconnect. While the “Mag 7” remain priced for frictionless growth, the leaders in energy, materials, and infrastructure are often priced for stagnation or extinction. Last month, we explored this tectonic shift and the resulting opportunity for investors in an essay entitled, The Great Rotation: The Case for Intelligent Investing 3D.
In this report (and subsequent future reports), we provide The Great Rotation Playbook, an actionable framework for reallocating capital into the 3D world, highlighting specific securities that serve as the backbone of the physical economy. We start with “Theme 1: The Energy Backbone of AI.”
AI is not merely code; it is a consumer of power. The digital revolution faces a physical constraint: energy. We are entering an era of “Tech-flation” and “Greenflation,” where the demand for compute power collides with a strained grid and a supply chain suffering from years of underinvestment. To support the AI ecosystem’s 24/7 uptime requirements, the world needs a massive expansion of reliable, baseload energy.
The Macro Framework
To understand the magnitude of the opportunity in energy, we must appreciate the theoretical underpinnings of the current market dislocation. The prevailing bias is one of “Tech Exceptionalism,” a belief nurtured by a decade of outperformance that suggests technology is the only vector for growth. However, history suggests returns are mean-reverting and driven by the capital cycle.
Capital cycle theory, popularized by Marathon Asset Management, posits a simple yet powerful dynamic: high returns attract capital, which leads to overcapacity and lower returns. Conversely, low returns repel capital, leading to underinvestment, supply shortages, and higher returns.
The 2D world exhibits all the hallmarks of a capital cycle peak. The S&P 500 has reached unprecedented concentration, with the top ten stocks comprising over 38% of the index by 2025. This creates a “suction pump effect,” as described by Murray Stahl, where passive flows blindly chase the largest market caps, divorcing prices from fundamental value and assuming margins will remain high forever.
In contrast, the 3D world — specifically the energy and mining sectors — has been in a brutal bear market for over a decade. Since the commodity peak in 2011, these sectors have been starved of capital. Public pressure, ESG, and shareholder demands for dividends over growth have forced energy companies to slash capex. They stopped exploring, stopped building, and liquidated inventory. As Mohnish Pabrai has noted regarding the coal sector, bank credit effectively dried up. A decade of underinvestment has created a “supply cliff.” Oil wells deplete, copper grades decline, and infrastructure ages. By pricing these assets for extinction, the market has inadvertently set the stage for a dramatic reversal. When demand inflects upward — as it is now doing via AI — there is no spare capacity to meet it.
Will Thomson of Massif Capital provides a framework for understanding the inflationary pressures emerging from this imbalance. He identifies two distinct but reinforcing trends:
Greenflation: This phenomenon arises from the internal contradictions of the energy transition. The shift to renewable energy is not a shift away from materials; it is a shift toward them. Wind turbines, solar panels, and electric vehicles are more material-intensive than their fossil fuel counterparts. They require vast amounts of copper, aluminum, nickel, and steel. As policy drives capital toward these technologies, the demand for the underlying hard assets surges. However, due to capital starvation in the mining sector, supply cannot respond. The result is rising prices for the very inputs required to decarbonize, increasing the cost of the transition itself.
Tech-flation: This is the inflationary pressure exerted by the digital economy on the physical world. For years, the digital economy was viewed as deflationary because it lowered the cost of information. However, as it scales into the realm of LLMs and generative AI, it hits physical limits. Data centers are behemoths. They compete for land, water, and, most critically, power. The “Great Convergence” is the moment where the digital world realizes it is parasitic on the physical world. To continue growing, Big Tech must pay a premium for physical resources, driving up the cost of energy and infrastructure for the broader economy.
Goehring & Rozencwajg (G&R) offer a complementary perspective, framing the market shift as a transition from a “Carry” regime to an “Anti-Carry” regime. For the past 15 years, the “Carry” trade (borrowing in low-yielding currencies or assets to invest in high-growth, long-duration assets like tech stocks) has dominated. This trade relies on low volatility and abundant liquidity. However, as resource scarcity drives inflation, volatility returns. In an inflationary environment, the correlation between stocks and bonds flips, and the “Carry” trade unwinds.
G&R argue that we are entering an “Anti-Carry” decade where the winners will be assets that benefit from volatility and rising input costs — namely, commodities and resource equities. They note a bifurcation in the commodity complex: while economically sensitive metals may fluctuate with recession fears, assets like uranium and gold act as “Anti-Carry” hedges, performing well when the broader financial system is under stress.
Let’s dive into ten actionable investment ideas in Power Generation, Nuclear Energy, Oil & Gas, and Coal.