Ever wondered how Japan's delayed rate hikes or the U.S.'s soaring interest payments relative to GDP could reshape global markets? Get ready for a deep dive with Tavi Costa from Crescat Capital as we untangle the intricate web of current macroeconomic trends. Discover why Tavi holds a bearish outlook on the dollar and what that means for fiat currencies, as well as his perspectives on the dramatic positioning in mega caps and the unpredictable behavior of equity markets amidst recent turmoil.
Moving into the metals and mining industry, Tavi offers a goldmine of opportunities, literally. We discuss the concept of fiscal exceptionalism, the undervaluation of mining assets, and why private mining deals could be a jackpot for savvy investors. Tavi reveals how inefficiencies and conservative gold price assumptions create fertile ground for significant returns, especially through leveraged buyouts and strategic investments. If you're looking for new investment frontiers, this segment is not to be missed.
Lastly, we tackle the twin giants of AI and infrastructure spending. Learn about the paradoxical nature of AI's initial inflationary pressures juxtaposed with its long-term deflationary effects. Tavi also sheds light on China's aggressive stockpiling of metals and its undisclosed gold purchases, a strategy that could provide unexpected liquidity and act as a market tailwind. This episode is packed with critical insights for anyone keen on understanding the future trajectory of global markets and the burgeoning demand for metals. Prepare to reframe your perspectives with expert analysis from Tavi Costa.
The content in this program is for informational purposes only. You should not construe any information or other material as investment, financial, tax, or other advice. The views expressed by the participants are solely their own. A participant may have taken or recommended any investment position discussed, but may close such position or alter its recommendation at any time without notice. Nothing contained in this program constitutes a solicitation, recommendation, endorsement, or offer to buy or sell any securities or other financial instruments in any jurisdiction. Please consult your own investment or financial advisor for advice related to all investment decisions.
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Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Speaker 1 (00:08):
my name is michael guy at, publisher of the lead
lagarboard.
Join me for the rough hour ismr tabi costa.
Uh, tabi, introduce yourselfthe audience.
Who are you, what's yourbackground, what we've done
throughout your career and uh,are you loving this market
action now?
Speaker 2 (00:21):
isn't this what we live for?
Macro seems so boring usuallyand then all of a sudden things
get really interesting.
But yeah, I was out to manage aglobal macro portfolio here at
Kresge Capital and then we alsohave a long short portfolio.
But I've also been very, veryinvolved with the commodities
trade.
We manage a fund in theexploration, development and
(00:43):
production side of mining mostlyexploration right now and some
development stories and I'vebeen very involved in
acquisition of private companiesas well in the mining space,
and so my involvement withcommodities is a little larger
than usual.
A little larger than usual.
But that's because of also mybackground in the macro.
(01:08):
That, I think, helps us to haveconviction on this long-term
idea that we identified a fewyears ago and continue to be
deploying capital into the space.
Speaker 1 (01:21):
Is what's going on macro or is it more structural,
mechanical?
So I say that purposely becauseyou know, it seems to me that
this is an element of both.
The macro is around the factthat you had Japan being late to
the game as far as raisingrates, so there's a mismatch of
the monetary cycle from themrelative to all the other
(01:42):
currencies and countries outthere.
But at the same time this feelsmechanical, which you know,
almost like a margin.
How do you think through sortof the last several days here?
Speaker 2 (01:52):
Yeah, I think we're all trying to understand what
exactly is causing this andoutside of the most obvious
answers, which is mega caps andthe yen, all through positioning
being very extreme, you know.
There's also the idea that, youknow, we've flipped from having
no interest rate cuts to nowpeople starting to believe again
(02:13):
we're going to have multiplecuts.
And in my opinion, you know,after diving in, it's just
difficult because you have yourshort-term median views on macro
and also your long-term views,term medium views on macro and
also your long term views.
My more kind of medium longterm view is that which I find
it fascinating to see, by theway, is how we're seeing these
big declines in equity marketsand the dollar is not really
(02:37):
rallying and, yeah, the yen isone big trade.
But there's other things aswell happening in that world
Emerging markets that areoutperforming S&P 500.
There's a few things that arekind of remarkable, even some
commodities.
You would expect a lot more ofa painful environment and it's
not really what we're seeing.
And so to me, when I step backand look at the macro data, to
(03:00):
me it seems like the Fed policyis inconsistent with the amount
of leverage we have, and this isan unpopular opinion, the fact
that the debt problem ismanageable Very unpopular.
I guess it's very manageable.
What is not manageable is howmuch we're paying on the
interest payment relative to GDP.
If you look back in any othercycles of reserve currencies and
(03:23):
all sorts of things, theBritish Empire had over 200% of
that to GDP.
Some people will talk aboutJapan.
Japan's case is a little bitdifferent because it's not the
reserve currency, so maybe ithas to manage that a little bit
differently.
But even from the standpoint ofhaving this sort of leadership
role that the dollar hasworldwide, but even from the
(03:45):
standpoint of having this sortof leadership role that the
dollar has worldwide, it isremarkable that we have interest
payments that close toestimates for 2025, approaching
5%, and the rest of the world isjust not there at all.
Japan, as an example, is like0.something percent right now
0.5%.
If you look at other places,you know Germany or you know
(04:06):
Canada would be other, you knowgood one to look at, australia,
even the UK are, you know,significantly smaller
percentages than the US and youknow that research itself kind
of branches out to a lot ofideas.
You know thoughts about,thoughts about.
Can the US really keep thisgoing?
(04:26):
Does it really matter thisobsession that I have, you have,
everybody has about labormarkets and inflation?
Do they really matter?
When it comes down to thisinterest payment relative to GDP
and trading currencies?
For some time now, and lookingat things for a long time in
terms of history and what matter, I don't think interest
(04:48):
payments relative to GDP hasreally mattered historically.
And talking about the dollar inthe 90s versus the yen, and so
all these things are starting tomatter now, I think that's just
the beginning.
Now, I think that's just thebeginning.
(05:13):
I actually think that thatinconsistency of the Fed is
reflecting on the sell off ofthe dollar, because the interest
rate policy has to be adjustedrelative to the world, as you
mentioned.
And if that's the case, this isdifferent than those other
cycles, which is a weirdsentence to say.
But because it's neverdifferent this time.
Because it's never differentthis time.
But looking at this from thoseoptics, yeah, the yen is maybe.
Yeah, this has been a big move,and when those things happen in
(05:34):
the short term, you don't wantto get caught up in another big
move on the other side.
But long term, medium term, I'mvery bearish to dollar versus
other fiat currencies, and thisis my first time of somebody.
I tweeted this and somebodysaid hey, you had this view for
many.
No, I never had this view.
I had the view of long gold.
(05:54):
I've never been bearish on thedollar versus other fiat
currencies.
This is a new view for me.
I have new territory in termsof adjusting my opinions, and so
I definitely think that thereare, after a big move we had
recently.
Now I wouldn't be betting onthose things short term, but it
is interesting how the behaviorof the market has changed.
(06:17):
It reminds me a little bit ofthe COVID crash, when you didn't
really see treasuries rallyingon the back of that market, and
so this is a little bit likethat in my view.
Speaker 1 (06:29):
That point about interest payments not mattering.
They haven't mattered becauseof negative rates.
Yeah, exactly About themajority of our history.
Right, and I want to relatethat actually to a post you put
out, because I think it'sactually interesting the way you
framed it on X, where you showa chart of the NASDAQ 100 year
to date, which is still positive, and your point is how can
(06:51):
anyone call for emergency cutswhen the NASDAQ is still up for
the year?
I want to relate that to thediscussion around negative real
rates, because it seems like thepolicymakers need an excuse.
How could you possibly dealwith these interest expenses on
the government debt side withrates where they are relative to
inflation?
Speaker 2 (07:10):
Well, I said it didn't matter as well, because I
was in a macro discussion withsome really smart guys and when
I mentioned the net debt andthat interest payment relative
to GDP, this really smart guy,which was actually part of the
Market Wizards book, came out tome and said that doesn't matter
(07:34):
, it has never mattered, it'snot going to matter.
I said look, I understand.
I mean, this is sort ofentering those kind of new
territory environments where wedon't really know how markets
will behave.
But in my opinion, this reallymatters.
Actually, it matters a lot morethan any other thing, and your
(07:55):
point is right.
Negative rates have played arole into making this irrelevant
for a long time, but now thisis very inconsistent, as I said
before.
And so, if we think about thisI thought about this more
mechanically in terms of well,if we do have interest rates
(08:17):
having to be adjusted, what havewe done in the past to fix that
problem?
Well, you can talk aboutradical changes like debt
restructuring, which I don'tthink we're there yet.
Usually you get there when thedebt is not manageable.
That's not the problem here.
The debt is manageable.
We can still add another 70% toGDP on the debt.
(08:38):
Looking back historically, wecould do that.
All we need to do is adjust theyield and make it a banana
republic environment, which islikely the case, and so that's
why I'm in an inflation camp forthe long term.
Because I think that's a Fedmember a former Fed member,
actually a former Fed employeecame up to one of my tweets and
(09:01):
said hey, you know, tavi, that'snot the solution.
I'm not proposing any solution.
I'm just talking about markets.
What's the path of leastresistance?
It's, you know, it'smanipulated yields, in my view,
and inflation, and it's just noway around this.
Or do you want another GreatDepression?
I don't think anybody wantsthat.
So you know, it's just the pathof least resistance here.
(09:24):
So you know.
So by no means I'm offering anysolution to the problem.
I'm just talking about marketsand you know, it is of my view
that, if we think about thisfrom the 1940s environment as
well, we actually had to reach aprimary budget surplus at that
time, which, for those thatdon't know what is primary
(09:45):
budget, that just means takingthe deficit and taking it out,
excluding interest payments onthe debt.
So what are you really spendingin the economy?
And today, if you look at theprimary deficit of the US so
excluding interest paymentsrelative to the rest of the
world's normal deficit.
So, including interest payments, we're still spending more than
(10:06):
the rest of the world's durabledeficit.
So, including interest payments, we're still spending more than
the rest of the world, which iscrazy.
Or the other way to think aboutthis what has really benefited
the US economy versus otherparts of the world since the
global financial crisis and whyhave we seen this really big
divergence of growth, not onlyin the economy versus, but also
in the equity markets of the USversus the rest of the world?
(10:27):
And I can make the case yeah,that's technology and all sorts
of things, but really comes downto how much we spend on the
fiscal side relative to thoseother economies.
I mean, we're talking probablyaverage outside of the US is
probably 3% or so.
The US alone has done close to8% deficit, you know, annually,
(10:50):
all the way back to the globalfinancial crisis, which is a
huge number.
It's a huge difference, and sothat interest payment eating its
way into the overall deficit is, which is now close to 60% of
the deficit, the deficit, youknow it's probably going to have
an impact on growth if youthink about that.
Um, and so I am of the view thatyou know, this physical
(11:13):
dominance that people like totalk about is really coming from
the us.
It's a fiscal exceptionalismand saw you know that that that
comes down to?
And can we keep that going,moving forward?
I think that's one of the mostcontrarian views out there is
can we see austerity in the nextthree years or something along
(11:34):
those lines?
Can we hit a wall here of debtat some point?
And again, not debt, butinterstatement on the debt.
I think we're getting close toit.
I think we're getting very,very close to it.
So, and I think those things aregoing to have impacts of growth
, are going to have changes infx, which hence my view about
dollar weakening versus othercurrencies um, that's not an
(11:57):
extreme view about the end ofthe dollar reserve currency
status and all sorts of things.
So don't even know for thosethinking about, don't even go
there, because that's not myopinion at all.
It's just a point about threeto five years in the markets and
uh and, and how things areshaping up for gold is really
really interesting, because youknow when you think about what
unleashes markets in terms ofthose dollar weakness trends
(12:22):
that we can see in three or fiveyears.
It's really really interestingstuff that could happen here.
Emerging markets can do verywell.
You can see their naturalresources, gold and all sorts of
things that have really laggedsort of changing the dynamics of
the market.
Speaker 1 (12:40):
So I'll bring up a post from Toll on X when would
you put your money today?
Or what would you put yourmoney in today?
And I want to relate that.
I know we're talking about gold, we're going to hit on that a
little bit more, but I want torelate that to this great chart
you always put out, which isgreat for context, which looks
at the commodities to equitiesratio.
Ok, historically, going back tothe 70s, explain for the
(13:03):
audience what this shows.
Speaker 2 (13:06):
Well, I think this goes back to an idea of Senzel
that said no great money is madeon lack of capital, interest
and access.
Actually, the lack of capitaloverall is an attention from
investors is what createsinefficiency and it creates
great opportunities.
So if you put that idea into amore, you know, pragmatic
(13:28):
approach and think about what'shappening with technology and so
forth, you know there is nolack of interest, there's no
lack of capital.
I mean, there's actuallyexcessive capital and so it's
hard to make those big bucks andtry to make great money in
those parts of the market.
And my understanding from youknow I started, you know I had a
view about looking at thatchart that you referred to and
(13:51):
started having a view about realassets and owning tangible
assets.
And a few years ago, and Istarted to think about okay,
which one should I own?
You know, is that the housingmarket, or should I buy
commodities, or should I do?
What commodities Should I do?
Energy, agricultural, metalsand mining?
What I, you know, started tounderstand was that the capital
spending of these industriesreally matter and the timing to
(14:14):
put something to go fromexploration to production also
really matters, and the timingto change the supply of
commodities is, it's even moreimportant, and so what I
realized is that the metals andmining industry have the longest
cycle because of that, and sothat attracted me immediately,
and public markets have beenbroken in terms of the mining
(14:36):
industry for a while now.
In other words, the improvementof fundamentals don't really
reflect the inequity prices.
I have my own theory of whythat's happening.
But to go back to your question, where should I put my money
into it?
Look, what I've been noticingmore and more is that these
private deals in the miningindustry are becoming more and
(14:58):
more attractive.
Can buy a mining project, atier one, tier two asset
nowadays that has a productionof gold that could be producing
hundreds of millions of freecash flow, and having access to
that cash flow is to me, I think, one of the best ideas out
there, because you're basicallybuying these mines for one to
(15:19):
two times free cash flownowadays.
You can lever that trade byusing, you know, doing leverage
buyouts A lot of there's.
You know, we know of a fewpartners that are looking to buy
gold, silver, copper from thosemines.
They're looking to financethose deals as well, and so, you
know, I don't think it's sortof unheard of an industry that
(15:43):
is being out there.
You can, or a business that youcan buy for two to three times
cash flow at current gold prices.
Actually, I should correct that, which is my view.
Why the public markets arebroken is that if you dive into
a mining industry the miningindustry today and dive into a
mining business, you're going tofigure it out that Most of
(16:04):
those forward earnings andmarkets trade in forward
earnings, as you know very well,I think, about those
assumptions.
They have assumptions that theymake the gold prices they're
assuming or considering in thenext five years.
We're talking about 1,800,1,700 gold prices in some of
(16:24):
these commodity businesses andso that's all my view.
I don't think gold prices aregoing to be at $1,800 in five
years from now.
So that's sort of an arbitrageif you think about it.
In fact they're being sold as$1,800 today at current gold
prices of $1,800.
And if you apply just normalprices now at, call it, you know
(16:47):
22, 2300 gold prices.
The changes in for cash flow arevery significant and it changes
the NPV calculation also verysignificantly.
And in fact, if you look at,what causes the suppression of
earnings of most of those miningdeals is basically predicated
on massive inflation of cost,which could be the case, and
(17:09):
then at the same time, deflationof metal prices, which to me
that's ludicrous.
And so if somebody is pricingan asset at that way, we all
like to be great negotiators,but the market is negotiating
for you, you don't really haveto do anything.
So you know there is a, as Isaid, there's inefficiencies in
that space and so not a lot ofpeople know how to navigate it.
(17:30):
Who is selling those assets Iwant to know.
So a lot of folks are not inthe industry, are not aware of
those deals and so those.
I think that applying theventure capital approach into
the mining industry has neverbeen so interesting to me, and
so I've been really trying tolearn what the technology space
(17:51):
that's done so well in the 90sand so forth and what created
that flood of capital that cameinto the space at that period,
and try to recreate this in themining industry, but obviously
try to get positioned as much asI can first, and I would love,
I would welcome a shakeout inthe gold price in the next six
months so I can get a round ofdeals done, but that's where my
(18:13):
capital and my attention isreally going after.
It's not trying to be too cuteabout where Fed funds rate are
going to be six months from now,but rather focus on this big
opportunity of buying businessesat two, three times free cash
flow with gold prices at $1,800.
You know, and to me I can'tfind anything else better than
that.
Speaker 1 (18:34):
It's an interesting observation from Thomas on
LinkedIn.
Talk about mining.
The only copy is making certainit's cash flow with CapEx
deducted and not EBITDA.
Maybe talk about some of thenuances of fundamental analysis
when it comes to mining stocksrelative to tech stocks, for
example.
Speaker 2 (18:51):
Well, that's a good point, because you know the
CapEx and I never look at EBITDA.
That's why I never mentionedEBITDA.
Especially in the miningindustry, you never want to
mention EBITDA.
But looking at the CapEx, youcan break it down to two things.
There's really reclamation cost, right, what's going to cost
you to close that mine, and thesustaining capital or the capex
(19:13):
that might be necessary toeither stay in production or
expand that production.
So you have to understand theprofile of the mining deal is to
be sold, obviously, andunderstanding what the capital
needs are of each of those deals.
They're very different fromeach other.
(19:34):
Now I like to find deals where Ican.
You know.
First, I I have a view aboutthe, the geology in terms of the
exploration potential.
That's number one, becausethat's going to add to the
ounces in the ground that youcan then expend the production.
Number two you want to makesure that the closure costs.
(19:54):
Usually these deals are beingpriced as what we call
reclamation project.
That asset is being basicallyunder the assumptions that this
asset is going to need a certainamount of capital until the end
of the mine life and some ofthese projects that are being
(20:17):
sold today that havehypothetically, mine lives of
seven years, eight years are themost interesting ones because
if you're able to have adifferent view about the
duration of it, meaning maybeyou can add double the mine life
, which is very usual,especially if it's an asset that
is under the umbrella of alarger company and that larger
(20:39):
company is not giving enoughlove to the asset that it
requires in order to find moreore.
The improvement and efficiencythat you can add to as a new
buyer could not only add to theduration of the mine life, but
also effectively change theentire business model and
(21:00):
meaning.
You know the NPV could.
You can be adding multiples ofthe NPV from that perspective,
and so that's where I think itbecomes very attractive.
And, plus, if there was ever atime to be looking at bolting on
all these ideas and creatingthe next major, it's right now,
(21:21):
because majority of people arelooking at Barrick, newmont and
all sorts of other large minersand looking at the share price
and being very discouraged by it, and I don't blame anybody for
doing that.
But the real opportunity is notin the share price of these
things, although they can dovery well.
The real opportunity is beingable to put together these deals
(21:42):
where you can buy it for reallycheap, own a very large
percentage of the business,keeping it as tight as it can be
, finding the strategicinvestors that can be part of
those deals and have access tothe free cash flow and then bolt
on to that because now you havea balance sheet.
And, just to give somebackground, I was very involved
(22:04):
and I am a large shareholder ofthe seventh largest silver mine
in the world and it's a privatebusiness and no, we don't care
about what people think aboutthe business itself.
What I know is that we haveaccess to the free cash flow of
it and for every dollar thesilver goes up, the leverage to
(22:25):
the free cash flow standpoint isreally significant, and so
using that to sort of break outand buy more mines is definitely
, I think, that I don't thinkanybody's really paying
attention to and I yeah, I meanit's really hard to actually pay
attention to the macroenvironment right now because
(22:47):
all these opportunities areshowing up and I would love a
recession to happen, because Ithink that could create an even
more sense of urgency from thesecompanies to selling these
assets that they don't want.
And the big idea is, as we'reseeing, some of the mergers
happening across most of the bigcompanies in the mining
industry, especially the oilbusinesses, are seeing the same
(23:08):
thing.
When two big companies merge,just so people know, what
happens is their tier two assets.
They become irrelevant to thatfusion of those two companies,
and so that's where you see thesales of these assets that tend
to be highly attractive.
And so I'm putting all myefforts on this, because I
(23:31):
definitely think this is one ofthe best opportunities I've seen
in my career.
Speaker 1 (23:38):
So there's the behavior of gold in fear moments
, flight to safety, and thenthere's the behavior of gold
from a very long-term cycleperspective.
Let's talk about the cycle here, a very long-term cycle
perspective.
Let's talk about the cycle hereas it relates to gold in
particular.
I'll share another post you putout which is a great look at
unemployment rate crossing abovethe 24-month moving average and
(23:59):
recessions afterwards.
Historically, I've made theargument that gold's demand will
pick up because largeinstitutional players do not
short, they're long only, and ifthey're long only and they're
bearish about the cycle, theytry to allocate to
non-correlated assets.
There aren't that many.
Gold happens to be one of them.
Draw the link betweenvolatility in risk on assets and
(24:24):
gold and typically, how doesgold behave in general when you
have a recession?
Speaker 2 (24:33):
That's a good question, because I think when
people say well, historically,gold doesn't perform well in
recessions, I'm not even surewhy they use the word
historically, because if they'rejust looking back, one
recession historically to memeans looking at multiple
recessions.
As we all know, we've had manyof those in history and there
were many times in history wheregold actually rallied
substantially despite thedownturn in the markets.
(24:54):
And I think it really comesdown to a lot of things Like,
for instance, there are cycleswhere we have a recession where
investors are heavily investedin equity markets in the US.
There are cycles when it's theopposite Markets are very frothy
outside of the US.
This is a classic one thatlooks much more like the tech
(25:16):
bubble kind of environment fromthat perspective, where markets
really are frothy.
If you look at valuations of UScompanies versus other parts of
the world, if you look at the,you know the sentiment of the
dollar, uh, you know what's beenhappening with treasury markets
recently selling off, whenmarkets, uh, also are volatile,
and you know, during those timesthe mining industry did very
(25:40):
well.
Gold did very well too.
So I am also of the view thatif you look back during, you
know, if you look one of theview that if you look back
during you know, if you look,one of the best, most reliable
indicators although thiscontrarian, I guess this labor
market one that you were showingis also very reliable Yield
curve inversions is a great one.
You know, when you deeplyinverted yield curve and you
(26:01):
started seeing a steepening ofthe yield curve, well, that's a
recession signal.
Then some people will getreally technical and say, well,
is this a bull stipper or a bearstipper?
It doesn't really matter.
We actually had bear steepenershappen in the 70s and it was
also a recession.
So really it comes down to thesignal of actually going
inverted and then steepeningagain.
(26:22):
And if you think about thosetimes, we did a comprehensive
analysis of this, looking at allpossible yields and the yield
possible spreads in the yieldcurve.
There's 45.
I presented this to the IMF nottoo long ago or about a year
and a half ago, where I talkedabout not just the percentage of
(26:42):
yield curving versions but whatcomes out of that yield
percentage of yield curveinverse.
Number one is recession ishighly likely.
But really is the gold to S&P500 ratio in the next call?
You can look at this in 12months, 24 months windows and so
forth, and the biggest tradesthat you tend to see during
those times is actually at timeswhen we have that are similar
(27:04):
to now, where the cycle ofcapital is really deeply
involved with the US marketsversus other parts of the world,
which is similar to what we sawin the tech bust, for instance,
and during those times, thegold to S&P 500 ratio performed
really well.
So, to your point aboutvolatility, I am a believer that
(27:25):
we're going to see this again,and it's interesting that the
S&P 500, now priced in goldturns, hasn't really gone
anywhere in the last, you know,probably since 2017 or so.
If you look at the Dow Jones,it started to already decline,
but the Dow Jones is lessrelevant than S&P, arguably, and
so, you know, I think that thatidea could potentially work
(27:50):
here, and so I'm, you know,paying close attention to gold.
And lastly, what I would pointout is the volatility of gold
versus treasuries.
You know it's the first time in45 years that gold is less
volatile than US treasuries.
It's the first time in 45 yearsthat gold is less volatile than
US treasuries.
Don't look at just today.
I'm talking about five, threeyears of movement, and if you're
(28:11):
running a patient fund or anytype of asset allocation that
requires a defensive asset, andyou're seeing the constant
decline in volatility oftreasuries.
You're starting to take note ofthe benefit that gold could
actually bring to your portfolio, rather than Bitcoin that has
(28:32):
almost always trades with a 3xon its back versus Nasdaq.
So, whatever you want to knowwhat Bitcoin is doing, just look
at Nasdaq and multiply by threetimes, and that's usually
(28:56):
what's going on.
In fact, yesterday I was reallyfunny See, nasdaq was down 5%,
and then I see Bitcoin down 15%.
I'm like, oh, that my view.
Central Bank's buying gold.
They're not net buyers oftreasuries, as we used to see
before, and when I say net buyer, it's buyers relative to how
much is being issued, not justhow much they've been buying
recently, I guess is a biggercalculation to me, and they are
(29:19):
definitely net buyers of gold,and so those things are starting
to shape up and will change thevolatility profiles.
Well then, my final point isthat if you are of that view
that gold can reach $3,000,$5,000, $10,000 an ounce one day
, I think it can reach stupidprices.
Personally, imagine what I saidabout those mining companies,
(29:40):
that you have control of thefree cash flow and what is the
NPV of a mine that is being soldfor $300-$400 million?
That actually makes $300million every year in cash flows
, free cash flow.
So I don't think you can findmany businesses like that with
potential growth right.
I mean, there's real growthhere.
It's not like an industry thatis dying and it will probably go
(30:03):
out of business here soon.
There's definitely growth here,potential if gold prices take
off to levels I think it could.
So I don't know.
To me it's almost as close toan arbitrage as it gets.
Speaker 1 (30:20):
It's a comment on X from CrashCoin, which actually I
want to tease out, the rotationfrom the metaverse to the
metalverse, which is actually agood way to frame it.
But where I want to go withthat is how important is it for
tech momentum to break for thereto be some real flow of funds
into the metal space?
Speaker 2 (30:42):
Well, I think that to answer that question, it would
be probably a decline in equitymarkets, a reckoning in equity
markets that would cause themining space to resiliently
behave.
And I'm not saying going up,I'm just saying not going down
as much as the market.
So, you know, relativeperformance improvements that
(31:07):
will cause people to think, hmm,if metals and mining companies
and industries have performedthis well during the recession
and a downturn, imagine what itcould do in the back of a normal
market.
I think that's what it takesand we saw some of that in the
early 2000s.
What I cautioned people in theearly 2000s about, about the
(31:31):
metals and mining industry, isthat this is a different
environment than back then fromthat perspective is, you know,
and uh, in terms of the extremesthat we have, in terms of the
CapEx trend is much more severethan we saw back during that
time, and I will also point outthe fact that deglobalization
(31:51):
trends may exacerbate this a lotfurther than back in those
times.
People like to talk about Chinabeing a large buyer of
commodities.
Now, imagine if we have G7economies actually financing
those purchases today, ratherthan one country having seven
economies or more.
I think that's possible.
You have the on-shoring.
(32:12):
You know it's the irony of AIbeing deflationary when you have
to build all these.
You know data centers and sortsof things and that
infrastructure and theelectrification, also from a
standpoint of you know thedemand of electricity that we
needed from the AI revolutionand all the electrical grids
(32:36):
that need to be revamped.
You know all those things aregoing to require a lot of metals
and that's inflationary, notdeflationary at first.
So until we build everything inorder to take advantage of AI,
it's probably going to be a lotmore inflationary at first until
we get to the results of AIactually causing prices to
(33:00):
become more subdued.
Speaker 1 (33:01):
I'm glad you mentioned it because I've been
on that kick also, actuallycausing prices to become more
subdued.
So yeah, I'm glad you mentionedit because I've been on that
kick.
Also, I don't recall any othertechnological revolution where
it could conceivably actually beinflationary for a while
because of that electricitydemand, because of that energy
demand.
I don't think there's ever beenan example of that in history.
Speaker 2 (33:20):
Yeah, it's a good point.
I mean I was looking more froma standpoint of infrastructure
spending not necessarily theelectricity, but that's a good
point and from infrastructurespending as well.
To your point too not even theMarshall Plan, which was a
global spending ofinfrastructure, doesn't get
(33:42):
close to what we're seeing inthe U Plan, which was a global
spending of infrastructure,doesn't get close to what we're
seeing in the US alone relativeto global GDP.
And imagine if other countrieswill, you know, add to the table
which I think they will interms of infrastructure spending
, and this is going to be, youknow, probably very big changes
(34:03):
in terms of constructionspending but also the demand for
those things over time thatprobably will create the demand,
the long term.
You know tailwind that we maysee for metal prices just from
the demand alone, not, you know,completely forgetting about the
supply side of it.
And you know, for those thatdon't know, the supply side of
it, that's the scary part to meis is the fact that you know we
(34:28):
just don't have enough.
I mean, I work with a lot ofpeople in the mining industry
and look it's, I have a lot ofprojects and I don't have people
to run it.
It's a problem.
You know that's the issue.
We don't have enough peoplethat know how to run a mining
company, people that have enoughknowledge about it, and we're
not going to see that changeuntil we see metal prices
(34:51):
improving drastically.
That also causes a boom in themining industry.
Those booms create excitementthat then create interest from
young people and wanting tobecome geologists and all sorts
of things.
I have a daughter.
If my daughter was actuallygoing to college right now, I
would certainly just tell herwell, look, the geologist space
(35:15):
looks really attractive rightnow and you should consider it,
and I would certainly considerthat because it's a geoscience
space.
In this environment ofmulti-year spending, of
construction and lack of metals,to me it seems like also a real
mismatch that needs to besolved at some point.
(35:36):
And now that's something AIwon't fix.
It will actually exacerbate it.
And so I think that there is a.
You know, that's why we seeinefficiency, right, I mean,
that's exactly why you have a.
You maybe copper or silverlikely into a major discovery
and share prices come off out ofthose news, because investors
(36:13):
are seeing this as anopportunity to finally get
liquidity and volumeimprovements, and so they sell
their shares.
And if you're a long-terminvestor, that's what you know
volume improvements, and so theysell their shares.
And you know, if you're alow-term investor, that's what
you love, right, it'sintrinsically that company's
improving and investors are justnot seeing that.
(36:33):
And so, yeah, fundamentally,markets are broken from that
perspective.
And if you are, you know, notpaying attention to the
day-to-day changes inperformances and actually trying
to buy a high-quality asset,what a wonderful time to be
involved with this stuff.
But again, it takes time.
It takes a lot of a hugelearning curve.
(36:57):
I feel like I'm new to theindustry and I've been here for
some time now.
And I feel like I'm new to theindustry and I've been here for
some time now, and I feel like Iknow nothing about this.
And it's a very complexindustry.
Everything you think it couldgo wrong, it goes wrong, and so.
But the margins are becomingreally interesting and I think
we're only getting it startedright now.
Speaker 1 (37:20):
You had mentioned China earlier.
I have written about what Ibelieve may be a bottoming out
process in china's economy andactually I don't think china's
markets have all done thatterribly in this, all things
considered.
But, um, from a big pictureperspective, um, is china
perhaps gonna surprise andencounter?
I mean, could you have asituation where the us enters
(37:41):
recession and China recovers?
Because I would think that'seven more fuel to the commodity
fire.
Speaker 2 (37:48):
Well, that's a good question.
I think the timing for beingbearish on China was five plus
years ago, amen.
I remember we were very deepinto shorting Chinese banks and
real estate companies at thetime.
Back in the days, it wasdifficult.
(38:09):
I remember having to speak withor actually create an
instrument from Goldman Sachs sowe could short it almost like
the big short really big short,really, and uh, and, and the
main reason was because thesecompanies would get suspended
and you couldn't really uh getout of your trade, uh and so, uh
(38:30):
, it was a scary moment for forsome time, but it now, I think
you know, people have finallyrealized a lot of these
companies sunac and evergrandand so forth have all gone, um,
if not bankrupt, very close toit, um, and now the banks are,
you know, have already collapsedin prices most of the regional
(38:51):
banks and, and the large banks,and you saw changes in
consolidations and so forth.
Um, you know, it shocks me alittle bit that the Chinese yuan
didn't weaken more.
To be honest, I thought it wasgoing to see more of that.
Now here is an insiderperspective.
You know what we sell in termsof metals.
(39:13):
I mean, what if I tell you thatthere's Chinese demand that is
well above the prices that arebeing bought out there by
Western societies, meaningChinese parties coming in and
saying we'll pay this much foryour metal, are you willing to
sell this for us?
(39:33):
Why wouldn't you?
I mean, it's like we're talkingsignificant percentages, higher
than everybody else.
So it is interesting that theyare stockpiling metals to in a
way that we haven't seen in along time, and I have.
I was, you know, I followmarkets from a data perspective
(39:56):
but also, you know, running thisother uh mining company and
helping to run that you.
You can kind of see that from,you know, from uh front seat
role of of what's happening andit's uh, it is kind of
remarkable.
I, you know, I did my own mathof how much potentially china is
(40:16):
buying I'm sorry how much goldhas gone up versus how much has
been disclosed of purchases ofcentral banks, and the math
doesn't add up.
Meaning I think there's, youknow, we're looking at GLD and
other instruments that should bebenefiting from this movement
in gold, and to me it seems likethere's a lot of undisclosed
(40:39):
purchases of gold that are muchmore relevant than what it's
been disclosed.
And so this whole, all thesecharts that I also share, charts
of, oh, china's buying gold andall that they're kind of
irrelevant because the purchasesare much bigger than what has
been shown in these charts andwe don't know how much it is and
who is buying.
But we know there's a buyer andI mean it wouldn't shock me if
(41:03):
there's a Western societyactually buying it and not
disclosing it.
I mean it wouldn't shock me.
So I don't know, it's sort ofbizarre Because from being in
this mining company as well, youcan kind of see that these
demands are off the charts.
You can kind of see that thesedemands are off the charts, and
but sometimes prices are notreflecting those demands either.
(41:24):
So, which is funny, I mean, youknow, you see silver prices
weakening and so forth, allsorts of things, and you know,
while there's a large buyer outthere that continues to buy it
every time it falls and and so I, I don't know, I think the
(41:47):
sides on the wall that this isthe early stages.
But you know, I think it's partof it.
The skepticism that is sharedby most communities is part of
it, and maybe this liquiditythat could potentially come from
China from your point could bean extra tailwind that nobody's
actually expecting, and I thinkthat there is a possibility of
that, and you know,fundamentally, some of these
other countries that have highexposure to metals are also
(42:14):
doing better.
And, lastly, the last thing Iwould point out is there are
jurisdictions that people arenot paying attention to.
my name is michael guy at, publisher of the lead
lagarboard.
Join me for the rough hour ismr tabi costa.
Uh, tabi, introduce yourselfthe audience.
Who are you, what's yourbackground, what we've done
throughout your career and uh,are you loving this market
action now?
Speaker 2 (00:21):
isn't this what we live for?
Macro seems so boring usuallyand then all of a sudden things
get really interesting.
But yeah, I was out to manage aglobal macro portfolio here at
Kresge Capital and then we alsohave a long short portfolio.
But I've also been very, veryinvolved with the commodities
trade.
We manage a fund in theexploration, development and
(00:43):
production side of mining mostlyexploration right now and some
development stories and I'vebeen very involved in
acquisition of private companiesas well in the mining space,
and so my involvement withcommodities is a little larger
than usual.
A little larger than usual.
But that's because of also mybackground in the macro.
(01:08):
That, I think, helps us to haveconviction on this long-term
idea that we identified a fewyears ago and continue to be
deploying capital into the space.
Speaker 1 (01:21):
Is what's going on macro or is it more structural,
mechanical?
So I say that purposely becauseyou know, it seems to me that
this is an element of both.
The macro is around the factthat you had Japan being late to
the game as far as raisingrates, so there's a mismatch of
the monetary cycle from themrelative to all the other
(01:42):
currencies and countries outthere.
But at the same time this feelsmechanical, which you know,
almost like a margin.
How do you think through sortof the last several days here?
Speaker 2 (01:52):
Yeah, I think we're all trying to understand what
exactly is causing this andoutside of the most obvious
answers, which is mega caps andthe yen, all through positioning
being very extreme, you know.
There's also the idea that, youknow, we've flipped from having
no interest rate cuts to nowpeople starting to believe again
(02:13):
we're going to have multiplecuts.
And in my opinion, you know,after diving in, it's just
difficult because you have yourshort-term median views on macro
and also your long-term views,term medium views on macro and
also your long term views.
My more kind of medium longterm view is that which I find
it fascinating to see, by theway, is how we're seeing these
big declines in equity marketsand the dollar is not really
(02:37):
rallying and, yeah, the yen isone big trade.
But there's other things aswell happening in that world
Emerging markets that areoutperforming S&P 500.
There's a few things that arekind of remarkable, even some
commodities.
You would expect a lot more ofa painful environment and it's
not really what we're seeing.
And so to me, when I step backand look at the macro data, to
(03:00):
me it seems like the Fed policyis inconsistent with the amount
of leverage we have, and this isan unpopular opinion, the fact
that the debt problem ismanageable Very unpopular.
I guess it's very manageable.
What is not manageable is howmuch we're paying on the
interest payment relative to GDP.
If you look back in any othercycles of reserve currencies and
(03:23):
all sorts of things, theBritish Empire had over 200% of
that to GDP.
Some people will talk aboutJapan.
Japan's case is a little bitdifferent because it's not the
reserve currency, so maybe ithas to manage that a little bit
differently.
But even from the standpoint ofhaving this sort of leadership
role that the dollar hasworldwide, but even from the
(03:45):
standpoint of having this sortof leadership role that the
dollar has worldwide, it isremarkable that we have interest
payments that close toestimates for 2025, approaching
5%, and the rest of the world isjust not there at all.
Japan, as an example, is like0.something percent right now
0.5%.
If you look at other places,you know Germany or you know
(04:06):
Canada would be other, you knowgood one to look at, australia,
even the UK are, you know,significantly smaller
percentages than the US and youknow that research itself kind
of branches out to a lot ofideas.
You know thoughts about,thoughts about.
Can the US really keep thisgoing?
(04:26):
Does it really matter thisobsession that I have, you have,
everybody has about labormarkets and inflation?
Do they really matter?
When it comes down to thisinterest payment relative to GDP
and trading currencies?
For some time now, and lookingat things for a long time in
terms of history and what matter, I don't think interest
(04:48):
payments relative to GDP hasreally mattered historically.
And talking about the dollar inthe 90s versus the yen, and so
all these things are starting tomatter now, I think that's just
the beginning.
Now, I think that's just thebeginning.
(05:13):
I actually think that thatinconsistency of the Fed is
reflecting on the sell off ofthe dollar, because the interest
rate policy has to be adjustedrelative to the world, as you
mentioned.
And if that's the case, this isdifferent than those other
cycles, which is a weirdsentence to say.
But because it's neverdifferent this time.
Because it's never differentthis time.
But looking at this from thoseoptics, yeah, the yen is maybe.
Yeah, this has been a big move,and when those things happen in
(05:34):
the short term, you don't wantto get caught up in another big
move on the other side.
But long term, medium term, I'mvery bearish to dollar versus
other fiat currencies, and thisis my first time of somebody.
I tweeted this and somebodysaid hey, you had this view for
many.
No, I never had this view.
I had the view of long gold.
(05:54):
I've never been bearish on thedollar versus other fiat
currencies.
This is a new view for me.
I have new territory in termsof adjusting my opinions, and so
I definitely think that thereare, after a big move we had
recently.
Now I wouldn't be betting onthose things short term, but it
is interesting how the behaviorof the market has changed.
(06:17):
It reminds me a little bit ofthe COVID crash, when you didn't
really see treasuries rallyingon the back of that market, and
so this is a little bit likethat in my view.
Speaker 1 (06:29):
That point about interest payments not mattering.
They haven't mattered becauseof negative rates.
Yeah, exactly About themajority of our history.
Right, and I want to relatethat actually to a post you put
out, because I think it'sactually interesting the way you
framed it on X, where you showa chart of the NASDAQ 100 year
to date, which is still positive, and your point is how can
(06:51):
anyone call for emergency cutswhen the NASDAQ is still up for
the year?
I want to relate that to thediscussion around negative real
rates, because it seems like thepolicymakers need an excuse.
How could you possibly dealwith these interest expenses on
the government debt side withrates where they are relative to
inflation?
Speaker 2 (07:10):
Well, I said it didn't matter as well, because I
was in a macro discussion withsome really smart guys and when
I mentioned the net debt andthat interest payment relative
to GDP, this really smart guy,which was actually part of the
Market Wizards book, came out tome and said that doesn't matter
(07:34):
, it has never mattered, it'snot going to matter.
I said look, I understand.
I mean, this is sort ofentering those kind of new
territory environments where wedon't really know how markets
will behave.
But in my opinion, this reallymatters.
Actually, it matters a lot morethan any other thing, and your
(07:55):
point is right.
Negative rates have played arole into making this irrelevant
for a long time, but now thisis very inconsistent, as I said
before.
And so, if we think about thisI thought about this more
mechanically in terms of well,if we do have interest rates
(08:17):
having to be adjusted, what havewe done in the past to fix that
problem?
Well, you can talk aboutradical changes like debt
restructuring, which I don'tthink we're there yet.
Usually you get there when thedebt is not manageable.
That's not the problem here.
The debt is manageable.
We can still add another 70% toGDP on the debt.
(08:38):
Looking back historically, wecould do that.
All we need to do is adjust theyield and make it a banana
republic environment, which islikely the case, and so that's
why I'm in an inflation camp forthe long term.
Because I think that's a Fedmember a former Fed member,
actually a former Fed employeecame up to one of my tweets and
(09:01):
said hey, you know, tavi, that'snot the solution.
I'm not proposing any solution.
I'm just talking about markets.
What's the path of leastresistance?
It's, you know, it'smanipulated yields, in my view,
and inflation, and it's just noway around this.
Or do you want another GreatDepression?
I don't think anybody wantsthat.
So you know, it's just the pathof least resistance here.
(09:24):
So you know.
So by no means I'm offering anysolution to the problem.
I'm just talking about marketsand you know, it is of my view
that, if we think about thisfrom the 1940s environment as
well, we actually had to reach aprimary budget surplus at that
time, which, for those thatdon't know what is primary
(09:45):
budget, that just means takingthe deficit and taking it out,
excluding interest payments onthe debt.
So what are you really spendingin the economy?
And today, if you look at theprimary deficit of the US so
excluding interest paymentsrelative to the rest of the
world's normal deficit.
So, including interest payments, we're still spending more than
(10:06):
the rest of the world's durabledeficit.
So, including interest payments, we're still spending more than
the rest of the world, which iscrazy.
Or the other way to think aboutthis what has really benefited
the US economy versus otherparts of the world since the
global financial crisis and whyhave we seen this really big
divergence of growth, not onlyin the economy versus, but also
in the equity markets of the USversus the rest of the world?
(10:27):
And I can make the case yeah,that's technology and all sorts
of things, but really comes downto how much we spend on the
fiscal side relative to thoseother economies.
I mean, we're talking probablyaverage outside of the US is
probably 3% or so.
The US alone has done close to8% deficit, you know, annually,
(10:50):
all the way back to the globalfinancial crisis, which is a
huge number.
It's a huge difference, and sothat interest payment eating its
way into the overall deficit is, which is now close to 60% of
the deficit, the deficit, youknow it's probably going to have
an impact on growth if youthink about that.
Um, and so I am of the view thatyou know, this physical
(11:13):
dominance that people like totalk about is really coming from
the us.
It's a fiscal exceptionalismand saw you know that that that
comes down to?
And can we keep that going,moving forward?
I think that's one of the mostcontrarian views out there is
can we see austerity in the nextthree years or something along
(11:34):
those lines?
Can we hit a wall here of debtat some point?
And again, not debt, butinterstatement on the debt.
I think we're getting close toit.
I think we're getting very,very close to it.
So, and I think those things aregoing to have impacts of growth
, are going to have changes infx, which hence my view about
dollar weakening versus othercurrencies um, that's not an
(11:57):
extreme view about the end ofthe dollar reserve currency
status and all sorts of things.
So don't even know for thosethinking about, don't even go
there, because that's not myopinion at all.
It's just a point about threeto five years in the markets and
uh and, and how things areshaping up for gold is really
really interesting, because youknow when you think about what
unleashes markets in terms ofthose dollar weakness trends
(12:22):
that we can see in three or fiveyears.
It's really really interestingstuff that could happen here.
Emerging markets can do verywell.
You can see their naturalresources, gold and all sorts of
things that have really laggedsort of changing the dynamics of
the market.
Speaker 1 (12:40):
So I'll bring up a post from Toll on X when would
you put your money today?
Or what would you put yourmoney in today?
And I want to relate that.
I know we're talking about gold, we're going to hit on that a
little bit more, but I want torelate that to this great chart
you always put out, which isgreat for context, which looks
at the commodities to equitiesratio.
Ok, historically, going back tothe 70s, explain for the
(13:03):
audience what this shows.
Speaker 2 (13:06):
Well, I think this goes back to an idea of Senzel
that said no great money is madeon lack of capital, interest
and access.
Actually, the lack of capitaloverall is an attention from
investors is what createsinefficiency and it creates
great opportunities.
So if you put that idea into amore, you know, pragmatic
(13:28):
approach and think about what'shappening with technology and so
forth, you know there is nolack of interest, there's no
lack of capital.
I mean, there's actuallyexcessive capital and so it's
hard to make those big bucks andtry to make great money in
those parts of the market.
And my understanding from youknow I started, you know I had a
view about looking at thatchart that you referred to and
(13:51):
started having a view about realassets and owning tangible
assets.
And a few years ago, and Istarted to think about okay,
which one should I own?
You know, is that the housingmarket, or should I buy
commodities, or should I do?
What commodities Should I do?
Energy, agricultural, metalsand mining?
What I, you know, started tounderstand was that the capital
spending of these industriesreally matter and the timing to
(14:14):
put something to go fromexploration to production also
really matters, and the timingto change the supply of
commodities is, it's even moreimportant, and so what I
realized is that the metals andmining industry have the longest
cycle because of that, and sothat attracted me immediately,
and public markets have beenbroken in terms of the mining
(14:36):
industry for a while now.
In other words, the improvementof fundamentals don't really
reflect the inequity prices.
I have my own theory of whythat's happening.
But to go back to your question, where should I put my money
into it?
Look, what I've been noticingmore and more is that these
private deals in the miningindustry are becoming more and
(14:58):
more attractive.
Can buy a mining project, atier one, tier two asset
nowadays that has a productionof gold that could be producing
hundreds of millions of freecash flow, and having access to
that cash flow is to me, I think, one of the best ideas out
there, because you're basicallybuying these mines for one to
(15:19):
two times free cash flownowadays.
You can lever that trade byusing, you know, doing leverage
buyouts A lot of there's.
You know, we know of a fewpartners that are looking to buy
gold, silver, copper from thosemines.
They're looking to financethose deals as well, and so, you
know, I don't think it's sortof unheard of an industry that
(15:43):
is being out there.
You can, or a business that youcan buy for two to three times
cash flow at current gold prices.
Actually, I should correct that, which is my view.
Why the public markets arebroken is that if you dive into
a mining industry the miningindustry today and dive into a
mining business, you're going tofigure it out that Most of
(16:04):
those forward earnings andmarkets trade in forward
earnings, as you know very well,I think, about those
assumptions.
They have assumptions that theymake the gold prices they're
assuming or considering in thenext five years.
We're talking about 1,800,1,700 gold prices in some of
(16:24):
these commodity businesses andso that's all my view.
I don't think gold prices aregoing to be at $1,800 in five
years from now.
So that's sort of an arbitrageif you think about it.
In fact they're being sold as$1,800 today at current gold
prices of $1,800.
And if you apply just normalprices now at, call it, you know
(16:47):
22, 2300 gold prices.
The changes in for cash flow arevery significant and it changes
the NPV calculation also verysignificantly.
And in fact, if you look at,what causes the suppression of
earnings of most of those miningdeals is basically predicated
on massive inflation of cost,which could be the case, and
(17:09):
then at the same time, deflationof metal prices, which to me
that's ludicrous.
And so if somebody is pricingan asset at that way, we all
like to be great negotiators,but the market is negotiating
for you, you don't really haveto do anything.
So you know there is a, as Isaid, there's inefficiencies in
that space and so not a lot ofpeople know how to navigate it.
(17:30):
Who is selling those assets Iwant to know.
So a lot of folks are not inthe industry, are not aware of
those deals and so those.
I think that applying theventure capital approach into
the mining industry has neverbeen so interesting to me, and
so I've been really trying tolearn what the technology space
(17:51):
that's done so well in the 90sand so forth and what created
that flood of capital that cameinto the space at that period,
and try to recreate this in themining industry, but obviously
try to get positioned as much asI can first, and I would love,
I would welcome a shakeout inthe gold price in the next six
months so I can get a round ofdeals done, but that's where my
(18:13):
capital and my attention isreally going after.
It's not trying to be too cuteabout where Fed funds rate are
going to be six months from now,but rather focus on this big
opportunity of buying businessesat two, three times free cash
flow with gold prices at $1,800.
You know, and to me I can'tfind anything else better than
that.
Speaker 1 (18:34):
It's an interesting observation from Thomas on
LinkedIn.
Talk about mining.
The only copy is making certainit's cash flow with CapEx
deducted and not EBITDA.
Maybe talk about some of thenuances of fundamental analysis
when it comes to mining stocksrelative to tech stocks, for
example.
Speaker 2 (18:51):
Well, that's a good point, because you know the
CapEx and I never look at EBITDA.
That's why I never mentionedEBITDA.
Especially in the miningindustry, you never want to
mention EBITDA.
But looking at the CapEx, youcan break it down to two things.
There's really reclamation cost, right, what's going to cost
you to close that mine, and thesustaining capital or the capex
(19:13):
that might be necessary toeither stay in production or
expand that production.
So you have to understand theprofile of the mining deal is to
be sold, obviously, andunderstanding what the capital
needs are of each of those deals.
They're very different fromeach other.
(19:34):
Now I like to find deals where Ican.
You know.
First, I I have a view aboutthe, the geology in terms of the
exploration potential.
That's number one, becausethat's going to add to the
ounces in the ground that youcan then expend the production.
Number two you want to makesure that the closure costs.
(19:54):
Usually these deals are beingpriced as what we call
reclamation project.
That asset is being basicallyunder the assumptions that this
asset is going to need a certainamount of capital until the end
of the mine life and some ofthese projects that are being
(20:17):
sold today that havehypothetically, mine lives of
seven years, eight years are themost interesting ones because
if you're able to have adifferent view about the
duration of it, meaning maybeyou can add double the mine life
, which is very usual,especially if it's an asset that
is under the umbrella of alarger company and that larger
(20:39):
company is not giving enoughlove to the asset that it
requires in order to find moreore.
The improvement and efficiencythat you can add to as a new
buyer could not only add to theduration of the mine life, but
also effectively change theentire business model and
(21:00):
meaning.
You know the NPV could.
You can be adding multiples ofthe NPV from that perspective,
and so that's where I think itbecomes very attractive.
And, plus, if there was ever atime to be looking at bolting on
all these ideas and creatingthe next major, it's right now,
(21:21):
because majority of people arelooking at Barrick, newmont and
all sorts of other large minersand looking at the share price
and being very discouraged by it, and I don't blame anybody for
doing that.
But the real opportunity is notin the share price of these
things, although they can dovery well.
The real opportunity is beingable to put together these deals
(21:42):
where you can buy it for reallycheap, own a very large
percentage of the business,keeping it as tight as it can be
, finding the strategicinvestors that can be part of
those deals and have access tothe free cash flow and then bolt
on to that because now you havea balance sheet.
And, just to give somebackground, I was very involved
(22:04):
and I am a large shareholder ofthe seventh largest silver mine
in the world and it's a privatebusiness and no, we don't care
about what people think aboutthe business itself.
What I know is that we haveaccess to the free cash flow of
it and for every dollar thesilver goes up, the leverage to
(22:25):
the free cash flow standpoint isreally significant, and so
using that to sort of break outand buy more mines is definitely
, I think, that I don't thinkanybody's really paying
attention to and I yeah, I meanit's really hard to actually pay
attention to the macroenvironment right now because
(22:47):
all these opportunities areshowing up and I would love a
recession to happen, because Ithink that could create an even
more sense of urgency from thesecompanies to selling these
assets that they don't want.
And the big idea is, as we'reseeing, some of the mergers
happening across most of the bigcompanies in the mining
industry, especially the oilbusinesses, are seeing the same
(23:08):
thing.
When two big companies merge,just so people know, what
happens is their tier two assets.
They become irrelevant to thatfusion of those two companies,
and so that's where you see thesales of these assets that tend
to be highly attractive.
And so I'm putting all myefforts on this, because I
(23:31):
definitely think this is one ofthe best opportunities I've seen
in my career.
Speaker 1 (23:38):
So there's the behavior of gold in fear moments
, flight to safety, and thenthere's the behavior of gold
from a very long-term cycleperspective.
Let's talk about the cycle here, a very long-term cycle
perspective.
Let's talk about the cycle hereas it relates to gold in
particular.
I'll share another post you putout which is a great look at
unemployment rate crossing abovethe 24-month moving average and
(23:59):
recessions afterwards.
Historically, I've made theargument that gold's demand will
pick up because largeinstitutional players do not
short, they're long only, and ifthey're long only and they're
bearish about the cycle, theytry to allocate to
non-correlated assets.
There aren't that many.
Gold happens to be one of them.
Draw the link betweenvolatility in risk on assets and
(24:24):
gold and typically, how doesgold behave in general when you
have a recession?
Speaker 2 (24:33):
That's a good question, because I think when
people say well, historically,gold doesn't perform well in
recessions, I'm not even surewhy they use the word
historically, because if they'rejust looking back, one
recession historically to memeans looking at multiple
recessions.
As we all know, we've had manyof those in history and there
were many times in history wheregold actually rallied
substantially despite thedownturn in the markets.
(24:54):
And I think it really comesdown to a lot of things Like,
for instance, there are cycleswhere we have a recession where
investors are heavily investedin equity markets in the US.
There are cycles when it's theopposite Markets are very frothy
outside of the US.
This is a classic one thatlooks much more like the tech
(25:16):
bubble kind of environment fromthat perspective, where markets
really are frothy.
If you look at valuations of UScompanies versus other parts of
the world, if you look at the,you know the sentiment of the
dollar, uh, you know what's beenhappening with treasury markets
recently selling off, whenmarkets, uh, also are volatile,
and you know, during those timesthe mining industry did very
(25:40):
well.
Gold did very well too.
So I am also of the view thatif you look back during, you
know, if you look one of theview that if you look back
during you know, if you look,one of the best, most reliable
indicators although thiscontrarian, I guess this labor
market one that you were showingis also very reliable Yield
curve inversions is a great one.
You know, when you deeplyinverted yield curve and you
(26:01):
started seeing a steepening ofthe yield curve, well, that's a
recession signal.
Then some people will getreally technical and say, well,
is this a bull stipper or a bearstipper?
It doesn't really matter.
We actually had bear steepenershappen in the 70s and it was
also a recession.
So really it comes down to thesignal of actually going
inverted and then steepeningagain.
(26:22):
And if you think about thosetimes, we did a comprehensive
analysis of this, looking at allpossible yields and the yield
possible spreads in the yieldcurve.
There's 45.
I presented this to the IMF nottoo long ago or about a year
and a half ago, where I talkedabout not just the percentage of
(26:42):
yield curving versions but whatcomes out of that yield
percentage of yield curveinverse.
Number one is recession ishighly likely.
But really is the gold to S&P500 ratio in the next call?
You can look at this in 12months, 24 months windows and so
forth, and the biggest tradesthat you tend to see during
those times is actually at timeswhen we have that are similar
(27:04):
to now, where the cycle ofcapital is really deeply
involved with the US marketsversus other parts of the world,
which is similar to what we sawin the tech bust, for instance,
and during those times, thegold to S&P 500 ratio performed
really well.
So, to your point aboutvolatility, I am a believer that
(27:25):
we're going to see this again,and it's interesting that the
S&P 500, now priced in goldturns, hasn't really gone
anywhere in the last, you know,probably since 2017 or so.
If you look at the Dow Jones,it started to already decline,
but the Dow Jones is lessrelevant than S&P, arguably, and
so, you know, I think that thatidea could potentially work
(27:50):
here, and so I'm, you know,paying close attention to gold.
And lastly, what I would pointout is the volatility of gold
versus treasuries.
You know it's the first time in45 years that gold is less
volatile than US treasuries.
It's the first time in 45 yearsthat gold is less volatile than
US treasuries.
Don't look at just today.
I'm talking about five, threeyears of movement, and if you're
(28:11):
running a patient fund or anytype of asset allocation that
requires a defensive asset, andyou're seeing the constant
decline in volatility oftreasuries.
You're starting to take note ofthe benefit that gold could
actually bring to your portfolio, rather than Bitcoin that has
(28:32):
almost always trades with a 3xon its back versus Nasdaq.
So, whatever you want to knowwhat Bitcoin is doing, just look
at Nasdaq and multiply by threetimes, and that's usually
(28:56):
what's going on.
In fact, yesterday I was reallyfunny See, nasdaq was down 5%,
and then I see Bitcoin down 15%.
I'm like, oh, that my view.
Central Bank's buying gold.
They're not net buyers oftreasuries, as we used to see
before, and when I say net buyer, it's buyers relative to how
much is being issued, not justhow much they've been buying
recently, I guess is a biggercalculation to me, and they are
(29:19):
definitely net buyers of gold,and so those things are starting
to shape up and will change thevolatility profiles.
Well then, my final point isthat if you are of that view
that gold can reach $3,000,$5,000, $10,000 an ounce one day
, I think it can reach stupidprices.
Personally, imagine what I saidabout those mining companies,
(29:40):
that you have control of thefree cash flow and what is the
NPV of a mine that is being soldfor $300-$400 million?
That actually makes $300million every year in cash flows
, free cash flow.
So I don't think you can findmany businesses like that with
potential growth right.
I mean, there's real growthhere.
It's not like an industry thatis dying and it will probably go
(30:03):
out of business here soon.
There's definitely growth here,potential if gold prices take
off to levels I think it could.
So I don't know.
To me it's almost as close toan arbitrage as it gets.
Speaker 1 (30:20):
It's a comment on X from CrashCoin, which actually I
want to tease out, the rotationfrom the metaverse to the
metalverse, which is actually agood way to frame it.
But where I want to go withthat is how important is it for
tech momentum to break for thereto be some real flow of funds
into the metal space?
Speaker 2 (30:42):
Well, I think that to answer that question, it would
be probably a decline in equitymarkets, a reckoning in equity
markets that would cause themining space to resiliently
behave.
And I'm not saying going up,I'm just saying not going down
as much as the market.
So, you know, relativeperformance improvements that
(31:07):
will cause people to think, hmm,if metals and mining companies
and industries have performedthis well during the recession
and a downturn, imagine what itcould do in the back of a normal
market.
I think that's what it takesand we saw some of that in the
early 2000s.
What I cautioned people in theearly 2000s about, about the
(31:31):
metals and mining industry, isthat this is a different
environment than back then fromthat perspective is, you know,
and uh, in terms of the extremesthat we have, in terms of the
CapEx trend is much more severethan we saw back during that
time, and I will also point outthe fact that deglobalization
(31:51):
trends may exacerbate this a lotfurther than back in those
times.
People like to talk about Chinabeing a large buyer of
commodities.
Now, imagine if we have G7economies actually financing
those purchases today, ratherthan one country having seven
economies or more.
I think that's possible.
You have the on-shoring.
(32:12):
You know it's the irony of AIbeing deflationary when you have
to build all these.
You know data centers and sortsof things and that
infrastructure and theelectrification, also from a
standpoint of you know thedemand of electricity that we
needed from the AI revolutionand all the electrical grids
(32:36):
that need to be revamped.
You know all those things aregoing to require a lot of metals
and that's inflationary, notdeflationary at first.
So until we build everything inorder to take advantage of AI,
it's probably going to be a lotmore inflationary at first until
we get to the results of AIactually causing prices to
(33:00):
become more subdued.
Speaker 1 (33:01):
I'm glad you mentioned it because I've been
on that kick also, actuallycausing prices to become more
subdued.
So yeah, I'm glad you mentionedit because I've been on that
kick.
Also, I don't recall any othertechnological revolution where
it could conceivably actually beinflationary for a while
because of that electricitydemand, because of that energy
demand.
I don't think there's ever beenan example of that in history.
Speaker 2 (33:20):
Yeah, it's a good point.
I mean I was looking more froma standpoint of infrastructure
spending not necessarily theelectricity, but that's a good
point and from infrastructurespending as well.
To your point too not even theMarshall Plan, which was a
global spending ofinfrastructure, doesn't get
(33:42):
close to what we're seeing inthe U Plan, which was a global
spending of infrastructure,doesn't get close to what we're
seeing in the US alone relativeto global GDP.
And imagine if other countrieswill, you know, add to the table
which I think they will interms of infrastructure spending
, and this is going to be, youknow, probably very big changes
(34:03):
in terms of constructionspending but also the demand for
those things over time thatprobably will create the demand,
the long term.
You know tailwind that we maysee for metal prices just from
the demand alone, not, you know,completely forgetting about the
supply side of it.
And you know, for those thatdon't know, the supply side of
it, that's the scary part to meis is the fact that you know we
(34:28):
just don't have enough.
I mean, I work with a lot ofpeople in the mining industry
and look it's, I have a lot ofprojects and I don't have people
to run it.
It's a problem.
You know that's the issue.
We don't have enough peoplethat know how to run a mining
company, people that have enoughknowledge about it, and we're
not going to see that changeuntil we see metal prices
(34:51):
improving drastically.
That also causes a boom in themining industry.
Those booms create excitementthat then create interest from
young people and wanting tobecome geologists and all sorts
of things.
I have a daughter.
If my daughter was actuallygoing to college right now, I
would certainly just tell herwell, look, the geologist space
(35:15):
looks really attractive rightnow and you should consider it,
and I would certainly considerthat because it's a geoscience
space.
In this environment ofmulti-year spending, of
construction and lack of metals,to me it seems like also a real
mismatch that needs to besolved at some point.
(35:36):
And now that's something AIwon't fix.
It will actually exacerbate it.
And so I think that there is a.
You know, that's why we seeinefficiency, right, I mean,
that's exactly why you have a.
You maybe copper or silverlikely into a major discovery
and share prices come off out ofthose news, because investors
(36:13):
are seeing this as anopportunity to finally get
liquidity and volumeimprovements, and so they sell
their shares.
And if you're a long-terminvestor, that's what you know
volume improvements, and so theysell their shares.
And you know, if you're alow-term investor, that's what
you love, right, it'sintrinsically that company's
improving and investors are justnot seeing that.
(36:33):
And so, yeah, fundamentally,markets are broken from that
perspective.
And if you are, you know, notpaying attention to the
day-to-day changes inperformances and actually trying
to buy a high-quality asset,what a wonderful time to be
involved with this stuff.
But again, it takes time.
It takes a lot of a hugelearning curve.
(36:57):
I feel like I'm new to theindustry and I've been here for
some time now.
And I feel like I'm new to theindustry and I've been here for
some time now, and I feel like Iknow nothing about this.
And it's a very complexindustry.
Everything you think it couldgo wrong, it goes wrong, and so.
But the margins are becomingreally interesting and I think
we're only getting it startedright now.
Speaker 1 (37:20):
You had mentioned China earlier.
I have written about what Ibelieve may be a bottoming out
process in china's economy andactually I don't think china's
markets have all done thatterribly in this, all things
considered.
But, um, from a big pictureperspective, um, is china
perhaps gonna surprise andencounter?
I mean, could you have asituation where the us enters
(37:41):
recession and China recovers?
Because I would think that'seven more fuel to the commodity
fire.
Speaker 2 (37:48):
Well, that's a good question.
I think the timing for beingbearish on China was five plus
years ago, amen.
I remember we were very deepinto shorting Chinese banks and
real estate companies at thetime.
Back in the days, it wasdifficult.
(38:09):
I remember having to speak withor actually create an
instrument from Goldman Sachs sowe could short it almost like
the big short really big short,really, and uh, and, and the
main reason was because thesecompanies would get suspended
and you couldn't really uh getout of your trade, uh and so, uh
(38:30):
, it was a scary moment for forsome time, but it now, I think
you know, people have finallyrealized a lot of these
companies sunac and evergrandand so forth have all gone, um,
if not bankrupt, very close toit, um, and now the banks are,
you know, have already collapsedin prices most of the regional
(38:51):
banks and, and the large banks,and you saw changes in
consolidations and so forth.
Um, you know, it shocks me alittle bit that the Chinese yuan
didn't weaken more.
To be honest, I thought it wasgoing to see more of that.
Now here is an insiderperspective.
You know what we sell in termsof metals.
(39:13):
I mean, what if I tell you thatthere's Chinese demand that is
well above the prices that arebeing bought out there by
Western societies, meaningChinese parties coming in and
saying we'll pay this much foryour metal, are you willing to
sell this for us?
(39:33):
Why wouldn't you?
I mean, it's like we're talkingsignificant percentages, higher
than everybody else.
So it is interesting that theyare stockpiling metals to in a
way that we haven't seen in along time, and I have.
I was, you know, I followmarkets from a data perspective
(39:56):
but also, you know, running thisother uh mining company and
helping to run that you.
You can kind of see that from,you know, from uh front seat
role of of what's happening andit's uh, it is kind of
remarkable.
I, you know, I did my own mathof how much potentially china is
(40:16):
buying I'm sorry how much goldhas gone up versus how much has
been disclosed of purchases ofcentral banks, and the math
doesn't add up.
Meaning I think there's, youknow, we're looking at GLD and
other instruments that should bebenefiting from this movement
in gold, and to me it seems likethere's a lot of undisclosed
(40:39):
purchases of gold that are muchmore relevant than what it's
been disclosed.
And so this whole, all thesecharts that I also share, charts
of, oh, china's buying gold andall that they're kind of
irrelevant because the purchasesare much bigger than what has
been shown in these charts andwe don't know how much it is and
who is buying.
But we know there's a buyer andI mean it wouldn't shock me if
(41:03):
there's a Western societyactually buying it and not
disclosing it.
I mean it wouldn't shock me.
So I don't know, it's sort ofbizarre Because from being in
this mining company as well, youcan kind of see that these
demands are off the charts.
You can kind of see that thesedemands are off the charts, and
but sometimes prices are notreflecting those demands either.
(41:24):
So, which is funny, I mean, youknow, you see silver prices
weakening and so forth, allsorts of things, and you know,
while there's a large buyer outthere that continues to buy it
every time it falls and and so I, I don't know, I think the
(41:47):
sides on the wall that this isthe early stages.
But you know, I think it's partof it.
The skepticism that is sharedby most communities is part of
it, and maybe this liquiditythat could potentially come from
China from your point could bean extra tailwind that nobody's
actually expecting, and I thinkthat there is a possibility of
that, and you know,fundamentally, some of these
other countries that have highexposure to metals are also
(42:14):
doing better.
And, lastly, the last thing Iwould point out is there are
jurisdictions that people arenot paying attention to.
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