AI's Secret Cost: The Inflation Trap Markets Are Missing | Tavi Costa
Summary
Is the “Build Phase” of the AI revolution creating a structural inflation shock the market is ignoring? Tavi Costa, Founder and CEO …
Transcript
Welcome back. I'm Jeremy Sappern. The physical metals market are undergoing a massive structural shift right under our noses. According to the European Central Bank, gold has just officially surpassed US treasuries become the largest share of global reserves. Now, let that sink in. At the same time, silver is staring down a projected 46 million ounce shortage this year. And copper supply chain is being choked off right when the global AI boom needs it the most. Now, while the physical supply shrinks, the mining sector is responding with multi-billion dollar M&A instead of possibly breaking on some new ground. Joining us to map out all these structural shifts and to track exactly where capital is flowing is Tavi Kusty, of course, macro strategist, founder and CEO of Aurora Capital, and someone who's closely been tracking the collision between, you know, the rising global debt, the tightening physical supply. Tabby, welcome back to the show. Good to see you. >> Thanks for having me. looking forward to this conversation. >> Uh me too. I mean it comes as an interesting time. Gold back in the headlines and I kind of want to start at the sovereign level and and just look at the math. I mean the ECB noted that gold now represents roughly 20 27% of global reserve assets with US treasuries falling to about 22. Now back in March you noted uh you were on this program and you noted that policy makers and I quote have to act on the debt problem regardless of inflation. I mean, is this massive reserve rotation less about political statement, you know, against fiat and more just about central bank reserve managers simply recognizing that treasuries no longer offer the same risk adjusted role in a portfolio? It it it's a bit of both, but when you think about it, you can you can raise debt as much as you want normally speaking and even relative to GDP. the problem becomes when uh you can afford paying that every every quarter, every month or every year. And we're getting to that point here in the US where you know interest payments to GDP are getting to a level that is well above any other country in the world today. Um particularly countries that are developed economies uh that are more comparable to the US. And the difference here is that we're probably going to see a major suppression of interest rates. We just don't know when. And so this is why when I see, you know, the market really shifting its uh uh views about what Kevin Walsh would do as a new Fed chair potentially raising rates or or chasing inflation uh on the hawkish side. I just don't believe in that at all. I mean, maybe we'll see one rate hike, and I'm wrong here, but I really don't think that should be uh any investors base case uh scenario. The base case to me is uh that we're probably going to see further cuts uh into uh uh into the interest rate uh environment not only the short end but also the long end eventually because the system cannot survive if we see this and so um you know I understand that there's a lot of issues but I think it's important to remember 1940s and other eras where we did see the government having to step in either through yield curve control um or some sort of mechanism uh that manipulate interest rates in the long end and the short end uh in order to reduce the burden on the debt. I I really think that that it's on the cards uh for the next 12 to 24 months. And if you think that way uh there's going to be a lot of changes in in how uh a lot of assets that tend to benefit from the suppression of rates uh will will will work through the system. I would also point out the dollar situation as well. Uh in conjunction with the uh reduction of rates and the suppression of the cost of debt, you're probably going to see also uh weakening of the dollar moving forward. And so as an investor, you just have to be aware of those two factors because they're going to dictate a lot of the uh the changes in the beneficiaries uh that are likely to win in an environment of weaker dollar and suppression of rates eventually here. >> Yeah. No, it's interesting. I mean, I guess so. You don't believe the the hawkish Fed path is kind of credible at these levels? What breaks first if they try it anyway? I mean, is it is it kind of Treasury financing? Is it credit markets, banks, private equity, or is it the labor market at this point? >> It's lots of things, but I would say we're getting close to an emerging markets moment in the Treasury market as well, which means emerging markets often see lots of volatility in their bond market when they start really playing uh with fire. And I think we're playing with fire in the US in a huge way. And so we're getting we're approaching that inflection uh uh point in my view that if we don't address the problem and who knows at what level you know it means that we're going to be addressing the issue uh but also uh dismissing uh the the power that politics uh could have in manipulating rates lower eventually is also uh important to be aware of. Uh what is also important to be aware of is that all of that manipulation has a cost. Cost is inflation. The cost is the basement of currencies. And so this why I keep going back to the idea of you know this environment we're seeing where gold is selling off, silver is selling off which is really just a digestion of a you know massive move we saw recently. That is normal. if if you just follow macro assets, it would be normal to see some sort of digestion, you know, level off uh on the price uh environment and then and then we get back to to normal. And so now we're seeing copper prices begin to move here and that divergence eventually will cause other hard assets to follow as well. You know, it's so important to to notice uh that the big picture hasn't changed and so um you know, the basement of currencies and the hard assets thesis remains as strong as it could be. >> Yeah. Yeah, let's bring this back to, you know, kind of the the retail level. I mean, let's translate this for to to Main Street as well. I mean, we have PCE inflation running at 3.8%. First quarter GDP growth sluggish at 1.6%. I mean, for the retail investor watching their purchasing power road at the grocery store, how do they survive this specific environment of stagnant growth and and and sticky inflation? um it it's going to be very difficult because at the same time you also have inequality issues at levels that we haven't seen since the 1930s. And so usually what you see in this uh combining factors of inflation and inequality or wealth gap problems uh it is it would be normal to see the start of a lot of social protesting and so forth. And I think we're starting to see some of that now. Um I I think politics uh is becoming such a a critical aspect of of macro today, especially in the US uh as we're seeing populism uh grow. Not not not to go too far out of the subject, but you know, just watch what happened recently here with Bernie Sanders talking about taking 50% of equity of AI companies. Now this is this is probably one of the most important changes in in politics in terms of you know a strengthening of a of a narrative uh across uh across that that those supporters uh um that you know it's it's you know it is something to be aware of. I've always said this, you know, one thing is is to allow, you know, uh, Trump, the Trump administration taking positions, equity positions in strategic, uh, industries and so forth. But we all know that equity positions, they live on forever. It's not like when, you know, there's a shift in politics where Trump is out and the next administration is in and let's assume it's not Trump, it's some someone else. um you know where would those equity positions sit on and will that administration be in line with those uh those those policies uh that were put in place by the private administration and look at the power that that new administration will have in those businesses as well. So I do think that that precedent of starting to take equity positions again driven by populism, driven by inequality, driven by the inflation problem you're referring to is forcing those extreme policies that you know I think it's going to be very problematic. And so and and by by no means I think the biggest thing is rule of law and all these changes used to be you know the main difference between the US versus an emerging market economy and the the the you know this the the stateowning equity positions in p in private companies uh or public companies. All it means is is that we're going back to that model that emerging markets were created on. And so it's not news. It's it's we've seen in the past it doesn't end well. Usually it ends with a lot of inefficiencies. It ends with a lot of issues. And I think that gap of valuation between emerging markets and the rule of law economy is is starting to be in check here in my opinion. >> Yeah, it's an interesting topic. I mean you know it it brings us back to hard as hard assets. I mean extreme politics can also attack the mining sector directly through you know royalties, taxes, permitting blocks, nationalization risks as you talk about. So I mean these politics are no longer a side effect of inflation inequality. It's becoming part of an investment cycle it seems. I mean how does that change your allocation between financial assets and and and hard assets? it it it doesn't I think it all it does is actually you know make you think through what are things that also benefit from a shift of prices of those hard assets themselves and it's hard to not consider commoditydriven economies as a as a great place to be investing here and I keep I keep going back to know Latin America had a an incredible run over the last one or two years now it's something I've been very much in front of however we've seen uh in the last uh few weeks or so a big discount uh recently uh in the markets. In other words, a pullback um and the fundamental story has not changed. I love pullbacks that the fundamental story hasn't changed. Um and so when you have those situations, it's the time to be uh acting on on on your positioning in my opinion. And so I've been adding to uh those uh those positions more and more. In other words, emerging markets exposure uh to me is is becoming a bigger and bigger pillar of my own portfolio because of this uh of the situation. And so I you know I think that that's important. A lot of people have been sort of mocking the fact that we haven't seen the US base assets rotation into uh other parts of the world. I don't think that's true necessarily. Yes, US-based assets have done very well and continue to do well particularly on the tax place especially semiconductors and others but it's not like the other parts of the world have not performed well either. Uh you know a lot of these uh other parts like Latin America or emerging markets or even some other developed economies I I suggest you to look at some European banks even uh that have been doing well. And so you know it's not just happening in the US. uh we're seeing actually uh asset prices being inflated in a large way and I think eventually that rotation will happen uh as we see investors looking for things that are fundamentally cheaper. >> I'm going to get into the emerging markets here a little bit later in the interview. First I just got to ask you specifically about copper. I mean I wanted to kind of look at that critical supply bottleneck across the sector which seems like it's rapidly becoming a strategic input for you know AI power demand. We got grid expansion, electrification. I think Google was going back to the market to to get more funding today for this buildout. I mean, prices recently tested historic highs on the copper front that was obviously driven by major operation disruptions at worldclass deposits. I think Grassburg in Indonesia, I think Codelos's El Teniente in Chile. When we look at these localized disruptions, is the broader market underestimate underestimating kind of how fragile the current global production base actually is? Yes. And I I I think we're in the situation right now where sort of silver was uh a few months ago when silver began to really bro break out and sort of reach what we call the price discovery phase. That's where copper is right now. Copper is at a price discovery phase. Nobody knows where that lands, but I think that it is plausible to at least consider uh the idea that copper prices could rise drastically in the next 3 to 6 months. and at least at least you know especially where where we're seeing from levels of today and so I think it's going to continue to drive that and mostly because of what you said I think a lot of people have been trying to justify the the the side of of copper especially on the demand front uh that is starting to be spreading towards the AI trade if you will and of course it is it's electrification it's AI it's also onshoring it's also industrialization uh bringing back manufacturing electrification. I mean, there's still a lot of electrification trends happening worldwide in places like China, for instance, where they don't want to be relying on oil anymore, and they want to be uh having more electrical vehicles and other things. And so, we're seeing that shift happen not just in the US, not just in China, but also in other economies too. And remember another factor that is now taking place which is central banks or I should say sovereign institutions is starting to build on um uh you know strategic uh reserves of of materials uh that are obviously important and essential for their economies and so copper is going to become a part of that. So I I I also think that this supply and demand mismatch is the main driver of prices here in copper overall. And it's so important to see that uh you know I I do think we're going to see the follow up on on on that and eventually the margins of companies because we're now seeing the divergence between margins as well. The margins of gold companies and silver companies is drastically higher today than copper companies. But that's just a function of how much prices of precious metals have run up relative to copper itself. I think I think we're in the process of seeing that shift now where copper companies will also benefit from a better uh profit margin uh which will be historical too in my in my view. >> Yeah, this is a good time to kind of bring up a post and I don't think you'll be able to see it here but the audience will. You were just talking on X. It's been kind of lighting up industry feeds this week regarding this exact supply panic. I mean uh looking at the data highlighted here, you're talking about how copper is now diverging from gold in a meaningful way. I mean, looking at this kind of data, majors are are generating massive cash flow from their existing operations. Yet, they remain visibly almost terrified of deploying billions into green field projects because prices rarely stay elevated long enough to justify, you know, that permitting timeline, capital intensity, energy, you know how it is, political risk at this point. I guess the question is, Tabby, if if if the majors won't build and the juniors can't get funded by generalist capital, I mean, where does the new supply actually come from to to meet this new demand? >> The answer is I don't know and nobody knows. And the the thing is if if nobody knows the answer and the problem is right now the political environment in some areas like the US for instance have become more favorable to build mines and so forth. The problem is we can't build mines in two years or three years. these things, you know, it's it's a view on 15 years from now. And so companies cannot deploy capital if they don't see a long-term run uh for, you know, really uh uh you know to to see that the reasoning for sustainably deploying capital into something that would be uh only cash flowing 1015 years from now. And so it is a very difficult position that a lot of these management companies are. Um I I happen to believe that you know you want to have a mix not just the miners you also want to have the metal here because that repricing uh will be very important and in my view uh for the metal but also in my view the highquality assets that are in place in other words companies that hold those assets they're going to be key for the future here and so uh you know this is the time for a niche investor uh that is able to selectively find these companies that have those assets uh are also also going to be uh incredibly uh uh relevant for uh for for investing in my my two cents. And so that that's where I'm focused on. I'm just trying to you know, do I own the absolutely highest quality assets in the world today? I think I think everyone should be thinking the same way if I if I would mention something and it's not just copper. There are other assets that are very strategic. I I will mention another one that very few people even in your program mention which is zinc. zinc prices um also need to be adjusted much higher. Uh we're seeing supply of zinc at the same levels or a new supply production at the same levels as we saw in 2012. Uh uh and so you know these things uh it's not just the copper market, it's the copper market, the zinc market is is is silver as well uh and even gold itself that often is not mentioned as as as something that we tend to see supply changing. So you usually the end of a commodity market uh tends to happen when supply really, you know, drastically changes. We're nowhere close to that. In fact, we're seeing the contraction of supply uh in in a lot of cases, the depletion of mines, the depletion of reserves. And so I would be um you know, I I I think that we're seeing the rebirth of mining in a large way uh as as an essential part of the economy. And so to me, this is going to be a theme for the next 5 to 10 years. These pullbacks we see here and there are in my view just an opportunity. >> You know I guess it also brings us directly to silver. You mentioned it there just briefly. But I mean it kind of shares a structural supply constraint story similar. I mean it carries that heavy monetary component obviously and according to the the world silver survey the market is projected to record to record a supply deficit of over 46 million ounces this year. Now we know that nearly 70% of silver is is mined as a byproduct of other metals. Higher silver prices do not automatically trigger new primary copper or zinc mines as you just talked about. I mean mechanically, how does this market balance? I mean, are we looking at a forced industrial demand destruction or is it and we've talked about this before. I mean, a violent price adjustment much like we saw those highs a couple months ago. >> Yes, it's likely to be the case. The repricing would probably be on the upside given the supply constraints. And um look, I mean, yeah, we can the other side of this would be a major depression that causes demand to completely collapse industrially speaking and causes metal prices to stay uh closer to the levels that we're seeing today or maybe 20 30% lower. But I I don't see that happening here because I think that the the world, particularly the US, is in a situation where it needs to inflate your way its way out of the of the debt problem. and inflating its way that out of the the debt problem really is a cool word for inflation. And inflation means dilution of money. And dilution of money means higher uh uh particularly hard assets. And so I I really think that uh you know this is this is all particularly the the noise that we see from I like I said the Kevin W situation and all that. It reminds me so much of you know what that when we had the elections back in 2024. I remember this so well. I put out a piece back then which was about how I thought that the dollar was about to peak, the US dollar versus other fiat currencies, which was a very unpopular view at that time. And guess what happened right after that? The dollar actually rose significantly. My position was in danger, if you will, because everyone was basically asking me, well, well, you just said that the dollar is in peak levels and and this thing keeps moving higher. And then the narrative at that time was that Trump and Basset were would be actually very positive for the US dollar. I couldn't disagree more of that view. And then immediately after elections, we saw the reversal of that to my uh my benefit. But boy, uh this is so similar to that period because it's the same thing happening today. Rates moving higher like you know and like I said, they're acting like emerging markets in my view. And so, you know, the moving deck is a great example. You know, you don't tend to see this type of volatility in the bond market without some major disruption in the markets. And so, yeah, I I think I think we're approaching a level where uh the the Scott Basson in its own and his team is going to have to look really deep into this and I'm sure they're looking deep into this and understanding what are the best ways to approach this market to uh calm things down on on the on the Treasury side. >> Yeah. No, the T- bills uh watching the bond market. It's been interesting every day moving with that volatility. I mean, okay, the the physical setup is kind of tight. The equities um tell a story of kind of investor hesitation and industrial I guess you could call it consolidation. Uh M&A has been taking place. Back in March when you were on this program, you explicitly mentioned adding to your position into Ora. Uh we just saw Equinox and Orla agree to an $18.5 billion merger to consolidate output. Uh simultaneously though, Orla is dealing with an illegal union blockade over profit sharing at its Camino Rojo mine in Mexico. Uh how do massive corporate consolidation and and these severe operational disruptions happening at the same time change your assessment of Ora specifically and kind of that broader mid-tier space as a whole? >> Well, it's problematic. There's two types of sell-offs. I mean, just making it basic, right? There's sell-offs where the fundamental story hasn't changed and there's selloffs where the fundamental story has changed and and then you have to reassess. Um I still own Ora but uh it is one of the situations where fundamental story could be changing here. It just goes to show how Mexico is is is is a difficult jurisdiction. I mean this is a stellar team uh um operating in an area where um you know it's it's not easy and we've seen this over and over again um in in that area. It's a very tough jurisdiction to uh to operate. However, putting that all aside, the Equinox and Orla um um combination uh makes sense, you know, makes a ton of sense. It's not necessarily a synergy uh you know, type of merger, though although they have one asset each uh that is uh close by. Um it it it won't, you know, it's not something like they're going to be using uh their facilities to to help each other in that sense. Um but however it is it is a sort of rerating uh thesis where you get to a million ounces uh production a year of gold equivalent and obviously those stories that have those situations with multiple assets tend to uh benefit from that. Now you know asking the question of if the deal is going to go through after this situation with Ora and so forth you know those are all extreme questions I don't know the answer for either. Um, as an investor, I'm watching closely the situation because I do think this changes the fundamental story a bit from the orla side, not from the Equinox side. Of course, if they acquire or it's a combined decision you have to make as an investor. Um, so those are uh that's a situation where it's slightly different from your your selloff in emerging markets or selloff in in in overall mining stocks where the fundamental story has not shifted at all. It's just it's just a sell-off, you know. was just welcome to markets where you tend to see normal noise and you have to assess your uh uh those changes uh and and and act on your conviction when when it's present itself. >> Yeah. Let's talk about jurisdictional risk commit. I I mean looking beyond the balance sheets, we kind of have to factor in these geopolitical realities now. I mean the race for minerals is accelerating. We're seeing Bareric, you know, weighing a London listing to spin off its African business. you've been bullish on Latin America as a defining investment opportunity. I mean, how do you kind of accurately price jurisdictional risk into your models when governments or or local forces can change the rules overnight? >> Yeah, I mean there's this is the risk anywhere in the world these days, but and it's always been the case, but I would say that uh the the big by no means I want to say that Latin America doesn't carry its own risks. I mean it does of course but what I would say to this is that I think there's some inherent uh um you know uh floor of safety uh in those markets just given the fact that uh we are in a crunch for supply and one of the areas that is likely to be that strategic partner of areas like the US is is likely to be Latin America. the proximity is one factor, but also look at the interference we're seeing in all sorts of markets. Uh not just the Argentinian market, but also Bolivia now, uh you know, Colombia and all the all these other places where Venezuela, of course, uh uh Cuba being in in in you know, in a conversation, even Brazil now, uh listing some of these uh gangs as as uh as as as um uh terrorist uh firm uh terrorist organizations. and so forth. And so all these things are beginning to uh uh really infiltrate the the region in a large way, which I think it's positive. I I do think it's positive uh just because uh it's very unlikely to see any uh of those politicians really challenge uh uh the the US administration in a large way. Of course, they're going to challenge on on things here and there, but not in a significant way like we've seen in the past. And so uh you know nationalizing a firm in today's markets well you know I I think that that would be a very difficult uh u endeavor to uh to pursue in in in today's markets uh given what's happening uh in terms of the crunch of supply uh that the US is facing today as well and not just the US but any other place in the world and so I do think that that uh um you know Latin America is going to be in the strategic area uh where where people are going to be investing. Look, a lot of people agree with me here not too long ago. It's so funny how things change, you know, two, three months and then everyone is just like, you know, uh uh panicking just because prices have changed. I I don't I don't work that way, you know. I I think it's it's just like going to a grocery store. Although I I don't go I don't go to a grocery store as often as as my wife does, but what I would say is is when you go to the grocery go grocery shopping and you see something in a discount that is it has value, you buy it, right? It's it's the same thing in the markets. It's just so funny to me how in the markets people approach things differently where prices fall and they just lose confidence instead. It's just not the way I work at least. But >> yeah, you know, it's it's actually it's a good point on on Latam too. I mean obviously it's not one jurisdiction. You got Mexico, Brazil, Chile, Argentina, Colombia. They all carry different risks. Where is the US strategic partner thesis kind of the strongest? And where do you think investors overgeneralizing? I think uh the US is using Argentina and and especially as a kind of a road map for for uh for others to to you know in a way follow and we're seeing a lot of things uh follow in that sense. I mean with the success of the Argentinian economy uh recently and the opening up of that economy and the uh level of investments we've seen and the improvement inflation numbers and so forth is certainly uh uh a factor to be uh know that is I think very noticeable uh and also uh being followed by a lot of other politicians in in other places of Latin America that are looking to chase a similar type of uh partnership with the US uh by giving in a similar uh strategy when it comes to uh their own agenda fiscally and economically and so uh but but places like uh Bolivia are trying to attempt something similar as well. I can speak that for firsthand uh and and you know Chile doing exactly the same thing as well. Um and and so it's it's very interesting how this is happening. Of course, you know, when you see prices really adjust like we saw in the last two years uh uh to those situations, people start thinking that it's going to be smooth sail. It's not going to be smooth sail. Uh it's obviously going to be rocky and volatile. Uh because there is a lot of opposition to a lot of these these ideas in in in those regions as well. And so, you know, right now that that opposition and all that has been more priced into to uh to markets and and therefore why we've seen these pullbacks in a lot of these places and so and now people are overstating that as well now. And so it's normal, you know, it's welcome to my life. It's like I'm just trying to walk a straight line and people just trying to push you in both directions. It's like calm down. You know, things are going to be okay. It's like the oil market not too long ago like you know I think in your show hopefully I I was I share that view eight nine months ago really strongly on look I think companies need to hedge their diesel exposure. I think investors need to have some oil exposure and so forth and then everyone wants to talk about oil going to $300 a barrel and so forth. You know that needed to calm down as well. Now we saw oil come down a little bit. It's just normal, you know. It's just like to walk a straight line, you know, and and in the middle of all these sentiment that we see in markets is it it's the challenging aspect of any investor. And so, yeah, it's, you know, welcome, at least to my life and other people's investors, other investors, they have that long-term mindset. They have to just mute that volatility and and stay focused on the big picture. >> I want to ask you about Argentina there because you brought up an interesting point. I mean obviously you know if it's become the road map. I'm curious what the the lesson for investors you kind of want them to watch because Argentina has improved but it's still a little early politically fragile. I mean you go to the to the cities. I I had family down in Buenosire it's much different than when you go out to the to the countries much like the US and other nations. But I guess my question is is the lesson for investors. I mean is it is it kind of fiscal discipline? Is it deregulations? Is it currency stipulation? lower inflation or or is it opening up the door to foreign capital in in a world that seems populism is winning? What should they take out of what Argentina is doing? >> Well, it's it's certainly those those those are going to be the the main metrics. I think what they've done with the inflation issue is such an important aspect for the population that sometimes is misunderstood. One of the biggest issues for uh you know I I lived in Brazil uh my my almost my entire life and what I can tell you is it's so difficult to win as a as an individual or as a company in that country because the inflation eats your way and um it's so difficult to produce uh or create wealth in a in a in a large and significant way. And so you know that's the challenge and so when you have some level of of improvement on the inflation front that alone is is a huge thing uh in my opinion and that alone also brings a lot of uh uh attention to foreign investors because the biggest risk for foreign investors usually is is of course rule of law and other things but you know add to the fact that there is also a lot of volatility on local currencies as well. So when you have some level of stabil stability on that side of things, you know, certainly it's easier for investors to make or companies to make uh uh decisions on deploying capital into either producing assets or creating developing assets and so forth. And so that's the change that we're seeing Argentina. By no means I think that Argentina is in a great place and everything is done. No, no, no, no. That's not the point at all. There's plenty issues there, you know. So the same thing happening in Brazil. Brazil right now still hasn't changed politically, but not because there's no desire to change. It's because elections happen uh this year. They still, you know, yet to occur. And so once we see that, we'll we'll balance things out. But uh um but we are seeing the contagious effect in other parts of Latin America. And I think that agenda that that narrative at least of being more fiscally uh prudent and so forth is at least, you know, spreading uh its way into Latin America. That's a positive thing of course and so I'm paying attention to that. We're seeing tax regimes being proposed. You know, all those are are changes are, you know, we're moving in the right direction. Let's put it that way. It's not like we're in the perfect place by no means. And we're not going to change the corruption scandals, all that. If you're waiting for that to change to invest in Latin America, good luck. You're never going to see that because it's never going to happen. And now, I hate to use the word never, but it's very unlikely. And so you know it's the net change of things that tends to create a positive impact in prices over time. >> So I mean the investment case is not just resources. It's kind of whether government can restore purchasing power and credibility before social pressure forces a reversal I guess. >> Well the the the the commodity improvement or the resource market improvement I think creates the the activity e economic activity in the underlying economy. That's one thing and then you need to have the stage there to perform which is the political environment. And so you know when you mix both it could be very explosive. So today you go look at a lot of these companies, banks, uh consumer businesses, utility businesses and basically they all have very you know usually singledigit PE ratios and and cape ratios whatever you use to look at uh the price relative to volatil of to um profitability is is usually as single digits are very compressed. And so what what I think people are underestimating is that the underlying economy is growing because of the resource markets. And eventually that growth is going to be embedded in those companies. And those companies are going to start seeing in my view expansion of those multiples caused by changes in fundamentals and also interest from the foreign investors that are looking for better things than buying tech at all-time highs is stretched technically and and just at absurd multiples. And so, you know, I think eventually we'll start seeing smart money, you know, doing that. It's already happening. Smart money is already in those areas in a large way. >> Yeah. Hey, listen, I mean that that gets us from kind of country level reform to state level strategy. I mean, if Argentina is the roadmap for attracting capital, the next question is how governments actually secure the materials they need. I I don't know if you saw this new report. I mean, the US government just committed up to 1.6 billion to back a tungsten mining in Kazakhstan. At the same time, I saw headlines today, China has picked a new state firm to coordinate its overseas mining deals. I mean, we've talked about this before, Tabby, but does does direct government intervention distort the free market for for these metals or or is it only viable is it for them to secure the critical supply chains that they need? Yes, but it's also unavoidable and it's also inevitable and it's also um you know uh I mean we've seen this in the past and um what scares me more in that front and a lot of CEOs and people are chasing that government money without understanding that again leaderships will change uh and you know today might be favorable for mining today might be great for uh having that as a partner to allow things to move faster than it would under other circumstances. But um who knows in the future, you know, uh if if something like I'm not saying Bernie Sanders has a a major uh uh probability of winning next election, anything like that, but those are narratives you need to pay attention to because if that catches on and people really start or the next uh person on the left starts to really uh gain momentum with those ideas, which is possible, again, you're you're seeing inequality at peak levels, inflation, as a problem. So, it's not really out of the uh of the possibilities here that that some people would try to justify those things. And by no means I think that's a good thing. I think it's a terrible thing personally. Um and so, but I I I also as a macro investor need to at least consider that as a as a very significant scenario. So, yeah, it's um you know, it is part of the game. We're living in a game in a world where uh sovereign institutions are under a lot of stress uh trying to uh uh solve a crunch for uh critical metals that uh you know that they haven't really solved in many years and many decades and now they're very dependent on markets that they don't would like to be dependent on like China >> right so I mean you know you can't get the the retail money maybe go after some some government money but so investors the question becomes follow the government capital but only where the underlying asset still works without permanent subsidy. >> Yeah, I I'm not f by no means I'm following the government capital by the way. Um I am I am uh I'm you know trying to do my own thing independently and and looking for high quality assets that I think makes sense to own and so forth and blah blah blah. Um but uh but I also understand that it's inevitable that we're going to see uh intervention or uh um you know governments wanting to get involved in different things. Um you know we're going to see um you know all sorts of uh of of vehicles being created by the governments. Uh uh when I say I say that in plural because it's going to be in plural. uh all parts of of the world are going to be looking to uh get a share of of of of strategic resources that make sense and so it's not just the US and so um yeah I mean as investors uh that will shape markets as well uh but uh overall that just speaks volumes about the level of desperation that we're seeing from sovereign institutions to make sure uh that they can get their hands on on critical m metals and other resources. Um at the same time puts into perspective as well uh that these you know types of volatility in prices that we tend to see here you know are they as relevant as they used to be here in the next last two to three years you know I mean we know that there's sovereign institution capital chasing these things anyways and so my my suggestion is focus on like a laser on these things because uh there's there's going to be in my view plenty returns and performance to be uh um to be getting here in this in these markets. >> Yeah. Yeah. Good point on the Bernie Sanders. I saw that headline. I mean, it's interesting. We're seeing proposals that do not just tax profits but go after ownership itself. Uh okay, let's wrap up by by testing the limits of of kind of this cycle. I mean, uh you previously told our audience that gold does not need or or lead a liquidation rather. um you know when we see a 20 30% draw down in the mining equities which shakes out a lot of retail capital what is the kind of strict factual distinction between a broken investment thesis and a standard market digestion phase you know >> it's you know probably not a price um analysis and the reason for it it's because look at the 1970s where you know you've had mining companies fall 60 70% in some cases and then come back and so um it doesn't mean the thesis is done. Now doesn't mean you shouldn't also manage capital prudently with some level of um you know also managing risk in in some ways after big runups and so forth that it's also should be part of your portfolio management in my my view. However, um the price volatility, if we learn anything about mining over decades and so of of data that we can look at, um you know, certainly price does not uh is not a a dictation of of where we are in the cycle in in in any way. In other words, you may still see be in a cycle after a major uh downside volatility uh uh situation. And we look 20 30% given the history of the this industry is nothing. Um you know be prepared that that things can get worse and and you know that's the that's the hard thing about investing in this industry. By no means I'm saying it's easy because it requires a lot of confidence particularly at times when we see these uh types of changes in prices. And so uh you you really need to be able to lean on uh your your thesis and with conviction uh to act on things. Some of the best deals we've seen in the mining space were done in the last seven years, not not in the last two to three years. You know, go back a little further than that because that was the moment of desperation of the industry where people are giving up and throwing the towel and smart money was chasing highquality assets. And so don't don't let price really, I guess, is is my two cents. Don't let price uh uh dictate those those changes. Focus on the fundamentals. You know, has supply changed? has production changed? Um, you know, if that hasn't the structural demand aspect, you know, will central banks are they done buying gold? Look at history. You know, where are we with debts today? Uh um can we survive this environment with rates where they are? No. ask those basic questions and and if you can answer them and say you know that uh uh that those those those have changed uh then most likely the the the the cycle has also uh uh you know change as well in terms of the location and so I don't think we're I think we're still kind of early to mid innings of this of this overall cycle. >> Uh before I let you go I mean you we're just talking about those draw downs 6070 still comes back in a bull market. I mean for a professional allocator, how do you kind of survive that volatility without turning convection into recklessness because you know I mean for for retail investors it came back eventually is not their risk management strategy but it do you use I mean what position sizing or maybe cash discipline or sell rules do you kind of use to a draw down so that it doesn't destroy the portfolio before this thesis plays out? >> Yeah. Yeah. Well, look, in the middle of the of the cycle, you're probably going to see things uh get slightly more frothy than other times. And um you know, when and and that's that's probably where you start u taking some money off the the table here. But uh it it's going to be it that the question you're asking is is a very difficult, you know, if I knew how to answer that question, I would be a trillionaire. And um there is no way around it outside of really focusing on uh fundamental analysis, knowing what you own uh uh feeling comfortable with the risk. Everything you own is going to have some level of risk. You need to understand that side of things and you know and and and being able to add to positions as well. I think investing in in this industry without carrying uh at some moment of of your fund or investment portfolio a significant portion of cash that can be uh you know that that you can you know add to your positions at moments gradually because you never know the actual bottom of anything. um you know acting acting clumbly, right? Like this is nobody knows the answer for anything here and certainly not me and you know you you just need to be uh uh I think uh acting that way as as you as you uh make your decisions of your own portfolio. But who am I to say anything? I mean I that's how I um work towards my my own portfolio. I mean, I I don't I'm never although I I sometimes post things that that may sound uh more uh uh definitive. Um you know, I don't think that investing you you should be that way. You should always gradually uh uh get uh your capital uh into a place where is exposed to your idea. Uh because things can always sell off a little bit more. I think Charlie Munger said this very well. I mean, um, uh, rest in peace, Charlie Munger, but he was, he had a great quote, I think. I don't know exactly the quote, but it was, uh, you know, if you're not prepared to lose 50% of your money on any stock that you invest, uh, uh, you know, you're just not ready to be an investor. And it it in the mining space, you can probably say not even 50, probably 60 to 70 because everything that that could go go wrong usually goes wrong in the mining space. And so um uh it's a wonderful industry. There's lots of money to be made, but you just got to be careful with risk and it's not easy. Um but you know, being able to to uh differentiate moments when things are getting a little frothier than usual and understanding sentiment and positioning, I think it's key uh uh to manage capital and understanding that metals rotate, right? Like we're seeing now copper. two months, three months ago, what was it? Was silver. Silver hitting $120 an ounce and nobody cared about copper. And now copper is moving. And so it's, you know, pay attention to the changes of narratives because those things will keep rotating. And it is what it is, but it's, you know, people tend to focus on one thing that is happening now, but they will keep on moving to the lagger as well. >> Charlie Charlie Munger, I I like his quote, too. The first rule of compounding is to never interrupt it unnecessarily. Hey, uh before I let you go, let's play devil's advocate for a moment. I mean, I got to what specifically breaks your structural kind of bull pieces? Is there a particular data point or a policy shift or or maybe a macroeconomic where where that would force you to liquidate your hard asset position at admit you know the cycle's turn? Yes, definitely there is a uh one uh I think the most important one is the situation where the US and other developed economies are facing uh if there's a way where you know AI take its course to improve uh uh growth in countries and ret we see now a change of uh debt levels relative to GDP that are substantially lower caused by this growth. uh that is not necessarily through inflation. Um then you know I'm I'm I have to be open-minded to that. Now here's my counter to that view you know because a lot of people think AI is is deflationary and it is of course it is. I mean look what's happening in terms of uh in a lot of ways what it's not is the buildup for AI to be deflationary is actually very inflationary and that buildup is where we are which is creating robots automation uh data centers the electrical uh uh infrastructure to allow AI to take its scores. Once all that is built we're going to be in a very deflationary world and I do not want to own hard assets in that environment. And so I'm not married with hard assets at all. I just think that that's the solution uh in in the near future. If that changes uh then I really need to adjust my view. I pay close attention to that. I'm not seeing any signs of that. I think fiscal budgets still remain uh um very elevated historically speaking. The debt is compounding in a in a in a double digit rate right now. Um there is no end in sight outside of you know inflating our way out of this this issue. And so um I think after the buildup phase you and then you can argue how long would it take? Is it 2 years, 5 years, 10 years, 15 years? Well, right now there's no end in sight here of of that. And so, you know, we're still just getting started in a lot of things. We need materials. Um and the energy shortage is it could take place here as well in terms of electricity shortage uh given how much we're using. And so all that is is you know I'm I'm I I'll I'm happy to be very vocal when that time comes. >> Yeah. Yeah. Interesting. So I mean the sequent matters right? First AI consumes resources push-ups those those input costs then maybe later it improves productivity. But that gap is where the hard asset trade lives. >> Yes. And and the the world of abundance that some people like to say we're going to get there. It's just not I I think we're going to get there. I don't know for for sure, but I I believe we're going to get there. I just don't think we're nowhere close to that because of the uh um uh that buildup phase. Imagine minds being run by, you know, 10 people rather than than hundreds of people because we have robots operating things 24/7 with no drama, no, you know, no politics of employees and all sorts of things and the highest efficient machines doing those jobs. like, yeah, that's a world we're going to get into eventually. We're just not ready for that yet. >> Yeah, appreciate this. Tabby Costa, founder and CEO of Aurora Capital. Always appreciate the macro and the hard asset perspective. Uh, I guess I'll see you at the Rick Rule Symposium next month. >> Yes, I'll see you there, man. >> All right, for our viewers, the physical markets and capital flows are shifting rapidly. To stay ahead of the data and the structural trends we track here every week, make sure to hit subscribe, like this video, comment. I'm Jeremy Saffron. Thanks for watching Kiko News.
AI's Secret Cost: The Inflation Trap Markets Are Missing | Tavi Costa
Summary
Is the “Build Phase” of the AI revolution creating a structural inflation shock the market is ignoring? Tavi Costa, Founder and CEO …Transcript
Welcome back. I'm Jeremy Sappern. The physical metals market are undergoing a massive structural shift right under our noses. According to the European Central Bank, gold has just officially surpassed US treasuries become the largest share of global reserves. Now, let that sink in. At the same time, silver is staring down a projected 46 million ounce shortage this year. And copper supply chain is being choked off right when the global AI boom needs it the most. Now, while the physical supply shrinks, the mining sector is responding with multi-billion dollar M&A instead of possibly breaking on some new ground. Joining us to map out all these structural shifts and to track exactly where capital is flowing is Tavi Kusty, of course, macro strategist, founder and CEO of Aurora Capital, and someone who's closely been tracking the collision between, you know, the rising global debt, the tightening physical supply. Tabby, welcome back to the show. Good to see you. >> Thanks for having me. looking forward to this conversation. >> Uh me too. I mean it comes as an interesting time. Gold back in the headlines and I kind of want to start at the sovereign level and and just look at the math. I mean the ECB noted that gold now represents roughly 20 27% of global reserve assets with US treasuries falling to about 22. Now back in March you noted uh you were on this program and you noted that policy makers and I quote have to act on the debt problem regardless of inflation. I mean, is this massive reserve rotation less about political statement, you know, against fiat and more just about central bank reserve managers simply recognizing that treasuries no longer offer the same risk adjusted role in a portfolio? It it it's a bit of both, but when you think about it, you can you can raise debt as much as you want normally speaking and even relative to GDP. the problem becomes when uh you can afford paying that every every quarter, every month or every year. And we're getting to that point here in the US where you know interest payments to GDP are getting to a level that is well above any other country in the world today. Um particularly countries that are developed economies uh that are more comparable to the US. And the difference here is that we're probably going to see a major suppression of interest rates. We just don't know when. And so this is why when I see, you know, the market really shifting its uh uh views about what Kevin Walsh would do as a new Fed chair potentially raising rates or or chasing inflation uh on the hawkish side. I just don't believe in that at all. I mean, maybe we'll see one rate hike, and I'm wrong here, but I really don't think that should be uh any investors base case uh scenario. The base case to me is uh that we're probably going to see further cuts uh into uh uh into the interest rate uh environment not only the short end but also the long end eventually because the system cannot survive if we see this and so um you know I understand that there's a lot of issues but I think it's important to remember 1940s and other eras where we did see the government having to step in either through yield curve control um or some sort of mechanism uh that manipulate interest rates in the long end and the short end uh in order to reduce the burden on the debt. I I really think that that it's on the cards uh for the next 12 to 24 months. And if you think that way uh there's going to be a lot of changes in in how uh a lot of assets that tend to benefit from the suppression of rates uh will will will work through the system. I would also point out the dollar situation as well. Uh in conjunction with the uh reduction of rates and the suppression of the cost of debt, you're probably going to see also uh weakening of the dollar moving forward. And so as an investor, you just have to be aware of those two factors because they're going to dictate a lot of the uh the changes in the beneficiaries uh that are likely to win in an environment of weaker dollar and suppression of rates eventually here. >> Yeah. No, it's interesting. I mean, I guess so. You don't believe the the hawkish Fed path is kind of credible at these levels? What breaks first if they try it anyway? I mean, is it is it kind of Treasury financing? Is it credit markets, banks, private equity, or is it the labor market at this point? >> It's lots of things, but I would say we're getting close to an emerging markets moment in the Treasury market as well, which means emerging markets often see lots of volatility in their bond market when they start really playing uh with fire. And I think we're playing with fire in the US in a huge way. And so we're getting we're approaching that inflection uh uh point in my view that if we don't address the problem and who knows at what level you know it means that we're going to be addressing the issue uh but also uh dismissing uh the the power that politics uh could have in manipulating rates lower eventually is also uh important to be aware of. Uh what is also important to be aware of is that all of that manipulation has a cost. Cost is inflation. The cost is the basement of currencies. And so this why I keep going back to the idea of you know this environment we're seeing where gold is selling off, silver is selling off which is really just a digestion of a you know massive move we saw recently. That is normal. if if you just follow macro assets, it would be normal to see some sort of digestion, you know, level off uh on the price uh environment and then and then we get back to to normal. And so now we're seeing copper prices begin to move here and that divergence eventually will cause other hard assets to follow as well. You know, it's so important to to notice uh that the big picture hasn't changed and so um you know, the basement of currencies and the hard assets thesis remains as strong as it could be. >> Yeah. Yeah, let's bring this back to, you know, kind of the the retail level. I mean, let's translate this for to to Main Street as well. I mean, we have PCE inflation running at 3.8%. First quarter GDP growth sluggish at 1.6%. I mean, for the retail investor watching their purchasing power road at the grocery store, how do they survive this specific environment of stagnant growth and and and sticky inflation? um it it's going to be very difficult because at the same time you also have inequality issues at levels that we haven't seen since the 1930s. And so usually what you see in this uh combining factors of inflation and inequality or wealth gap problems uh it is it would be normal to see the start of a lot of social protesting and so forth. And I think we're starting to see some of that now. Um I I think politics uh is becoming such a a critical aspect of of macro today, especially in the US uh as we're seeing populism uh grow. Not not not to go too far out of the subject, but you know, just watch what happened recently here with Bernie Sanders talking about taking 50% of equity of AI companies. Now this is this is probably one of the most important changes in in politics in terms of you know a strengthening of a of a narrative uh across uh across that that those supporters uh um that you know it's it's you know it is something to be aware of. I've always said this, you know, one thing is is to allow, you know, uh, Trump, the Trump administration taking positions, equity positions in strategic, uh, industries and so forth. But we all know that equity positions, they live on forever. It's not like when, you know, there's a shift in politics where Trump is out and the next administration is in and let's assume it's not Trump, it's some someone else. um you know where would those equity positions sit on and will that administration be in line with those uh those those policies uh that were put in place by the private administration and look at the power that that new administration will have in those businesses as well. So I do think that that precedent of starting to take equity positions again driven by populism, driven by inequality, driven by the inflation problem you're referring to is forcing those extreme policies that you know I think it's going to be very problematic. And so and and by by no means I think the biggest thing is rule of law and all these changes used to be you know the main difference between the US versus an emerging market economy and the the the you know this the the stateowning equity positions in p in private companies uh or public companies. All it means is is that we're going back to that model that emerging markets were created on. And so it's not news. It's it's we've seen in the past it doesn't end well. Usually it ends with a lot of inefficiencies. It ends with a lot of issues. And I think that gap of valuation between emerging markets and the rule of law economy is is starting to be in check here in my opinion. >> Yeah, it's an interesting topic. I mean you know it it brings us back to hard as hard assets. I mean extreme politics can also attack the mining sector directly through you know royalties, taxes, permitting blocks, nationalization risks as you talk about. So I mean these politics are no longer a side effect of inflation inequality. It's becoming part of an investment cycle it seems. I mean how does that change your allocation between financial assets and and and hard assets? it it it doesn't I think it all it does is actually you know make you think through what are things that also benefit from a shift of prices of those hard assets themselves and it's hard to not consider commoditydriven economies as a as a great place to be investing here and I keep I keep going back to know Latin America had a an incredible run over the last one or two years now it's something I've been very much in front of however we've seen uh in the last uh few weeks or so a big discount uh recently uh in the markets. In other words, a pullback um and the fundamental story has not changed. I love pullbacks that the fundamental story hasn't changed. Um and so when you have those situations, it's the time to be uh acting on on on your positioning in my opinion. And so I've been adding to uh those uh those positions more and more. In other words, emerging markets exposure uh to me is is becoming a bigger and bigger pillar of my own portfolio because of this uh of the situation. And so I you know I think that that's important. A lot of people have been sort of mocking the fact that we haven't seen the US base assets rotation into uh other parts of the world. I don't think that's true necessarily. Yes, US-based assets have done very well and continue to do well particularly on the tax place especially semiconductors and others but it's not like the other parts of the world have not performed well either. Uh you know a lot of these uh other parts like Latin America or emerging markets or even some other developed economies I I suggest you to look at some European banks even uh that have been doing well. And so you know it's not just happening in the US. uh we're seeing actually uh asset prices being inflated in a large way and I think eventually that rotation will happen uh as we see investors looking for things that are fundamentally cheaper. >> I'm going to get into the emerging markets here a little bit later in the interview. First I just got to ask you specifically about copper. I mean I wanted to kind of look at that critical supply bottleneck across the sector which seems like it's rapidly becoming a strategic input for you know AI power demand. We got grid expansion, electrification. I think Google was going back to the market to to get more funding today for this buildout. I mean, prices recently tested historic highs on the copper front that was obviously driven by major operation disruptions at worldclass deposits. I think Grassburg in Indonesia, I think Codelos's El Teniente in Chile. When we look at these localized disruptions, is the broader market underestimate underestimating kind of how fragile the current global production base actually is? Yes. And I I I think we're in the situation right now where sort of silver was uh a few months ago when silver began to really bro break out and sort of reach what we call the price discovery phase. That's where copper is right now. Copper is at a price discovery phase. Nobody knows where that lands, but I think that it is plausible to at least consider uh the idea that copper prices could rise drastically in the next 3 to 6 months. and at least at least you know especially where where we're seeing from levels of today and so I think it's going to continue to drive that and mostly because of what you said I think a lot of people have been trying to justify the the the side of of copper especially on the demand front uh that is starting to be spreading towards the AI trade if you will and of course it is it's electrification it's AI it's also onshoring it's also industrialization uh bringing back manufacturing electrification. I mean, there's still a lot of electrification trends happening worldwide in places like China, for instance, where they don't want to be relying on oil anymore, and they want to be uh having more electrical vehicles and other things. And so, we're seeing that shift happen not just in the US, not just in China, but also in other economies too. And remember another factor that is now taking place which is central banks or I should say sovereign institutions is starting to build on um uh you know strategic uh reserves of of materials uh that are obviously important and essential for their economies and so copper is going to become a part of that. So I I I also think that this supply and demand mismatch is the main driver of prices here in copper overall. And it's so important to see that uh you know I I do think we're going to see the follow up on on on that and eventually the margins of companies because we're now seeing the divergence between margins as well. The margins of gold companies and silver companies is drastically higher today than copper companies. But that's just a function of how much prices of precious metals have run up relative to copper itself. I think I think we're in the process of seeing that shift now where copper companies will also benefit from a better uh profit margin uh which will be historical too in my in my view. >> Yeah, this is a good time to kind of bring up a post and I don't think you'll be able to see it here but the audience will. You were just talking on X. It's been kind of lighting up industry feeds this week regarding this exact supply panic. I mean uh looking at the data highlighted here, you're talking about how copper is now diverging from gold in a meaningful way. I mean, looking at this kind of data, majors are are generating massive cash flow from their existing operations. Yet, they remain visibly almost terrified of deploying billions into green field projects because prices rarely stay elevated long enough to justify, you know, that permitting timeline, capital intensity, energy, you know how it is, political risk at this point. I guess the question is, Tabby, if if if the majors won't build and the juniors can't get funded by generalist capital, I mean, where does the new supply actually come from to to meet this new demand? >> The answer is I don't know and nobody knows. And the the thing is if if nobody knows the answer and the problem is right now the political environment in some areas like the US for instance have become more favorable to build mines and so forth. The problem is we can't build mines in two years or three years. these things, you know, it's it's a view on 15 years from now. And so companies cannot deploy capital if they don't see a long-term run uh for, you know, really uh uh you know to to see that the reasoning for sustainably deploying capital into something that would be uh only cash flowing 1015 years from now. And so it is a very difficult position that a lot of these management companies are. Um I I happen to believe that you know you want to have a mix not just the miners you also want to have the metal here because that repricing uh will be very important and in my view uh for the metal but also in my view the highquality assets that are in place in other words companies that hold those assets they're going to be key for the future here and so uh you know this is the time for a niche investor uh that is able to selectively find these companies that have those assets uh are also also going to be uh incredibly uh uh relevant for uh for for investing in my my two cents. And so that that's where I'm focused on. I'm just trying to you know, do I own the absolutely highest quality assets in the world today? I think I think everyone should be thinking the same way if I if I would mention something and it's not just copper. There are other assets that are very strategic. I I will mention another one that very few people even in your program mention which is zinc. zinc prices um also need to be adjusted much higher. Uh we're seeing supply of zinc at the same levels or a new supply production at the same levels as we saw in 2012. Uh uh and so you know these things uh it's not just the copper market, it's the copper market, the zinc market is is is silver as well uh and even gold itself that often is not mentioned as as as something that we tend to see supply changing. So you usually the end of a commodity market uh tends to happen when supply really, you know, drastically changes. We're nowhere close to that. In fact, we're seeing the contraction of supply uh in in a lot of cases, the depletion of mines, the depletion of reserves. And so I would be um you know, I I I think that we're seeing the rebirth of mining in a large way uh as as an essential part of the economy. And so to me, this is going to be a theme for the next 5 to 10 years. These pullbacks we see here and there are in my view just an opportunity. >> You know I guess it also brings us directly to silver. You mentioned it there just briefly. But I mean it kind of shares a structural supply constraint story similar. I mean it carries that heavy monetary component obviously and according to the the world silver survey the market is projected to record to record a supply deficit of over 46 million ounces this year. Now we know that nearly 70% of silver is is mined as a byproduct of other metals. Higher silver prices do not automatically trigger new primary copper or zinc mines as you just talked about. I mean mechanically, how does this market balance? I mean, are we looking at a forced industrial demand destruction or is it and we've talked about this before. I mean, a violent price adjustment much like we saw those highs a couple months ago. >> Yes, it's likely to be the case. The repricing would probably be on the upside given the supply constraints. And um look, I mean, yeah, we can the other side of this would be a major depression that causes demand to completely collapse industrially speaking and causes metal prices to stay uh closer to the levels that we're seeing today or maybe 20 30% lower. But I I don't see that happening here because I think that the the world, particularly the US, is in a situation where it needs to inflate your way its way out of the of the debt problem. and inflating its way that out of the the debt problem really is a cool word for inflation. And inflation means dilution of money. And dilution of money means higher uh uh particularly hard assets. And so I I really think that uh you know this is this is all particularly the the noise that we see from I like I said the Kevin W situation and all that. It reminds me so much of you know what that when we had the elections back in 2024. I remember this so well. I put out a piece back then which was about how I thought that the dollar was about to peak, the US dollar versus other fiat currencies, which was a very unpopular view at that time. And guess what happened right after that? The dollar actually rose significantly. My position was in danger, if you will, because everyone was basically asking me, well, well, you just said that the dollar is in peak levels and and this thing keeps moving higher. And then the narrative at that time was that Trump and Basset were would be actually very positive for the US dollar. I couldn't disagree more of that view. And then immediately after elections, we saw the reversal of that to my uh my benefit. But boy, uh this is so similar to that period because it's the same thing happening today. Rates moving higher like you know and like I said, they're acting like emerging markets in my view. And so, you know, the moving deck is a great example. You know, you don't tend to see this type of volatility in the bond market without some major disruption in the markets. And so, yeah, I I think I think we're approaching a level where uh the the Scott Basson in its own and his team is going to have to look really deep into this and I'm sure they're looking deep into this and understanding what are the best ways to approach this market to uh calm things down on on the on the Treasury side. >> Yeah. No, the T- bills uh watching the bond market. It's been interesting every day moving with that volatility. I mean, okay, the the physical setup is kind of tight. The equities um tell a story of kind of investor hesitation and industrial I guess you could call it consolidation. Uh M&A has been taking place. Back in March when you were on this program, you explicitly mentioned adding to your position into Ora. Uh we just saw Equinox and Orla agree to an $18.5 billion merger to consolidate output. Uh simultaneously though, Orla is dealing with an illegal union blockade over profit sharing at its Camino Rojo mine in Mexico. Uh how do massive corporate consolidation and and these severe operational disruptions happening at the same time change your assessment of Ora specifically and kind of that broader mid-tier space as a whole? >> Well, it's problematic. There's two types of sell-offs. I mean, just making it basic, right? There's sell-offs where the fundamental story hasn't changed and there's selloffs where the fundamental story has changed and and then you have to reassess. Um I still own Ora but uh it is one of the situations where fundamental story could be changing here. It just goes to show how Mexico is is is is a difficult jurisdiction. I mean this is a stellar team uh um operating in an area where um you know it's it's not easy and we've seen this over and over again um in in that area. It's a very tough jurisdiction to uh to operate. However, putting that all aside, the Equinox and Orla um um combination uh makes sense, you know, makes a ton of sense. It's not necessarily a synergy uh you know, type of merger, though although they have one asset each uh that is uh close by. Um it it it won't, you know, it's not something like they're going to be using uh their facilities to to help each other in that sense. Um but however it is it is a sort of rerating uh thesis where you get to a million ounces uh production a year of gold equivalent and obviously those stories that have those situations with multiple assets tend to uh benefit from that. Now you know asking the question of if the deal is going to go through after this situation with Ora and so forth you know those are all extreme questions I don't know the answer for either. Um, as an investor, I'm watching closely the situation because I do think this changes the fundamental story a bit from the orla side, not from the Equinox side. Of course, if they acquire or it's a combined decision you have to make as an investor. Um, so those are uh that's a situation where it's slightly different from your your selloff in emerging markets or selloff in in in overall mining stocks where the fundamental story has not shifted at all. It's just it's just a sell-off, you know. was just welcome to markets where you tend to see normal noise and you have to assess your uh uh those changes uh and and and act on your conviction when when it's present itself. >> Yeah. Let's talk about jurisdictional risk commit. I I mean looking beyond the balance sheets, we kind of have to factor in these geopolitical realities now. I mean the race for minerals is accelerating. We're seeing Bareric, you know, weighing a London listing to spin off its African business. you've been bullish on Latin America as a defining investment opportunity. I mean, how do you kind of accurately price jurisdictional risk into your models when governments or or local forces can change the rules overnight? >> Yeah, I mean there's this is the risk anywhere in the world these days, but and it's always been the case, but I would say that uh the the big by no means I want to say that Latin America doesn't carry its own risks. I mean it does of course but what I would say to this is that I think there's some inherent uh um you know uh floor of safety uh in those markets just given the fact that uh we are in a crunch for supply and one of the areas that is likely to be that strategic partner of areas like the US is is likely to be Latin America. the proximity is one factor, but also look at the interference we're seeing in all sorts of markets. Uh not just the Argentinian market, but also Bolivia now, uh you know, Colombia and all the all these other places where Venezuela, of course, uh uh Cuba being in in in you know, in a conversation, even Brazil now, uh listing some of these uh gangs as as uh as as as um uh terrorist uh firm uh terrorist organizations. and so forth. And so all these things are beginning to uh uh really infiltrate the the region in a large way, which I think it's positive. I I do think it's positive uh just because uh it's very unlikely to see any uh of those politicians really challenge uh uh the the US administration in a large way. Of course, they're going to challenge on on things here and there, but not in a significant way like we've seen in the past. And so uh you know nationalizing a firm in today's markets well you know I I think that that would be a very difficult uh u endeavor to uh to pursue in in in today's markets uh given what's happening uh in terms of the crunch of supply uh that the US is facing today as well and not just the US but any other place in the world and so I do think that that uh um you know Latin America is going to be in the strategic area uh where where people are going to be investing. Look, a lot of people agree with me here not too long ago. It's so funny how things change, you know, two, three months and then everyone is just like, you know, uh uh panicking just because prices have changed. I I don't I don't work that way, you know. I I think it's it's just like going to a grocery store. Although I I don't go I don't go to a grocery store as often as as my wife does, but what I would say is is when you go to the grocery go grocery shopping and you see something in a discount that is it has value, you buy it, right? It's it's the same thing in the markets. It's just so funny to me how in the markets people approach things differently where prices fall and they just lose confidence instead. It's just not the way I work at least. But >> yeah, you know, it's it's actually it's a good point on on Latam too. I mean obviously it's not one jurisdiction. You got Mexico, Brazil, Chile, Argentina, Colombia. They all carry different risks. Where is the US strategic partner thesis kind of the strongest? And where do you think investors overgeneralizing? I think uh the US is using Argentina and and especially as a kind of a road map for for uh for others to to you know in a way follow and we're seeing a lot of things uh follow in that sense. I mean with the success of the Argentinian economy uh recently and the opening up of that economy and the uh level of investments we've seen and the improvement inflation numbers and so forth is certainly uh uh a factor to be uh know that is I think very noticeable uh and also uh being followed by a lot of other politicians in in other places of Latin America that are looking to chase a similar type of uh partnership with the US uh by giving in a similar uh strategy when it comes to uh their own agenda fiscally and economically and so uh but but places like uh Bolivia are trying to attempt something similar as well. I can speak that for firsthand uh and and you know Chile doing exactly the same thing as well. Um and and so it's it's very interesting how this is happening. Of course, you know, when you see prices really adjust like we saw in the last two years uh uh to those situations, people start thinking that it's going to be smooth sail. It's not going to be smooth sail. Uh it's obviously going to be rocky and volatile. Uh because there is a lot of opposition to a lot of these these ideas in in in those regions as well. And so, you know, right now that that opposition and all that has been more priced into to uh to markets and and therefore why we've seen these pullbacks in a lot of these places and so and now people are overstating that as well now. And so it's normal, you know, it's welcome to my life. It's like I'm just trying to walk a straight line and people just trying to push you in both directions. It's like calm down. You know, things are going to be okay. It's like the oil market not too long ago like you know I think in your show hopefully I I was I share that view eight nine months ago really strongly on look I think companies need to hedge their diesel exposure. I think investors need to have some oil exposure and so forth and then everyone wants to talk about oil going to $300 a barrel and so forth. You know that needed to calm down as well. Now we saw oil come down a little bit. It's just normal, you know. It's just like to walk a straight line, you know, and and in the middle of all these sentiment that we see in markets is it it's the challenging aspect of any investor. And so, yeah, it's, you know, welcome, at least to my life and other people's investors, other investors, they have that long-term mindset. They have to just mute that volatility and and stay focused on the big picture. >> I want to ask you about Argentina there because you brought up an interesting point. I mean obviously you know if it's become the road map. I'm curious what the the lesson for investors you kind of want them to watch because Argentina has improved but it's still a little early politically fragile. I mean you go to the to the cities. I I had family down in Buenosire it's much different than when you go out to the to the countries much like the US and other nations. But I guess my question is is the lesson for investors. I mean is it is it kind of fiscal discipline? Is it deregulations? Is it currency stipulation? lower inflation or or is it opening up the door to foreign capital in in a world that seems populism is winning? What should they take out of what Argentina is doing? >> Well, it's it's certainly those those those are going to be the the main metrics. I think what they've done with the inflation issue is such an important aspect for the population that sometimes is misunderstood. One of the biggest issues for uh you know I I lived in Brazil uh my my almost my entire life and what I can tell you is it's so difficult to win as a as an individual or as a company in that country because the inflation eats your way and um it's so difficult to produce uh or create wealth in a in a in a large and significant way. And so you know that's the challenge and so when you have some level of of improvement on the inflation front that alone is is a huge thing uh in my opinion and that alone also brings a lot of uh uh attention to foreign investors because the biggest risk for foreign investors usually is is of course rule of law and other things but you know add to the fact that there is also a lot of volatility on local currencies as well. So when you have some level of stabil stability on that side of things, you know, certainly it's easier for investors to make or companies to make uh uh decisions on deploying capital into either producing assets or creating developing assets and so forth. And so that's the change that we're seeing Argentina. By no means I think that Argentina is in a great place and everything is done. No, no, no, no. That's not the point at all. There's plenty issues there, you know. So the same thing happening in Brazil. Brazil right now still hasn't changed politically, but not because there's no desire to change. It's because elections happen uh this year. They still, you know, yet to occur. And so once we see that, we'll we'll balance things out. But uh um but we are seeing the contagious effect in other parts of Latin America. And I think that agenda that that narrative at least of being more fiscally uh prudent and so forth is at least, you know, spreading uh its way into Latin America. That's a positive thing of course and so I'm paying attention to that. We're seeing tax regimes being proposed. You know, all those are are changes are, you know, we're moving in the right direction. Let's put it that way. It's not like we're in the perfect place by no means. And we're not going to change the corruption scandals, all that. If you're waiting for that to change to invest in Latin America, good luck. You're never going to see that because it's never going to happen. And now, I hate to use the word never, but it's very unlikely. And so you know it's the net change of things that tends to create a positive impact in prices over time. >> So I mean the investment case is not just resources. It's kind of whether government can restore purchasing power and credibility before social pressure forces a reversal I guess. >> Well the the the the commodity improvement or the resource market improvement I think creates the the activity e economic activity in the underlying economy. That's one thing and then you need to have the stage there to perform which is the political environment. And so you know when you mix both it could be very explosive. So today you go look at a lot of these companies, banks, uh consumer businesses, utility businesses and basically they all have very you know usually singledigit PE ratios and and cape ratios whatever you use to look at uh the price relative to volatil of to um profitability is is usually as single digits are very compressed. And so what what I think people are underestimating is that the underlying economy is growing because of the resource markets. And eventually that growth is going to be embedded in those companies. And those companies are going to start seeing in my view expansion of those multiples caused by changes in fundamentals and also interest from the foreign investors that are looking for better things than buying tech at all-time highs is stretched technically and and just at absurd multiples. And so, you know, I think eventually we'll start seeing smart money, you know, doing that. It's already happening. Smart money is already in those areas in a large way. >> Yeah. Hey, listen, I mean that that gets us from kind of country level reform to state level strategy. I mean, if Argentina is the roadmap for attracting capital, the next question is how governments actually secure the materials they need. I I don't know if you saw this new report. I mean, the US government just committed up to 1.6 billion to back a tungsten mining in Kazakhstan. At the same time, I saw headlines today, China has picked a new state firm to coordinate its overseas mining deals. I mean, we've talked about this before, Tabby, but does does direct government intervention distort the free market for for these metals or or is it only viable is it for them to secure the critical supply chains that they need? Yes, but it's also unavoidable and it's also inevitable and it's also um you know uh I mean we've seen this in the past and um what scares me more in that front and a lot of CEOs and people are chasing that government money without understanding that again leaderships will change uh and you know today might be favorable for mining today might be great for uh having that as a partner to allow things to move faster than it would under other circumstances. But um who knows in the future, you know, uh if if something like I'm not saying Bernie Sanders has a a major uh uh probability of winning next election, anything like that, but those are narratives you need to pay attention to because if that catches on and people really start or the next uh person on the left starts to really uh gain momentum with those ideas, which is possible, again, you're you're seeing inequality at peak levels, inflation, as a problem. So, it's not really out of the uh of the possibilities here that that some people would try to justify those things. And by no means I think that's a good thing. I think it's a terrible thing personally. Um and so, but I I I also as a macro investor need to at least consider that as a as a very significant scenario. So, yeah, it's um you know, it is part of the game. We're living in a game in a world where uh sovereign institutions are under a lot of stress uh trying to uh uh solve a crunch for uh critical metals that uh you know that they haven't really solved in many years and many decades and now they're very dependent on markets that they don't would like to be dependent on like China >> right so I mean you know you can't get the the retail money maybe go after some some government money but so investors the question becomes follow the government capital but only where the underlying asset still works without permanent subsidy. >> Yeah, I I'm not f by no means I'm following the government capital by the way. Um I am I am uh I'm you know trying to do my own thing independently and and looking for high quality assets that I think makes sense to own and so forth and blah blah blah. Um but uh but I also understand that it's inevitable that we're going to see uh intervention or uh um you know governments wanting to get involved in different things. Um you know we're going to see um you know all sorts of uh of of vehicles being created by the governments. Uh uh when I say I say that in plural because it's going to be in plural. uh all parts of of the world are going to be looking to uh get a share of of of of strategic resources that make sense and so it's not just the US and so um yeah I mean as investors uh that will shape markets as well uh but uh overall that just speaks volumes about the level of desperation that we're seeing from sovereign institutions to make sure uh that they can get their hands on on critical m metals and other resources. Um at the same time puts into perspective as well uh that these you know types of volatility in prices that we tend to see here you know are they as relevant as they used to be here in the next last two to three years you know I mean we know that there's sovereign institution capital chasing these things anyways and so my my suggestion is focus on like a laser on these things because uh there's there's going to be in my view plenty returns and performance to be uh um to be getting here in this in these markets. >> Yeah. Yeah. Good point on the Bernie Sanders. I saw that headline. I mean, it's interesting. We're seeing proposals that do not just tax profits but go after ownership itself. Uh okay, let's wrap up by by testing the limits of of kind of this cycle. I mean, uh you previously told our audience that gold does not need or or lead a liquidation rather. um you know when we see a 20 30% draw down in the mining equities which shakes out a lot of retail capital what is the kind of strict factual distinction between a broken investment thesis and a standard market digestion phase you know >> it's you know probably not a price um analysis and the reason for it it's because look at the 1970s where you know you've had mining companies fall 60 70% in some cases and then come back and so um it doesn't mean the thesis is done. Now doesn't mean you shouldn't also manage capital prudently with some level of um you know also managing risk in in some ways after big runups and so forth that it's also should be part of your portfolio management in my my view. However, um the price volatility, if we learn anything about mining over decades and so of of data that we can look at, um you know, certainly price does not uh is not a a dictation of of where we are in the cycle in in in any way. In other words, you may still see be in a cycle after a major uh downside volatility uh uh situation. And we look 20 30% given the history of the this industry is nothing. Um you know be prepared that that things can get worse and and you know that's the that's the hard thing about investing in this industry. By no means I'm saying it's easy because it requires a lot of confidence particularly at times when we see these uh types of changes in prices. And so uh you you really need to be able to lean on uh your your thesis and with conviction uh to act on things. Some of the best deals we've seen in the mining space were done in the last seven years, not not in the last two to three years. You know, go back a little further than that because that was the moment of desperation of the industry where people are giving up and throwing the towel and smart money was chasing highquality assets. And so don't don't let price really, I guess, is is my two cents. Don't let price uh uh dictate those those changes. Focus on the fundamentals. You know, has supply changed? has production changed? Um, you know, if that hasn't the structural demand aspect, you know, will central banks are they done buying gold? Look at history. You know, where are we with debts today? Uh um can we survive this environment with rates where they are? No. ask those basic questions and and if you can answer them and say you know that uh uh that those those those have changed uh then most likely the the the the cycle has also uh uh you know change as well in terms of the location and so I don't think we're I think we're still kind of early to mid innings of this of this overall cycle. >> Uh before I let you go I mean you we're just talking about those draw downs 6070 still comes back in a bull market. I mean for a professional allocator, how do you kind of survive that volatility without turning convection into recklessness because you know I mean for for retail investors it came back eventually is not their risk management strategy but it do you use I mean what position sizing or maybe cash discipline or sell rules do you kind of use to a draw down so that it doesn't destroy the portfolio before this thesis plays out? >> Yeah. Yeah. Well, look, in the middle of the of the cycle, you're probably going to see things uh get slightly more frothy than other times. And um you know, when and and that's that's probably where you start u taking some money off the the table here. But uh it it's going to be it that the question you're asking is is a very difficult, you know, if I knew how to answer that question, I would be a trillionaire. And um there is no way around it outside of really focusing on uh fundamental analysis, knowing what you own uh uh feeling comfortable with the risk. Everything you own is going to have some level of risk. You need to understand that side of things and you know and and and being able to add to positions as well. I think investing in in this industry without carrying uh at some moment of of your fund or investment portfolio a significant portion of cash that can be uh you know that that you can you know add to your positions at moments gradually because you never know the actual bottom of anything. um you know acting acting clumbly, right? Like this is nobody knows the answer for anything here and certainly not me and you know you you just need to be uh uh I think uh acting that way as as you as you uh make your decisions of your own portfolio. But who am I to say anything? I mean I that's how I um work towards my my own portfolio. I mean, I I don't I'm never although I I sometimes post things that that may sound uh more uh uh definitive. Um you know, I don't think that investing you you should be that way. You should always gradually uh uh get uh your capital uh into a place where is exposed to your idea. Uh because things can always sell off a little bit more. I think Charlie Munger said this very well. I mean, um, uh, rest in peace, Charlie Munger, but he was, he had a great quote, I think. I don't know exactly the quote, but it was, uh, you know, if you're not prepared to lose 50% of your money on any stock that you invest, uh, uh, you know, you're just not ready to be an investor. And it it in the mining space, you can probably say not even 50, probably 60 to 70 because everything that that could go go wrong usually goes wrong in the mining space. And so um uh it's a wonderful industry. There's lots of money to be made, but you just got to be careful with risk and it's not easy. Um but you know, being able to to uh differentiate moments when things are getting a little frothier than usual and understanding sentiment and positioning, I think it's key uh uh to manage capital and understanding that metals rotate, right? Like we're seeing now copper. two months, three months ago, what was it? Was silver. Silver hitting $120 an ounce and nobody cared about copper. And now copper is moving. And so it's, you know, pay attention to the changes of narratives because those things will keep rotating. And it is what it is, but it's, you know, people tend to focus on one thing that is happening now, but they will keep on moving to the lagger as well. >> Charlie Charlie Munger, I I like his quote, too. The first rule of compounding is to never interrupt it unnecessarily. Hey, uh before I let you go, let's play devil's advocate for a moment. I mean, I got to what specifically breaks your structural kind of bull pieces? Is there a particular data point or a policy shift or or maybe a macroeconomic where where that would force you to liquidate your hard asset position at admit you know the cycle's turn? Yes, definitely there is a uh one uh I think the most important one is the situation where the US and other developed economies are facing uh if there's a way where you know AI take its course to improve uh uh growth in countries and ret we see now a change of uh debt levels relative to GDP that are substantially lower caused by this growth. uh that is not necessarily through inflation. Um then you know I'm I'm I have to be open-minded to that. Now here's my counter to that view you know because a lot of people think AI is is deflationary and it is of course it is. I mean look what's happening in terms of uh in a lot of ways what it's not is the buildup for AI to be deflationary is actually very inflationary and that buildup is where we are which is creating robots automation uh data centers the electrical uh uh infrastructure to allow AI to take its scores. Once all that is built we're going to be in a very deflationary world and I do not want to own hard assets in that environment. And so I'm not married with hard assets at all. I just think that that's the solution uh in in the near future. If that changes uh then I really need to adjust my view. I pay close attention to that. I'm not seeing any signs of that. I think fiscal budgets still remain uh um very elevated historically speaking. The debt is compounding in a in a in a double digit rate right now. Um there is no end in sight outside of you know inflating our way out of this this issue. And so um I think after the buildup phase you and then you can argue how long would it take? Is it 2 years, 5 years, 10 years, 15 years? Well, right now there's no end in sight here of of that. And so, you know, we're still just getting started in a lot of things. We need materials. Um and the energy shortage is it could take place here as well in terms of electricity shortage uh given how much we're using. And so all that is is you know I'm I'm I I'll I'm happy to be very vocal when that time comes. >> Yeah. Yeah. Interesting. So I mean the sequent matters right? First AI consumes resources push-ups those those input costs then maybe later it improves productivity. But that gap is where the hard asset trade lives. >> Yes. And and the the world of abundance that some people like to say we're going to get there. It's just not I I think we're going to get there. I don't know for for sure, but I I believe we're going to get there. I just don't think we're nowhere close to that because of the uh um uh that buildup phase. Imagine minds being run by, you know, 10 people rather than than hundreds of people because we have robots operating things 24/7 with no drama, no, you know, no politics of employees and all sorts of things and the highest efficient machines doing those jobs. like, yeah, that's a world we're going to get into eventually. We're just not ready for that yet. >> Yeah, appreciate this. Tabby Costa, founder and CEO of Aurora Capital. Always appreciate the macro and the hard asset perspective. Uh, I guess I'll see you at the Rick Rule Symposium next month. >> Yes, I'll see you there, man. >> All right, for our viewers, the physical markets and capital flows are shifting rapidly. To stay ahead of the data and the structural trends we track here every week, make sure to hit subscribe, like this video, comment. I'm Jeremy Saffron. Thanks for watching Kiko News.