Energy Transition: Argues decarbonization is far more materials- and energy-intensive than appreciated, driving long-term demand for copper, lithium, nickel, manganese, graphite, and tin.
Gold Strategy: Bullish on gold via producers, royalty companies, and especially Sprott Inc (SII) as a high-convexity gold asset manager with dividend yield and AUM upside.
European Natural Gas: Sees an asymmetric opportunity in a basket of North Sea gas producers after a swing from crisis to complacency, with attractive valuations and yields.
AI Infrastructure: Prefers upstream materials like tin that benefit from secular growth in semiconductors and AI demand rather than paying premium multiples for chip leaders.
Electric Vehicles: Highlights EVs’ real-world physics and input costs (battery weight, metals intensity, tires, aluminum) and the need for honest cost accounting and infrastructure buildout.
Portfolio Construction: Focus on free-cash-flow resource equities, low-cost assets, and capital returns, balanced with alpha shorts and cheap optional hedges to create positive convexity.
Macro Dynamics: Notes Europe’s power-price whiplash, China’s LNG demand return, and policy/weather risks; emphasizes hedging inflation, dollar spikes, and growth/value rotations.
Transcript
foreign [Music] so here we are beautiful Lake Tahoe at the Edgewood Resort at a wonderful private event put on by the collective I think this is maybe my first time recording outdoor podcast how about you definitely a first for me well I think uh the first is a quite quite an eventful first I mean I don't think we're ever going to do anything better than this no it's a pretty high bar so we're both Northern California so we're able to drive up here so both of us have been here many times and when I look behind us obviously it's the grand natural resources of California yeah right yep and we're here also to talk about the other natural resources but I was also telling um PJ yesterday at the event how what I love about California is like the cosmic insignificance meditation right this place is so Grand it makes me feel so insignificant yeah but you've lived here your whole life do you did you take it for granted sometimes do you still see all that natural beauty you know you do have to catch yourself every once in a while I've been coming up to Tahoe since I was you know three or four years old and my family had a place up here for 20 years uh and so yeah there there are times when you're a younger person where you definitely start to take it for granted um but I think there are always moments where you know you have the quiet and you have the calm and you look out on something like that and you understand you know why this was considered such a spiritual place by you know the original Indians that inhabited it it's it's a very grounding place I've always really enjoyed it up here and then for those that don't know my pleasure today is my illustrious guest is my friend Robert Mullen from Marathon resource advisors in San Francisco um so maybe Robert maybe we could start with you given a brief bio or in your own words of of how you got here sure um so I've been a natural resource investor since the early 1990s um you know went to school in another beautiful place the University of Colorado at Boulder you know clearly I I like the mountains um and and skiing and everything that goes along with it uh but I started out in the natural resource space at the Franklin Templeton group I covered a couple of sectors before that but really gravitated towards resources I had a little bit of a family history in that my mom was uh grew up on a West Texas Cattle Ranch where Unfortunately they never actually they looked for oil and natural gas they never found it so it was definitely it was about as far from Dallas as you could imagine very unglamorous but a wonderful place to you know really understand the outdoors and sort of rural Texas and so um but uh you know came out of the University of Colorado uh backpacked around the world for a year and then started working for Franklin Templeton and the energy sector was always one that you know was seemed like an easy fit for me it's fit with my natural skill set which was I've always been less of sort of a fortune teller about sort of what future multiples might be on certain sectors or certain companies it's really about you know trying to buy a dollar's worth of assets for significantly less than a dollar you know and it's it's very mechanical in some ways and very uh you know mathematical and you build models and you understand cash flows and you understand assets and you and and so that's how I got started in it and so I haven't been doing it ever since announced pretty much 30 years of uh banging my way around the natural resource space and then you said 30 Years also you probably won't remind me dating you a little bit but I had to go back to backpacking around the world for a year what year uh so that was 1991 1992. this is so perfect because I remember the very first time I got an email address was 99 in Istanbul Turkey I signed up in an internet cafe for like a Hotmail account yeah so what you and I both know is like when you're traveling around the world in the early 90s it's a totally different world right absolutely no cell phones no email no anything it's a totally different one no my parents wanted me to check in like every Sunday so I would try and find a place where I can make an international call which is easy from Europe um but significantly harder from areas like Thailand or um you know mainland China which we went for a little while we actually thought about doing uh the Trans-Siberian Railway but unfortunately there was a coup around that time so it was uh it got a little messy but it was it was an amazing experience and it was navigating around the world back then pardon the pun but demanded a resourcefulness to be able to figure out where you were staying there wasn't an internet to figure out you know where you would go you couldn't email back and forth with these people oftentimes the language barrier was pretty significant because in some places English was very frequently spoken other places not so much so it really took it took effort to travel and there was a reward that came with that which was was pretty amazing I was thinking about now that I'm an adult my poor parents like I would call home once a month for like five minutes like you know like I'm doing fine I'm alive and that's all that's all they knew about it was going on and then so I think about two I'm always very romantic about the natural resource space you know and I think about the miners that are you know flying all around the world these far-flung places like going into these countries figuring things out and then so part of the Romanticism is Jim Rogers and Jim Rogers wrote you know those great books about riding his motorcycle around the world so is that yeah how much is that like tied in like how do you think about that it's like that probably that backpacking trip not knowing at the time so it's kind of those seeds where when you're dealing with natural resources you're dealing with these global Commodities and it has a very to me very Romanticism very Global traveler kind of sense to it there's there's something sort of basal and fundamental to them you understand how everything works off of the raw materials whether it be you know energy or copper or agriculture or it just nothing nothing works without it nothing survives without it so you get a taste of that um but it is also there's a there is without question a sort of adventurism Romanticism uh about it's like Pirates and buried treasure you know you are trying to go to the far reaches of the world to find something that before you no one thought existed and so that's that's uh there is an element it's distinctly less sexy when you're you know you know camping out in the middle of uh you know the Northwest Territories and you know it did and this was never me to be clear um you know banging away at rocks for six or seven years and all of a sudden you're like well geez we got nothing um so but I think the air from the investor side and even the casual Riverside is very much that you know this is there there's there is some Romanticism to it absolutely and then everything you know now about like uh drilling technology and everything do you still wish you guys had that West Texas ranch do you think there's actually this part of you think with the technology that might have actually been something there they just missed it yeah so this the ranch still is in the family oh really yeah so uh I'm the oldest of 13 cousins uh who are still um you know involved with uh the ranch it's you know we're pretty sure that I think natural gas would probably have to go to something very very high to make whatever is on the ranch economic it's in a period it's sort of in it's called the Marfa Basin uh so it's not too temp not too far away from a very cool artsy town where I actually have family um in Marfa Texas uh and so you know look at some point if natural gas trades for 20 bucks on them um you know we might we might have a story there between now and we actually one of the things that we thought about was when the Frac sand boom was going on whether people were looking for the materials to push down into the reservoirs to be able to hold open the cracks in the very highly pressurized reservoirs we thought we might have a deposited Frack sand on on the ranch and unfortunately that boom kind of crested and rolled over a little bit too quickly for us to take advantage of it timing gets us every time so one of the things that's been obviously highly prevalent these days but you've been writing about for years and I always love reading everything you write about and watching all the videos you do and how the talks you give is this transition to EVs and whether that battery transition looks like with you know traditional raw materials but also to rare Earths all that sort of thing so talk to me a little bit about how you think about that transition to EVs and and how that affects the way you think about trading the markets yeah so there's so there is this there's a political imperative to move this way the decarbonization um you know kind of flips out of that is anti-fossil fuels but there's there is a there's an extraordinary Global imperative to move towards more EVS that's seen as sort of the tip of the Spear of decarbonization and reducing CO2 emissions I think there are there are nuances to it that are lost in most of the political discussion um but without question I think the status is someone like a Robert Friedland from Ivanhoe will tell you that we need more copper in the next 20 years than we've mined in the last 200. so it's a huge call whether it's the batteries for the EVS themselves the other materials that are necessary uh to be able to make EVS work all of the transition mechanism of transmission mechanisms and and all the infrastructure that goes around it the grid level battery storage that you need to turn wind and solar power into something closer to base load so it effectively can be integrated into the grid all of that is is is massively massively materials intensive for the same kilowatt hours of uh you know of energy relative to a natural gas or a coal plant you need about seven to 15 times more materials metals and materials to be able to generate that same kilowatt of energy via wind or solar and so I think we've seen this as this easy oh wind is free and and the Sun is free and this is all going to be very easy and all just just just subtract that sort of side of The Ledger that is the emissions generated by the oil and gas industry and you know we're we're off and it's free and easy um the energy transition comes with a gigantic materials and therefore a energy and carbon footprint along with it to make it happen and so so that's it is both a challenge and a really neat opportunity I mean one of the things we were talking about one of the sessions yesterday was you know Ai and how do you express it um and so this is a little less energy transition but more that you know if you look at almost everything as materials intensive in one way or another so you know Nvidia trades it depending on your estimates 35 to 40 time sales um you don't have to believe that Nvidia wins if you believe AI is a big thing clearly the proliferation of significant numbers of microchips and microprocessors is going to be a key theme of that you know Nvidia may be the winner in that they may not the one thing you need for all of those is 10 you know because 50 of the global tin market goes into microchips to be able to effectively solder them together there are alternatives for it but no one's using lead anymore for anything that's uh you know that's even more toxic than that than most of the hydrocarbons so so so one can't win without the other one you can pay 40 times sales for the others you can pay four times earnings for and so to me I think there's just a much more interesting way to express it you know the the the the consensus around the room was you know that's the way to invest in it as opposed to trade it and will people ever care we don't know but to me that's just a much more comfortable way of allocating Capital it's interesting to me in the sense that when you're dealing with commodities right it's almost like a throwback to buy gun errors which is part of the Romanticism and then when you think about cash flows and being a value investor it's a it's a very um staid way of looking at the market a very smart way of looking the market but at the same time when we're talking about EVS we're talking about the future of batteries yeah so you have this bifurcation of right you're thinking about old school commodity and digging stuff out of the earth and what is that was the cash flows of the company look like and then people are promising all these future things with batteries yeah and so I wonder like how do you deal with that some of that dichotomy is like right now the batteries in the EVS are you know they obviously become more and more impressive like you're saying for solar and wind we have transmission we need better batteries people talk about even using batteries on planes yeah like so how much do you go you want to believe in this future battery but sometimes you're like the physics just doesn't pan out and so it's hard to deal with yeah so so you know you're replacing when you build an EV you're replacing 180 pounds of a gas tank with a thousand or twelve hundred pounds of a battery which is massive it's lithium it is copper it is manganese it is graphite um it is all those things um because of the weight of that battery you need to do other things to the car which is you need to make lighter panels so you need more Plastics guess what more hydrocarbons you need to replace steel with aluminum guess what huge energy intensity on that and you have to actually get the aluminum you got to get the bauxite the torque generated the weight and the torque of the EV actually goes through rubber tires much faster so you're all of a sudden going through much more of a carbon footprint on the tires themselves and so I think it's it is viewed in black and white I can sometimes be absolutely insufferable at San Francisco cocktail parties when people decide to go off on a tangent and I try to inject some of the real math to it occasionally I just get the tap on my shoulder from my wife just saying all right come on it's um but it's it but it's true and the unfortunate the the real unfortunate truth is that most of the political discussion about the integration of renewable energy and EVS is done on effectively kind of cocktail napkin map it's it it just it Bears no relation to a can we find all the stuff that we need to build these as fast as we're promising which I think the answer is now um B can we get the infrastructure there fast enough to be able to make all of this work together in a way that gives us power on a reliable basis and allows our economy to much you know to at least stay where it is if not grow um and then you know finally there's just there's there's I think this massive misconception about the actual cost of it both in terms of dollars and in terms of carbon emissions itself and so I just think that gets lost in the discussion and all we get is Snippets of politicians competing with each other as to who can promise the transition faster because look at polls great and people love it they're just not being told how much it actually costs people here well we're actually in Nevada but in the great state of California we've seen exactly what it costs where you know we've been the most aggressive in terms of integrating Renewable Power into our grid and our power costs are going up four times as fast as anywhere else in the rest of the country and Germany is having the same thing and so um I just I'd like the discussion to be more honest and more thorough and unfortunately that's just not the nature of politics there's a couple of divergences I want to take there one I think you'll bring up yesterday too like how many even hydrocarbons are in Asphalt like I think even in the rubber tires you need carbon black which is a hydrocarbon as well right but this is a out totally outside the box question but like sometimes you read about uh reflective Natures of Road surfaces and everything and a lot of scientists or people will speculate that we should have like white roads and everything like do you think we could eventually change that like I was thinking like do they need to change tires how like is there a reason like we would go with black everything yeah I think there's there are a lot of things that work you know at bench scale that are really hard to implement on you know at real scale so there was actually there someone built a solar Road in um yeah I think it lasted about six weeks before you know the pressure of the cars and the dirt that was on it and everything else just totally in the degradation of productivity um was was really rapid in the cost of it I think they abandoned it after you know less than six months uh and so I think what we have to believe is that most of the things that are getting integrated today have been in the works for a really long time these transitions take um you know decades if not more and the idea that we have that we can look at sort of the evolution of microchip technology and how fast do those things move and do that to it and and extrapolate that to the physical world where look the first lithium ion battery was created by a guy at Stanford who was on you know a consultant for excellent Mobile in the late 1960s and while the battery chemistry has changed it's not you know it's not significantly different the electronics around it have evolved yes um but I think the likelihood that we find a magic hugely scalable kind of uh solution that really changes the economics of Renewable Power and I think I think that's a stretch you know the closest thing quite frankly that we have is nuclear and we are for reasons that are wholly political choosing not to use that which I think is one of the most remarkably short-sighted things that uh you know the world I think we will look back at this in 30 or 40 years and say if the goal is really to reduce CO2 why in the world are we shutting down existing nuclear facilities um the other diversion I'll take hopefully you'll disavow me of because we brought California and you've been around for both Governor rounds I assume right maybe your kid you know with the first governor Brown but like uh I've always heard and I never really dug it too deep into it so maybe you can tell me is like the idea it was originally what with original California Governor Brown and even to his son is like the idea with PG e was like you didn't have to upgrade your infrastructure costs as much as long as they um invested in Renewables so they gave them the incentive because they really wanted to push renewable energy and so for decades now in California instead of like upgrading their wires and their infrastructure they put it all into Renewables and that's how they got away with not upgrading the infrastructure now that is easily like uh you know I jump to conclusions there but do you think that's categorically true or is it a lot more nuanced it is more nuanced in what I understand it's not an area that I am you know extremely well versed in but I do think that the push to spend in areas that don't necessarily generate a near-term economic return has absolutely caused the starvation of capital to just the base level of Maintenance and we see that throughout the country not just at PG e they are the most you know most pointy an example of that um but uh but look there's only a certain number of dollars out there and if you are investing in things that don't currently generate economic returns and I think one of the things we discussed in one of the sessions yesterday was you know those who will tell you that the energy transition will pay for itself are relying on I think one of the most inane statistics out there which is the lizard levelized cost of energy which is an interesting way to compare to some degree what um you know if normalizing what sort of the costs of different power sources are but it Bears absolutely no relation to the economic reality of installed power anywhere in the world and so they'll point to these metrics and say solar is you know solar is the the the cheapest way to you know generate power and it's like yes if you don't have to pay for the land and yes if you don't have to figure out how to transmit it from one way or to the other and yes if you don't have to store it someplace so you can use it at a period of time and yes if you don't need backup power from anywhere else just in case the Sun's Up shining which it happens to do kind of half the day and there are clouds and it's there there's just a there's a there's a there's a shallowness of the arguments of economic viability I'm fine with trying to make the environment better I think this maniacal focus on co2 is a little short-sighted there are other things that we should be concerned about as well um but we just we have to have an honest discussion about what it's going to cost I think people will be much less likely to give politicians a blank check to push Renewables to a mess thing if they get the honest scoop which is well guess what your power bills are going to go up by 30 or 50 or 100 percent um so let's just have that discussion have it honestly and if we're willing to pay for that great um if we're not if we'd rather pay for schools or roads or retirement for employees or whatever we need to do you know then we have to prioritize one of the my favorite things in life is one of those minor epiphanies or light bulb moment when somebody makes a statement of the obvious that you didn't think about before and then you hear it you're like oh my God that's so obvious and one of the things you were really going into yesterday that was so brilliant that to me was a statement of the obvious I couldn't believe I hadn't really thought about it as much before it was the idea like you're saying it's like any sort of natural resource extraction to go Eevee or however you're looking at it the input costs of the energy and the the cyclicality of this feedback loop of how much energy does it take to get these energy intensive resources out of the ground and like the feedback loops of that and like as these prices go up the input costs go up and so maybe you could speak on the kind of like that circular nature a little bit of like yeah cost structure so the so the energy transition has progressed as fast I can and Renewables have gone have grown as fast as they have because of you know over the last decade we've had very low cost of inputs um the raw materials and energy inputs have been very inexpensive production has been consistently moved to low-cost locales a lot of it into China where they get cheap labor and cheap power and you know quite frankly a massive amount of government subsidies and so you know the spend on Renewables has been something close to 10 trillion globally a significant portion of that has been government funded um very little of it has generated actual profits or economic return you know I'm a believer that at some point whether 10 trillion is that point or not you know Renewables have to sort of put on their big boy pants kick off the you know the uh the training wheels and show that they can generate economic returns and we just we haven't got there yet so the subsidies are still really significant um but then absolutely you look at this uh sort of cycle of okay in order to create the renewable systems that we need to do um you know we need to extract 20 times as much lithium we need to you know set get as much copper in the next 20 years as we've gotten in the last two thousand the problem with all of this that is lost in those who just look at sort of the U.S geologic survey and say yes there's tons of copper out there we can easily meet these needs they miss the fact that there is copper in the air so it's just like there's gold in the ocean it's just not economic to extract and so look we've had a big boom in the production of natural resources that was driven by the Chinese and Asian industrialization back in 2000 to kind of 2010 that capital expenditure boom extended out to 2014 and um you know and we built a huge number of projects and that led to the over capacity that made resources such an awful place to be effectively from 2010 to 2020. um but you know now all of a sudden we're stuck with having to massively accelerate how much of these things that we need to produce for you know for Renewables copper lithium nickel zinc uh all you know all of the Rare Earth elements and things at a time when the cupboard is it's not bare but there's a reason that the current projects that are in jurisdictions that we can do that are you have gotten the permits that they need that have had the delineation drilling that they need to under really understand that deposit the ones that are left are sort of you know the way I described them yesterday was kind of an island and Misfit Toys there are reasons that they don't that they haven't been developed yet because if they weren't developed in the last you know it from 20 you know 2006 to kind of 2015 there was something wrong with them right because we had a really low cost of capital equity and debt were freely given to the resource companies because there was this belief of this the extrapolation of this great commodity boom um so if it didn't get developed it's because your grade is too low you got to move too much dirt it's too deep it's too remote and all of that what that all boils down to is it's more energy intensive you know that and the you know look the the head grade which is what you typically the production grade of copper you know 15 years ago was 1.3 percent now it's 0.7 I think so the amount of dirt that you have to move from today's Minds the existing Minds not the new ones that we have to build but the existing Minds you have to move twice as much dirt to get the same amount of copper that is energy to be able to move all that and the idea that we can kind of go out into the you know Wilds of Chile or the you know uh or none of it up in uh you know Northern Canada and then power that with Renewables like you know a big electric dump truck is going to have to have a battery about as big as the truck and so it decreases the efficacy of it um and they're starting to get some of that technology forth and in some places there may be ways to use it but but then you're talking about having to make the battery for that truck and then and so there's the way I described it was a giant oroborus the more you create renewable systems the more energy and extraction and quite frankly CO2 production that will have happen because of that and so I just think we're not we're looking at a very narrow part of The Ledger without taking into account the secondary and tertiary effects of it my simplified analogy of it that I thought of too was like uh those first few seasons of Gold Rush the TV show very romantic love watching it but all I could ever look at was the the input cost is like the more the more tailings they like you said like all the good land's been picked over right for the for in the Yukon so they're going like into tailings or they got to dig deeper whatever and then every time they they fire up all of their bulldozers or other everything they do as requiring that oil input costs so there's other things oil remained low they had that Delta and gold prices remain high and there was just there's always this race like everybody look at the gold at the end of the week and being poured in they go oh my God they made like a half a million dollars this week mining right and then I'm like I'm waiting for the after of like how much did they spend on gasoline how much they spend on labor it's like running three shifts like the amount of gasoline the inputs cost like to that and to end of how they have to mine it was It was kind of fascinating to me to think about the input cost and the other one I thought of just now was uh thinking about you know you have to have a rational perspective I mean it's good for people to be optimistic to push this forward but then it made me think Ikea Batista and Brazil right like deep ocean drilling off the coast of Brazil yeah great idea maybe two the input costs were higher than he expected and he Lo he lost his wealth faster than any billionaire in history yeah another example yeah a little less romantic version that's definitely the less romantic version uh it's it's such a fascinating story I was like living in Brazil at the time that all that stuff happened so it was always fascinating to me um one of the other things like we you know we talked about um all the all these different parts one of the you have a coordination problem and you and I didn't have time to talk about this yesterday but like when you're talking about especially movement to electric vehicles batteries Renewables there's a global coordination problem and I think like historically um it always is kind of interesting to me that as as as First World countries we tend to push our pollution our refining our toxic you know Industries off into emerging markets and then we tell them you need to upgrade to our standards and they're like we're just industrializing our nation and you push this pollution under us and so yeah so there's a there's a tragedy of the commons problem but the one that I thought was most interesting recently that um I think I was talking to a guy with stock gen was talking about this was that um when Germany you know was always hold the line hold the line we're doing all this stuff and then when when also in their natural gas pipe like gets shut down and everything all sudden they flipped on a dime and so what does that tell all the Emerging Markets they're like hey you changed your mind and you switched who are you to tell us to to do what you do you couldn't do yeah yeah they went you know they spent half a trillion dollars to build out their renewable infrastructure and built a very flawed and very vulnerable system and then the moment that it looked like the lights might go out they went straight back to lignite Cove you know the bottom of the barrel kind of dirtiest nastiest stuff that you can imagine and so it it I think it's it's a great example of how challenging this is um it really is it's just there's the the struggles to be able to do that the the political imperatives have outrun the physical realities um last year was a bit of a Day of Reckoning for that I think we've slipped kind of back into a little bit of complacency about that you know I look at you know we have gone if you think about what's happened in sort of Europe and the European power markets we have gone from the equivalent of you know like oil prices hitting 145 dollars in 19 uh whatever or sorry 2007. um right at the very front end of the global financial crisis um two the equivalent of the negative 45 print in covid you've actually got negative power prices in Europe right now because they swung so far they spent again in addition to the half trillion dollars that they that Germany's alone spent to go renewable to go wind and solar Europe as a whole spent half a trillion dollars this summer or sorry this winter just to make sure they had enough resources to be able so they got they got a little bit of a hand from Mother Nature so they had a two standard deviation you know warmer than uh uh warmer than normal winter and so you know now they've got this Surplus and power prices have gone negative and so everyone's like hey we're good you know we there's there's a problem we're done with it we're all you know we're back that's not the case you know there were some things about last year not only just the weather variability that you can't count on having cooler Summers and warmer Winters in Rapid succession like that history shows you just doesn't happen but really the reason that they were able to secure as much LNG as they did last year was that China was shut down you know China was effectively out of the market they were you know importing you know uh I think 30 30 less LNG so that opened it up for Europe to go and compete for it John's no longer closed down and so if we do and certainly Nordstroms doesn't look like it's going to be working anytime soon so um there's a really interesting kind of opportunity set opening up because we've gone some some kind of Maximum concern to Total complacency again and that's reflected in the equity markets for some of the European um kind of natural gas producers uh and so I think there's there's kind of an interesting uh I think very asymmetric bet that can be put on there that I think is kind of interesting so I want to come back to the asymmetric bag I want to also come back to like uh Global macro and how you think about that overlay and Supply chains and Dynamics with China and Belton Road initiative and those sorts of things but I kind of come back to some Basics a little bit it's like when we think about natural resources Commodities Etc I work with a lot of ctas and that's how people usually think about um you know investing in those markets is via you know future strategies but part of it is a lot of people will say that you know when they look at stocks bonds and then Commodities are like it's a neutral return environment so people like to put a trend following overlay on it and trade directly in those Futures markets but I think a lot of times we were talking about yesterday that when we talk about rare Earths or some kind of like off the run so to speak you know Metals Etc you know there's not liquid commodity Futures markets for that like they're only spot markets and so then it's maybe better to go into the the resource Equity markets like you do and then that's where you can find companies that are working on this but now you've got another set of problems we all have nuanced trade-offs right and now you have you know a management problem you also have that uh Keynesian beauty contest that we were talking about yesterday um with how does what's the Market's voting machine you know doing to that Equity so maybe talk to me about the the nuances of why you prefer the natural resource equities than necessarily playing in the the Futures markets yeah and I will say I do I do some of the the Futures directly and you know we put on some reasonably successful um you know gold and silver direct commodity trades earlier this year um but really the skill set that I think I've developed over the last 30 years is really in resource equities um and so it's part about about trade construction it's part about understanding the different variables and it differs at various points of the cycle and sometimes it's just it's better to do a commodity investment um but it to me I have always believed that if you really do your work in the you know three four five hundred kind of resource Securities that I think kind of fit our criteria which are high free cash flow generating um you know some sort of capital return and folks doing so so we're naturally self-selecting a less volatile less downside vulnerable uh sort of uh subset of resources equities um and so to the extent that we can find things that work in that realm and you can really get comfortable with management risk and local geopolitical risk and the geologic risk of the specific deposit um and the more you invest in sort of later stage things and not taking exploration risk the more you have kind of certainty about that and so that's why we've typically done I did a lot of early stage um you know pre-production exploration in early development stage investing earlier in my career I'm just more comfortable when you know we know what's underground and we know what the cash flow statement looks like and so you know sometimes it's hard you know I've found at times where there are there might be a very specific Niche commodity that I want to be involved with and there just isn't a good Equity way to express that so then you sort of have to look for something else and maybe you know uh you know like Chris's Chris had a fantastic talk yesterday about uh sort of options uh Theory and trade expression and so you know then then there are ways that you can you can find different ways to express it and um but you know for the most part there's there's typically enough equity depth to be able to find what we want to do in at least you know modest size to be able to make it work in in various markets and so right now we're you know very constructive in energy which is usually pretty easy to express um you know there's lots of options there because of globally and it's it's probably half of the natural resource traded Market is is an energy agriculture is a little bit of a thinner Market but there's still a fair amount of you know volume in those names and um and a lot of different options whether you want to be into fertilizers or Plantation companies or you know that we've been involved with palm oil companies in Indonesia and sort there there are lots of different ways to get there I think that's a very interesting space um we have had you know last year was a big year for us in the lithium space and so we we've had some things that were a little bit earlier stage than we typically go but it was just a really spectacular asset in a place where we thought we had a due diligence Edge on it because of some of the people that we work with and so you you know like I think there's just a lot of very interesting things going on in the natural resource space and there's no shortage of ideas if anything it's just a shortage of capital to be able to invest in all the things that we want to so one of the ways I think about resource equities too I think a lot of people's first entree and resource equities is to be a gold right like people who started with gold and then they want to they want more leveraged versions so they go with the gold mining you know equities and you see people play that but like they're searching for positive convexity but a lot of people just tend to get burned in that scenario because also they just they don't maybe do enough research or due diligence or expertise in the space they're just looking for a leveraged gold play so maybe talk to me then about like how you construct your book and how you think about it like when I think about your book that the three elements are like equities yield and options even though those kind of blend together but like kind of talk about like how you think about how do you achieve positive convexity in the natural resource base yeah yeah so you know let's start with the long book so really the core criteria is significant free cash flow generation that is sustainable so not just someone that's going to generate great cash flow for three or four years but can do it for 10 or 15 or 20. low cost structure so they can survive the cyclical nature of these commodities um hopefully coupled with the management team who's willing to give some significant portion of that income free cash flow generation back to us we like to see a combination of growth in capital returns so we're we're not just necessarily looking for stagnating or even liquidating entities we like people who can grow assets over time as well uh and so you know we're willing to accept lower yields off of things like that that have a growth element to them as well and then it's really about spreading the book across the resource Spectrum in a way that gives us sort of stability and I think most resource funds are typically kind of mostly energy maybe a little bit of copper and so that tends to be a very GDP economic growth sensitive kind of book um I like incorporating in areas like agriculture with which are a little less cyclical from a traditional you know growth sense I like some of the processing Industries or Transportation Industries shipping uh and uh refineries and chemical producers and things like that gold has a tendency to be counter cyclical and so you don't see a lot of people who incorporate a decent gold book into a traditional energy and maybe based metal book and so that's an area that I've always really liked um and then you know and then you delve into those pockets and you sort of say all right how how big do I want that to be to and how should it fit into the overall structure and then how do I construct it via the Securities underneath it and so I think the gold book right now is a really interesting example of that you know I have a combination of kind of larger cap gold producers you know again very low cost you know generating good dividend yields uh and and good highly economic growth um and those are sort of a basket I think our biggest position there is seven or eight percent but I think our total uh precious metals books is you know over 40 percent uh of a on a gross basis of fund Equity do you run any like constraint bands when you think about sector waiting or do you not worry about them I don't um and it's really it's it's just if it feels too big then you know you've got to take it down or or if you can't find enough ways to express it then you've got just got to keep it smaller so the way we've expressed the gold book is so we've got some producers we've got some royalty companies and we also have a kind of a very interesting way to play that that I've talked about publicly before um is a gold asset manager where I think you know you've got uh go ahead and name it's a sprot Inc you know I used to work with John Hathaway at tocqueville uh he and Doug Rowe and the rest of the team are great mutual fund managers but Sprott has this really interesting combination of physical commodity ETFs not just precious metals but also uranium and and uh and other pgms and things like that and and you look at at this asset manager and you know it was the same market cap uh you know stock basically the same place today when it was when they ran 8 billion in AUM and then they went to 16 billion in AUM and then they went to you know 20 plus billion dollars in AUM it's in the same spot uh and so in a world where I think people would prefer to play if they're going to go into these dirty extractive Industries um and they're gonna you know have to make a strain on their ESG thing give them the easiest thing to find that they can and a gold asset manager is a very low bar the royalty companies are very similar because they don't have a big they have relatively good ESG scores and so what you've got is you know if if you're in my my parallel for this is in the early 2000s so the great gold market of kind of 2001 to 2007. there was a period in sort of the middle part of that bull market where you know I think from 2004 to 2006 the um GDI or the predecessor to the GDX was up 50 or 60 so you know good move over a couple of years the one major gold asset manager which is a company called us Global was up tenfold and it was because portfolio managers kind of found a way they're like all right this this Market is getting underway gold asset managers can win in multiple ways in that they get both the appreciation of the existing asset base as the sector rallies but they also get inflows so there's a reflexive element to it that can make them go from you know say 20 or 30 million or 20 or 30 billion under management to 100 billion under management then all of a sudden you sort of put a you know a five percent of AUM multiple on that and you've got a stock that can go up five or six times where you're not taking geopolitical risk you're not taking specific taxation risk anything else from you're not taking specific Asset Risk where you know you have a a wall cave-in or something like that or a tailings dam break what you've got is just a very clean way to say is this a sector that I think is going to work expressed in a way that can potentially be very asymmetric in the interim I'm just you know clipping a four percent dividend and so I've got that positive carry with a convexity that's like it looks to me like it assets Could Fall by half and the stock would really not go down much from here one of the other things you said uh yesterday that is one of those obvious things but it takes a while to learn and it's it's easier said than done is the idea like like you said you're finding these Securities you're doing your due diligence you like uh cash flow free cash flow and that that gives you that dividend yield so there's your your equity and your yield but part of what you said too is if if you structure the trade properly and you're comfortable with what they're doing and you could create that positive convexity through that structuring that now your position size need to be larger and it's like the correlation between position size conviction or limiting or truncating the left tail to opening up to the right tail is like now you found over the decades that you need to take larger positions than you previously would based on like maybe the it wouldn't be volatility but you're figuring out a way to structure maybe lower volatility with positive asymmetry or based on like kind of like a sortino ratio effect it's really about the asymmetry right um you know what is my potential to interlook in in you know when I was a 25 or 30 year old hedge fund manager you know I the biggest step side had the biggest position in the portfolio you know now it's more about upside relative downside and you know that's that's just part of you know getting kicked in the teeth you know a couple dozen times over the last 30 years so then the next element of it is the short book and so layered on top of that is areas where I try and isolate specific risks for the portfolio whether it be in specific Commodities so if I've got a big energy book Running I'm going to look for ways that I can find a short energy position whether that be through you know companies kind of destroying uh economic value whether it be through you know and this is true across the book you know a lot of times I like companies that are destroying clearly negative cash flow and will be perpetually but I also like finding companies where you know unsustainable dividend yields are being paid and after 20 plus years of really understanding what's sustainable and what is not in the sector when you find the unsustainable dividends the the asymmetry on the downside when dividends have to be reduced or cut are fantastic uh and so you know we've had something work this year in the wood pellet space that I thought was a little bit of a kind of a BS green uh story anyway but there was a company involved with that that was you know paying double-digit dividend yield that was generating negative free cash flow and so you knew it could not last forever and when they finally did cut it you know the stock was already down 50 it fell another 70 that day um so that's that's where we try and create so that's part of the short book is directly within the kind of resource verticals we have sometimes it's more efficient to express like we're vulnerable to a turn a negative turn in the economy and so you know whether it's whether you can express that well by shorting more cheap you know copper companies or steel companies or whatever and we do some of that when we can find situations where we think we've got an edge but sometimes it's better expressed through other ways you know we have a little bit of a consumer discretionary short book on right now um also short a little bit in sort of subprime Auto Lenders and things like that where that is the sort of the the most vulnerable segment if we do have an economic slowdown that people would say oh no we're going to be consuming less resources you know energy companies might not be the most the ones that you know trading at four times cash flow and you know 10 dividend yields they may not be the most vulnerable to that most vulnerable to that is kind of consumer or you know some of these highly leveraged stocks that that really require consumer spending and consumer health to be very high you know look if peop if you think people are going to drive their cars less maybe they just can't afford the car so um so that's that's where I think um you know there are some other things in our book that are a little bit tangential to what we do and then the overlay on top of that when you mention the options you know this is a you know something that we've been doing for the last four years is sort of a long volatility overlay in areas where we think we can find cheap expressions of volatility that correlate well with the vulnerabilities of the portfolio you know sometimes that can be you know for a while we were sort of Long Dollar calls you know the weird thing was last year both long resource equities and Long Dollar calls actually worked and so that's uncommon but under normal circumstances a spiking dollar is something that won't resource stocks are vulnerable to you know right now we own you know um some out of the money puts on the emerging market index which is typically a group that trades pretty similarly to natural resource equities and it's just cheaper than buying you know puts on the oil service index or you know volt air is three times as high as it is in the eem there are some other places where you know this is always an evolution as and as we have become a bigger fund more instruments open up to us and so to the spaces that I think are very interesting for us to try to hedge with on a real macro basis are sort of the growth value rotation which we have a tendency to be a little bit vulnerable to because you know when when you know when growth is in favor and people are selling all their their resource stocks that's oftentimes that's you know either neutral or modestly positive for our short book in other words those stocks are going up instead of down and our long book is is suffering um but the other area that um that there are some interesting ways to potentially hedge in very highly convex ways is forward inflation expectations so clearly when inflation expectations are running high and you go into something like the five year five year forwards market and um and and be able to hedge whatever might cause inflation expectations to come down rapidly that's an interesting way for us to hedge our portfolio as well and again it's not a significant Capital allocation for us at any given time it's kind of one to two percent of fund equity but when we get those things right they can be very powerful counterweights um to negative and shock environments for our long book and you know one of the things that I another thing that I talked about yesterday was resource stocks are never going to get this slow and steady up into the right bull market like health care or technology because the environment that makes resource stocks perform well which is rising commodity prices which is typically a component of rising inflation you know that is inherently a very destabilizing force on the broader Market particularly a market that is priced for inflation never to be a sustainable entity ever again and so that's something that we want to be cognizant of I also think about like uh you get that amazing amount of positive uh asymmetry in options Market when those correlation flips like you said that long like if you're on the other side of that and historically like correlation's been negative or flips the positive or vice versa that's when you get some really explosiveness because people are just basing it on a short-term look back and if you can time those correlation changes that's amazing one of the other I thought brilliant questions that Chris Edward Messiah did ask you yesterday is like and this is a relation to the China about Road and Global macro and how you think about it it's like he said do you just hedge out and neutralize your Global macro arrest so that way you can you know really just look at them as idiosyncratic bets or like so how do you think about that yeah and that's sort of that's all part of what um you know the short book and the option book do is kind of addressing those current risks and it's it's never going to be a clean dollar for dollar 100 Delta kind of hedge but if we can find ways where we can inexpensively express that or you know look so if I'm trying to neutralize my falling oil book or my long energy book from falling oil prices I Express that either inputs or put spreads in the energy in oil specifically I can do that you know via puts one energy and resource indices I can do it via short individual equities and clearly for us the best is if we can find Alpha gender pardon me Alpha generating shorts at the same time that we can layer on top of a long book that we're very excited about which is you know kind of where we are today that's the best of all worlds and so it's just a matter of kind of looking at the at the entire you know spectrum of ways to be able to to try and say you know take a step back and say look I have to have a macro View um but my back review does not have to be correct and more importantly if my macro view is wrong how much am I going to lose and so you know one of the other you know there's there's so many wonderful things about this whole event but you know you you talk to someone like Mike Green who um you know is talking about some of the underlying um you know sort of net distribution that's happening and and you know the potential for a little bit of index funds selling and things like that A reversal of kind of the passive flows uh and it it it perks up your ears about the need to really be thoughtful about you know a risk of a kind of equity liquidation cycle is not something that I think there's much in the equity markets this price for right now and there are probably some relatively inexpensive ways to express that and so you know again that's another risk that if you can find a way to throw 30 or 40 or 50 basis points at it um you know they can potentially give you a 10 or 15 or 20 20 to 1 kind of payout those are those are bets worth making so unfortunately we're running up on time here but we don't want to miss our sailboat on this beautiful Lake behind us but I thought a perfect place to end is because you teased it earlier so I'll give the audience the morsels that it wants you tease like some of the opportunities in Europe right now like tell us about what you think is one of the more interesting trade ideas or interesting ideas you have like that could potentially uh be implemented in Europe yeah so I'll speak it about this at a high level because I'm actually still constructing it myself and still kind of getting positioned for it but what I spoke about earlier which was we have swung from Maximum concern to maximum complacency in the European power markets and so you look at some of the natural gas producers in the North Sea and some of the related areas that really feed into the European Energy System and they had this they had an unbelievable year last year I mean many of these companies generated their entire market caps in precache and what they did is they paid out debt they started Capital return programs and now the stocks are kind of 50 off their highs they're trading it you know two three four times cash flow you can construct a basket of these stocks with kind of different characteristics so you're you're spreading around your risk of specific uh you know specific jurisdictions specific uh assets and things like that and you can create kind of this interesting basket with a mid High single digit yield kind of nice growth component to it you're paying two or three times cash flow and expectations for European power prices are you know are are in the in the gutter and so you know I look at that market and I just I love in complacency intrigues me because these markets are self-correcting and it's you know they it it beats you over the head time and time again but when you're able to step into those and you know stocks have gotten blown out and they're kind of basing around and they're not acting poorly on you know bad news or concerns about windfall taxes or anything like that you know it kind of feels like this is an area to pick up cheap convexity and so and again with the Positive carry and so you've got kind of a six to nine month window where you know look maybe you know maybe we get another Super warm winter and you know these stocks you you clip your six or seven or eight percent dividend yield and you know maybe these guys retire a little bit of stock or yeah and and so fine you know six to eight percent my worst case scenario that's okay um but if we do get to a tight Market which I can actually see because of the availability of LNG because of sort of the turning on of some of the other European industries that were shut down last winter now you get the opportunity set for you know these stocks get double pretty easily um and so you know we've got a portion of our energy book is is allocated to that and we're kind of in the process of growing that so you had some other really interesting ideas around like carbon sequestration you had some amazing statistics around petrobras but for people to have those kind of ideas they're gonna have to come to the next Collective event you can't give away all the secret sauce but I want to thank you for this conversation I always love picking your brain about resources and also want to give huge shout out to Shannon and the collective for obviously giving us this beautiful place to have these intimate conversations where we don't have to worry about kind of the outside world and we can all kind of banter back and forth and iron sharpens iron that's what I love about these is like you have all kinds of experts in the room and people will really push back and collectively we hopefully find a better place yeah so once again thank you for coming on this has been fantastic Jason and such a wonderful event and um you know I say look my previous travels this month were you know I went to two different conferences a mining conference and a agricultural conference met with 40 companies over the course of collectively like six or seven days and so that's part of The Blocking and tackling of what I do the harder part of what I do is creating the world view and how to express it that enables me um to be a better portfolio manager not just the mechanics of the companies underlying it but really how to construct a portfolio that's going to weather the whatever the world looks like over the next six to nine months and this is that's why this this sort of opportunity set is so unique it's been it's been a lot of fun this podcast is provided for informational purposes only and should not be relied upon as legal business investment or tax advice all opinions expressed by podcast participants or certainly their own opinions and do not necessarily reflect the opinions of mutual fund their Affiliates or companies featured due to Industry regulations participants of this podcast are instructed to not make specific trade recommendations nor reference past or potential profits listeners are reminded that managed features commodity trading Forex Trading and other alternative Investments are complex and carry a risk of substantial losses as such they're not suitable for all investors and you should not rely on any of the information as a substitute for the exercise of your own skill and judgment in making a decision on the appropriateness of such Investments visit mutinifan.com disclaimer for more information foreign
Upstream Downstream – Robert Mullin
Summary
Transcript
foreign [Music] so here we are beautiful Lake Tahoe at the Edgewood Resort at a wonderful private event put on by the collective I think this is maybe my first time recording outdoor podcast how about you definitely a first for me well I think uh the first is a quite quite an eventful first I mean I don't think we're ever going to do anything better than this no it's a pretty high bar so we're both Northern California so we're able to drive up here so both of us have been here many times and when I look behind us obviously it's the grand natural resources of California yeah right yep and we're here also to talk about the other natural resources but I was also telling um PJ yesterday at the event how what I love about California is like the cosmic insignificance meditation right this place is so Grand it makes me feel so insignificant yeah but you've lived here your whole life do you did you take it for granted sometimes do you still see all that natural beauty you know you do have to catch yourself every once in a while I've been coming up to Tahoe since I was you know three or four years old and my family had a place up here for 20 years uh and so yeah there there are times when you're a younger person where you definitely start to take it for granted um but I think there are always moments where you know you have the quiet and you have the calm and you look out on something like that and you understand you know why this was considered such a spiritual place by you know the original Indians that inhabited it it's it's a very grounding place I've always really enjoyed it up here and then for those that don't know my pleasure today is my illustrious guest is my friend Robert Mullen from Marathon resource advisors in San Francisco um so maybe Robert maybe we could start with you given a brief bio or in your own words of of how you got here sure um so I've been a natural resource investor since the early 1990s um you know went to school in another beautiful place the University of Colorado at Boulder you know clearly I I like the mountains um and and skiing and everything that goes along with it uh but I started out in the natural resource space at the Franklin Templeton group I covered a couple of sectors before that but really gravitated towards resources I had a little bit of a family history in that my mom was uh grew up on a West Texas Cattle Ranch where Unfortunately they never actually they looked for oil and natural gas they never found it so it was definitely it was about as far from Dallas as you could imagine very unglamorous but a wonderful place to you know really understand the outdoors and sort of rural Texas and so um but uh you know came out of the University of Colorado uh backpacked around the world for a year and then started working for Franklin Templeton and the energy sector was always one that you know was seemed like an easy fit for me it's fit with my natural skill set which was I've always been less of sort of a fortune teller about sort of what future multiples might be on certain sectors or certain companies it's really about you know trying to buy a dollar's worth of assets for significantly less than a dollar you know and it's it's very mechanical in some ways and very uh you know mathematical and you build models and you understand cash flows and you understand assets and you and and so that's how I got started in it and so I haven't been doing it ever since announced pretty much 30 years of uh banging my way around the natural resource space and then you said 30 Years also you probably won't remind me dating you a little bit but I had to go back to backpacking around the world for a year what year uh so that was 1991 1992. this is so perfect because I remember the very first time I got an email address was 99 in Istanbul Turkey I signed up in an internet cafe for like a Hotmail account yeah so what you and I both know is like when you're traveling around the world in the early 90s it's a totally different world right absolutely no cell phones no email no anything it's a totally different one no my parents wanted me to check in like every Sunday so I would try and find a place where I can make an international call which is easy from Europe um but significantly harder from areas like Thailand or um you know mainland China which we went for a little while we actually thought about doing uh the Trans-Siberian Railway but unfortunately there was a coup around that time so it was uh it got a little messy but it was it was an amazing experience and it was navigating around the world back then pardon the pun but demanded a resourcefulness to be able to figure out where you were staying there wasn't an internet to figure out you know where you would go you couldn't email back and forth with these people oftentimes the language barrier was pretty significant because in some places English was very frequently spoken other places not so much so it really took it took effort to travel and there was a reward that came with that which was was pretty amazing I was thinking about now that I'm an adult my poor parents like I would call home once a month for like five minutes like you know like I'm doing fine I'm alive and that's all that's all they knew about it was going on and then so I think about two I'm always very romantic about the natural resource space you know and I think about the miners that are you know flying all around the world these far-flung places like going into these countries figuring things out and then so part of the Romanticism is Jim Rogers and Jim Rogers wrote you know those great books about riding his motorcycle around the world so is that yeah how much is that like tied in like how do you think about that it's like that probably that backpacking trip not knowing at the time so it's kind of those seeds where when you're dealing with natural resources you're dealing with these global Commodities and it has a very to me very Romanticism very Global traveler kind of sense to it there's there's something sort of basal and fundamental to them you understand how everything works off of the raw materials whether it be you know energy or copper or agriculture or it just nothing nothing works without it nothing survives without it so you get a taste of that um but it is also there's a there is without question a sort of adventurism Romanticism uh about it's like Pirates and buried treasure you know you are trying to go to the far reaches of the world to find something that before you no one thought existed and so that's that's uh there is an element it's distinctly less sexy when you're you know you know camping out in the middle of uh you know the Northwest Territories and you know it did and this was never me to be clear um you know banging away at rocks for six or seven years and all of a sudden you're like well geez we got nothing um so but I think the air from the investor side and even the casual Riverside is very much that you know this is there there's there is some Romanticism to it absolutely and then everything you know now about like uh drilling technology and everything do you still wish you guys had that West Texas ranch do you think there's actually this part of you think with the technology that might have actually been something there they just missed it yeah so this the ranch still is in the family oh really yeah so uh I'm the oldest of 13 cousins uh who are still um you know involved with uh the ranch it's you know we're pretty sure that I think natural gas would probably have to go to something very very high to make whatever is on the ranch economic it's in a period it's sort of in it's called the Marfa Basin uh so it's not too temp not too far away from a very cool artsy town where I actually have family um in Marfa Texas uh and so you know look at some point if natural gas trades for 20 bucks on them um you know we might we might have a story there between now and we actually one of the things that we thought about was when the Frac sand boom was going on whether people were looking for the materials to push down into the reservoirs to be able to hold open the cracks in the very highly pressurized reservoirs we thought we might have a deposited Frack sand on on the ranch and unfortunately that boom kind of crested and rolled over a little bit too quickly for us to take advantage of it timing gets us every time so one of the things that's been obviously highly prevalent these days but you've been writing about for years and I always love reading everything you write about and watching all the videos you do and how the talks you give is this transition to EVs and whether that battery transition looks like with you know traditional raw materials but also to rare Earths all that sort of thing so talk to me a little bit about how you think about that transition to EVs and and how that affects the way you think about trading the markets yeah so there's so there is this there's a political imperative to move this way the decarbonization um you know kind of flips out of that is anti-fossil fuels but there's there is a there's an extraordinary Global imperative to move towards more EVS that's seen as sort of the tip of the Spear of decarbonization and reducing CO2 emissions I think there are there are nuances to it that are lost in most of the political discussion um but without question I think the status is someone like a Robert Friedland from Ivanhoe will tell you that we need more copper in the next 20 years than we've mined in the last 200. so it's a huge call whether it's the batteries for the EVS themselves the other materials that are necessary uh to be able to make EVS work all of the transition mechanism of transmission mechanisms and and all the infrastructure that goes around it the grid level battery storage that you need to turn wind and solar power into something closer to base load so it effectively can be integrated into the grid all of that is is is massively massively materials intensive for the same kilowatt hours of uh you know of energy relative to a natural gas or a coal plant you need about seven to 15 times more materials metals and materials to be able to generate that same kilowatt of energy via wind or solar and so I think we've seen this as this easy oh wind is free and and the Sun is free and this is all going to be very easy and all just just just subtract that sort of side of The Ledger that is the emissions generated by the oil and gas industry and you know we're we're off and it's free and easy um the energy transition comes with a gigantic materials and therefore a energy and carbon footprint along with it to make it happen and so so that's it is both a challenge and a really neat opportunity I mean one of the things we were talking about one of the sessions yesterday was you know Ai and how do you express it um and so this is a little less energy transition but more that you know if you look at almost everything as materials intensive in one way or another so you know Nvidia trades it depending on your estimates 35 to 40 time sales um you don't have to believe that Nvidia wins if you believe AI is a big thing clearly the proliferation of significant numbers of microchips and microprocessors is going to be a key theme of that you know Nvidia may be the winner in that they may not the one thing you need for all of those is 10 you know because 50 of the global tin market goes into microchips to be able to effectively solder them together there are alternatives for it but no one's using lead anymore for anything that's uh you know that's even more toxic than that than most of the hydrocarbons so so so one can't win without the other one you can pay 40 times sales for the others you can pay four times earnings for and so to me I think there's just a much more interesting way to express it you know the the the the consensus around the room was you know that's the way to invest in it as opposed to trade it and will people ever care we don't know but to me that's just a much more comfortable way of allocating Capital it's interesting to me in the sense that when you're dealing with commodities right it's almost like a throwback to buy gun errors which is part of the Romanticism and then when you think about cash flows and being a value investor it's a it's a very um staid way of looking at the market a very smart way of looking the market but at the same time when we're talking about EVS we're talking about the future of batteries yeah so you have this bifurcation of right you're thinking about old school commodity and digging stuff out of the earth and what is that was the cash flows of the company look like and then people are promising all these future things with batteries yeah and so I wonder like how do you deal with that some of that dichotomy is like right now the batteries in the EVS are you know they obviously become more and more impressive like you're saying for solar and wind we have transmission we need better batteries people talk about even using batteries on planes yeah like so how much do you go you want to believe in this future battery but sometimes you're like the physics just doesn't pan out and so it's hard to deal with yeah so so you know you're replacing when you build an EV you're replacing 180 pounds of a gas tank with a thousand or twelve hundred pounds of a battery which is massive it's lithium it is copper it is manganese it is graphite um it is all those things um because of the weight of that battery you need to do other things to the car which is you need to make lighter panels so you need more Plastics guess what more hydrocarbons you need to replace steel with aluminum guess what huge energy intensity on that and you have to actually get the aluminum you got to get the bauxite the torque generated the weight and the torque of the EV actually goes through rubber tires much faster so you're all of a sudden going through much more of a carbon footprint on the tires themselves and so I think it's it is viewed in black and white I can sometimes be absolutely insufferable at San Francisco cocktail parties when people decide to go off on a tangent and I try to inject some of the real math to it occasionally I just get the tap on my shoulder from my wife just saying all right come on it's um but it's it but it's true and the unfortunate the the real unfortunate truth is that most of the political discussion about the integration of renewable energy and EVS is done on effectively kind of cocktail napkin map it's it it just it Bears no relation to a can we find all the stuff that we need to build these as fast as we're promising which I think the answer is now um B can we get the infrastructure there fast enough to be able to make all of this work together in a way that gives us power on a reliable basis and allows our economy to much you know to at least stay where it is if not grow um and then you know finally there's just there's there's I think this massive misconception about the actual cost of it both in terms of dollars and in terms of carbon emissions itself and so I just think that gets lost in the discussion and all we get is Snippets of politicians competing with each other as to who can promise the transition faster because look at polls great and people love it they're just not being told how much it actually costs people here well we're actually in Nevada but in the great state of California we've seen exactly what it costs where you know we've been the most aggressive in terms of integrating Renewable Power into our grid and our power costs are going up four times as fast as anywhere else in the rest of the country and Germany is having the same thing and so um I just I'd like the discussion to be more honest and more thorough and unfortunately that's just not the nature of politics there's a couple of divergences I want to take there one I think you'll bring up yesterday too like how many even hydrocarbons are in Asphalt like I think even in the rubber tires you need carbon black which is a hydrocarbon as well right but this is a out totally outside the box question but like sometimes you read about uh reflective Natures of Road surfaces and everything and a lot of scientists or people will speculate that we should have like white roads and everything like do you think we could eventually change that like I was thinking like do they need to change tires how like is there a reason like we would go with black everything yeah I think there's there are a lot of things that work you know at bench scale that are really hard to implement on you know at real scale so there was actually there someone built a solar Road in um yeah I think it lasted about six weeks before you know the pressure of the cars and the dirt that was on it and everything else just totally in the degradation of productivity um was was really rapid in the cost of it I think they abandoned it after you know less than six months uh and so I think what we have to believe is that most of the things that are getting integrated today have been in the works for a really long time these transitions take um you know decades if not more and the idea that we have that we can look at sort of the evolution of microchip technology and how fast do those things move and do that to it and and extrapolate that to the physical world where look the first lithium ion battery was created by a guy at Stanford who was on you know a consultant for excellent Mobile in the late 1960s and while the battery chemistry has changed it's not you know it's not significantly different the electronics around it have evolved yes um but I think the likelihood that we find a magic hugely scalable kind of uh solution that really changes the economics of Renewable Power and I think I think that's a stretch you know the closest thing quite frankly that we have is nuclear and we are for reasons that are wholly political choosing not to use that which I think is one of the most remarkably short-sighted things that uh you know the world I think we will look back at this in 30 or 40 years and say if the goal is really to reduce CO2 why in the world are we shutting down existing nuclear facilities um the other diversion I'll take hopefully you'll disavow me of because we brought California and you've been around for both Governor rounds I assume right maybe your kid you know with the first governor Brown but like uh I've always heard and I never really dug it too deep into it so maybe you can tell me is like the idea it was originally what with original California Governor Brown and even to his son is like the idea with PG e was like you didn't have to upgrade your infrastructure costs as much as long as they um invested in Renewables so they gave them the incentive because they really wanted to push renewable energy and so for decades now in California instead of like upgrading their wires and their infrastructure they put it all into Renewables and that's how they got away with not upgrading the infrastructure now that is easily like uh you know I jump to conclusions there but do you think that's categorically true or is it a lot more nuanced it is more nuanced in what I understand it's not an area that I am you know extremely well versed in but I do think that the push to spend in areas that don't necessarily generate a near-term economic return has absolutely caused the starvation of capital to just the base level of Maintenance and we see that throughout the country not just at PG e they are the most you know most pointy an example of that um but uh but look there's only a certain number of dollars out there and if you are investing in things that don't currently generate economic returns and I think one of the things we discussed in one of the sessions yesterday was you know those who will tell you that the energy transition will pay for itself are relying on I think one of the most inane statistics out there which is the lizard levelized cost of energy which is an interesting way to compare to some degree what um you know if normalizing what sort of the costs of different power sources are but it Bears absolutely no relation to the economic reality of installed power anywhere in the world and so they'll point to these metrics and say solar is you know solar is the the the cheapest way to you know generate power and it's like yes if you don't have to pay for the land and yes if you don't have to figure out how to transmit it from one way or to the other and yes if you don't have to store it someplace so you can use it at a period of time and yes if you don't need backup power from anywhere else just in case the Sun's Up shining which it happens to do kind of half the day and there are clouds and it's there there's just a there's a there's a there's a shallowness of the arguments of economic viability I'm fine with trying to make the environment better I think this maniacal focus on co2 is a little short-sighted there are other things that we should be concerned about as well um but we just we have to have an honest discussion about what it's going to cost I think people will be much less likely to give politicians a blank check to push Renewables to a mess thing if they get the honest scoop which is well guess what your power bills are going to go up by 30 or 50 or 100 percent um so let's just have that discussion have it honestly and if we're willing to pay for that great um if we're not if we'd rather pay for schools or roads or retirement for employees or whatever we need to do you know then we have to prioritize one of the my favorite things in life is one of those minor epiphanies or light bulb moment when somebody makes a statement of the obvious that you didn't think about before and then you hear it you're like oh my God that's so obvious and one of the things you were really going into yesterday that was so brilliant that to me was a statement of the obvious I couldn't believe I hadn't really thought about it as much before it was the idea like you're saying it's like any sort of natural resource extraction to go Eevee or however you're looking at it the input costs of the energy and the the cyclicality of this feedback loop of how much energy does it take to get these energy intensive resources out of the ground and like the feedback loops of that and like as these prices go up the input costs go up and so maybe you could speak on the kind of like that circular nature a little bit of like yeah cost structure so the so the energy transition has progressed as fast I can and Renewables have gone have grown as fast as they have because of you know over the last decade we've had very low cost of inputs um the raw materials and energy inputs have been very inexpensive production has been consistently moved to low-cost locales a lot of it into China where they get cheap labor and cheap power and you know quite frankly a massive amount of government subsidies and so you know the spend on Renewables has been something close to 10 trillion globally a significant portion of that has been government funded um very little of it has generated actual profits or economic return you know I'm a believer that at some point whether 10 trillion is that point or not you know Renewables have to sort of put on their big boy pants kick off the you know the uh the training wheels and show that they can generate economic returns and we just we haven't got there yet so the subsidies are still really significant um but then absolutely you look at this uh sort of cycle of okay in order to create the renewable systems that we need to do um you know we need to extract 20 times as much lithium we need to you know set get as much copper in the next 20 years as we've gotten in the last two thousand the problem with all of this that is lost in those who just look at sort of the U.S geologic survey and say yes there's tons of copper out there we can easily meet these needs they miss the fact that there is copper in the air so it's just like there's gold in the ocean it's just not economic to extract and so look we've had a big boom in the production of natural resources that was driven by the Chinese and Asian industrialization back in 2000 to kind of 2010 that capital expenditure boom extended out to 2014 and um you know and we built a huge number of projects and that led to the over capacity that made resources such an awful place to be effectively from 2010 to 2020. um but you know now all of a sudden we're stuck with having to massively accelerate how much of these things that we need to produce for you know for Renewables copper lithium nickel zinc uh all you know all of the Rare Earth elements and things at a time when the cupboard is it's not bare but there's a reason that the current projects that are in jurisdictions that we can do that are you have gotten the permits that they need that have had the delineation drilling that they need to under really understand that deposit the ones that are left are sort of you know the way I described them yesterday was kind of an island and Misfit Toys there are reasons that they don't that they haven't been developed yet because if they weren't developed in the last you know it from 20 you know 2006 to kind of 2015 there was something wrong with them right because we had a really low cost of capital equity and debt were freely given to the resource companies because there was this belief of this the extrapolation of this great commodity boom um so if it didn't get developed it's because your grade is too low you got to move too much dirt it's too deep it's too remote and all of that what that all boils down to is it's more energy intensive you know that and the you know look the the head grade which is what you typically the production grade of copper you know 15 years ago was 1.3 percent now it's 0.7 I think so the amount of dirt that you have to move from today's Minds the existing Minds not the new ones that we have to build but the existing Minds you have to move twice as much dirt to get the same amount of copper that is energy to be able to move all that and the idea that we can kind of go out into the you know Wilds of Chile or the you know uh or none of it up in uh you know Northern Canada and then power that with Renewables like you know a big electric dump truck is going to have to have a battery about as big as the truck and so it decreases the efficacy of it um and they're starting to get some of that technology forth and in some places there may be ways to use it but but then you're talking about having to make the battery for that truck and then and so there's the way I described it was a giant oroborus the more you create renewable systems the more energy and extraction and quite frankly CO2 production that will have happen because of that and so I just think we're not we're looking at a very narrow part of The Ledger without taking into account the secondary and tertiary effects of it my simplified analogy of it that I thought of too was like uh those first few seasons of Gold Rush the TV show very romantic love watching it but all I could ever look at was the the input cost is like the more the more tailings they like you said like all the good land's been picked over right for the for in the Yukon so they're going like into tailings or they got to dig deeper whatever and then every time they they fire up all of their bulldozers or other everything they do as requiring that oil input costs so there's other things oil remained low they had that Delta and gold prices remain high and there was just there's always this race like everybody look at the gold at the end of the week and being poured in they go oh my God they made like a half a million dollars this week mining right and then I'm like I'm waiting for the after of like how much did they spend on gasoline how much they spend on labor it's like running three shifts like the amount of gasoline the inputs cost like to that and to end of how they have to mine it was It was kind of fascinating to me to think about the input cost and the other one I thought of just now was uh thinking about you know you have to have a rational perspective I mean it's good for people to be optimistic to push this forward but then it made me think Ikea Batista and Brazil right like deep ocean drilling off the coast of Brazil yeah great idea maybe two the input costs were higher than he expected and he Lo he lost his wealth faster than any billionaire in history yeah another example yeah a little less romantic version that's definitely the less romantic version uh it's it's such a fascinating story I was like living in Brazil at the time that all that stuff happened so it was always fascinating to me um one of the other things like we you know we talked about um all the all these different parts one of the you have a coordination problem and you and I didn't have time to talk about this yesterday but like when you're talking about especially movement to electric vehicles batteries Renewables there's a global coordination problem and I think like historically um it always is kind of interesting to me that as as as First World countries we tend to push our pollution our refining our toxic you know Industries off into emerging markets and then we tell them you need to upgrade to our standards and they're like we're just industrializing our nation and you push this pollution under us and so yeah so there's a there's a tragedy of the commons problem but the one that I thought was most interesting recently that um I think I was talking to a guy with stock gen was talking about this was that um when Germany you know was always hold the line hold the line we're doing all this stuff and then when when also in their natural gas pipe like gets shut down and everything all sudden they flipped on a dime and so what does that tell all the Emerging Markets they're like hey you changed your mind and you switched who are you to tell us to to do what you do you couldn't do yeah yeah they went you know they spent half a trillion dollars to build out their renewable infrastructure and built a very flawed and very vulnerable system and then the moment that it looked like the lights might go out they went straight back to lignite Cove you know the bottom of the barrel kind of dirtiest nastiest stuff that you can imagine and so it it I think it's it's a great example of how challenging this is um it really is it's just there's the the struggles to be able to do that the the political imperatives have outrun the physical realities um last year was a bit of a Day of Reckoning for that I think we've slipped kind of back into a little bit of complacency about that you know I look at you know we have gone if you think about what's happened in sort of Europe and the European power markets we have gone from the equivalent of you know like oil prices hitting 145 dollars in 19 uh whatever or sorry 2007. um right at the very front end of the global financial crisis um two the equivalent of the negative 45 print in covid you've actually got negative power prices in Europe right now because they swung so far they spent again in addition to the half trillion dollars that they that Germany's alone spent to go renewable to go wind and solar Europe as a whole spent half a trillion dollars this summer or sorry this winter just to make sure they had enough resources to be able so they got they got a little bit of a hand from Mother Nature so they had a two standard deviation you know warmer than uh uh warmer than normal winter and so you know now they've got this Surplus and power prices have gone negative and so everyone's like hey we're good you know we there's there's a problem we're done with it we're all you know we're back that's not the case you know there were some things about last year not only just the weather variability that you can't count on having cooler Summers and warmer Winters in Rapid succession like that history shows you just doesn't happen but really the reason that they were able to secure as much LNG as they did last year was that China was shut down you know China was effectively out of the market they were you know importing you know uh I think 30 30 less LNG so that opened it up for Europe to go and compete for it John's no longer closed down and so if we do and certainly Nordstroms doesn't look like it's going to be working anytime soon so um there's a really interesting kind of opportunity set opening up because we've gone some some kind of Maximum concern to Total complacency again and that's reflected in the equity markets for some of the European um kind of natural gas producers uh and so I think there's there's kind of an interesting uh I think very asymmetric bet that can be put on there that I think is kind of interesting so I want to come back to the asymmetric bag I want to also come back to like uh Global macro and how you think about that overlay and Supply chains and Dynamics with China and Belton Road initiative and those sorts of things but I kind of come back to some Basics a little bit it's like when we think about natural resources Commodities Etc I work with a lot of ctas and that's how people usually think about um you know investing in those markets is via you know future strategies but part of it is a lot of people will say that you know when they look at stocks bonds and then Commodities are like it's a neutral return environment so people like to put a trend following overlay on it and trade directly in those Futures markets but I think a lot of times we were talking about yesterday that when we talk about rare Earths or some kind of like off the run so to speak you know Metals Etc you know there's not liquid commodity Futures markets for that like they're only spot markets and so then it's maybe better to go into the the resource Equity markets like you do and then that's where you can find companies that are working on this but now you've got another set of problems we all have nuanced trade-offs right and now you have you know a management problem you also have that uh Keynesian beauty contest that we were talking about yesterday um with how does what's the Market's voting machine you know doing to that Equity so maybe talk to me about the the nuances of why you prefer the natural resource equities than necessarily playing in the the Futures markets yeah and I will say I do I do some of the the Futures directly and you know we put on some reasonably successful um you know gold and silver direct commodity trades earlier this year um but really the skill set that I think I've developed over the last 30 years is really in resource equities um and so it's part about about trade construction it's part about understanding the different variables and it differs at various points of the cycle and sometimes it's just it's better to do a commodity investment um but it to me I have always believed that if you really do your work in the you know three four five hundred kind of resource Securities that I think kind of fit our criteria which are high free cash flow generating um you know some sort of capital return and folks doing so so we're naturally self-selecting a less volatile less downside vulnerable uh sort of uh subset of resources equities um and so to the extent that we can find things that work in that realm and you can really get comfortable with management risk and local geopolitical risk and the geologic risk of the specific deposit um and the more you invest in sort of later stage things and not taking exploration risk the more you have kind of certainty about that and so that's why we've typically done I did a lot of early stage um you know pre-production exploration in early development stage investing earlier in my career I'm just more comfortable when you know we know what's underground and we know what the cash flow statement looks like and so you know sometimes it's hard you know I've found at times where there are there might be a very specific Niche commodity that I want to be involved with and there just isn't a good Equity way to express that so then you sort of have to look for something else and maybe you know uh you know like Chris's Chris had a fantastic talk yesterday about uh sort of options uh Theory and trade expression and so you know then then there are ways that you can you can find different ways to express it and um but you know for the most part there's there's typically enough equity depth to be able to find what we want to do in at least you know modest size to be able to make it work in in various markets and so right now we're you know very constructive in energy which is usually pretty easy to express um you know there's lots of options there because of globally and it's it's probably half of the natural resource traded Market is is an energy agriculture is a little bit of a thinner Market but there's still a fair amount of you know volume in those names and um and a lot of different options whether you want to be into fertilizers or Plantation companies or you know that we've been involved with palm oil companies in Indonesia and sort there there are lots of different ways to get there I think that's a very interesting space um we have had you know last year was a big year for us in the lithium space and so we we've had some things that were a little bit earlier stage than we typically go but it was just a really spectacular asset in a place where we thought we had a due diligence Edge on it because of some of the people that we work with and so you you know like I think there's just a lot of very interesting things going on in the natural resource space and there's no shortage of ideas if anything it's just a shortage of capital to be able to invest in all the things that we want to so one of the ways I think about resource equities too I think a lot of people's first entree and resource equities is to be a gold right like people who started with gold and then they want to they want more leveraged versions so they go with the gold mining you know equities and you see people play that but like they're searching for positive convexity but a lot of people just tend to get burned in that scenario because also they just they don't maybe do enough research or due diligence or expertise in the space they're just looking for a leveraged gold play so maybe talk to me then about like how you construct your book and how you think about it like when I think about your book that the three elements are like equities yield and options even though those kind of blend together but like kind of talk about like how you think about how do you achieve positive convexity in the natural resource base yeah yeah so you know let's start with the long book so really the core criteria is significant free cash flow generation that is sustainable so not just someone that's going to generate great cash flow for three or four years but can do it for 10 or 15 or 20. low cost structure so they can survive the cyclical nature of these commodities um hopefully coupled with the management team who's willing to give some significant portion of that income free cash flow generation back to us we like to see a combination of growth in capital returns so we're we're not just necessarily looking for stagnating or even liquidating entities we like people who can grow assets over time as well uh and so you know we're willing to accept lower yields off of things like that that have a growth element to them as well and then it's really about spreading the book across the resource Spectrum in a way that gives us sort of stability and I think most resource funds are typically kind of mostly energy maybe a little bit of copper and so that tends to be a very GDP economic growth sensitive kind of book um I like incorporating in areas like agriculture with which are a little less cyclical from a traditional you know growth sense I like some of the processing Industries or Transportation Industries shipping uh and uh refineries and chemical producers and things like that gold has a tendency to be counter cyclical and so you don't see a lot of people who incorporate a decent gold book into a traditional energy and maybe based metal book and so that's an area that I've always really liked um and then you know and then you delve into those pockets and you sort of say all right how how big do I want that to be to and how should it fit into the overall structure and then how do I construct it via the Securities underneath it and so I think the gold book right now is a really interesting example of that you know I have a combination of kind of larger cap gold producers you know again very low cost you know generating good dividend yields uh and and good highly economic growth um and those are sort of a basket I think our biggest position there is seven or eight percent but I think our total uh precious metals books is you know over 40 percent uh of a on a gross basis of fund Equity do you run any like constraint bands when you think about sector waiting or do you not worry about them I don't um and it's really it's it's just if it feels too big then you know you've got to take it down or or if you can't find enough ways to express it then you've got just got to keep it smaller so the way we've expressed the gold book is so we've got some producers we've got some royalty companies and we also have a kind of a very interesting way to play that that I've talked about publicly before um is a gold asset manager where I think you know you've got uh go ahead and name it's a sprot Inc you know I used to work with John Hathaway at tocqueville uh he and Doug Rowe and the rest of the team are great mutual fund managers but Sprott has this really interesting combination of physical commodity ETFs not just precious metals but also uranium and and uh and other pgms and things like that and and you look at at this asset manager and you know it was the same market cap uh you know stock basically the same place today when it was when they ran 8 billion in AUM and then they went to 16 billion in AUM and then they went to you know 20 plus billion dollars in AUM it's in the same spot uh and so in a world where I think people would prefer to play if they're going to go into these dirty extractive Industries um and they're gonna you know have to make a strain on their ESG thing give them the easiest thing to find that they can and a gold asset manager is a very low bar the royalty companies are very similar because they don't have a big they have relatively good ESG scores and so what you've got is you know if if you're in my my parallel for this is in the early 2000s so the great gold market of kind of 2001 to 2007. there was a period in sort of the middle part of that bull market where you know I think from 2004 to 2006 the um GDI or the predecessor to the GDX was up 50 or 60 so you know good move over a couple of years the one major gold asset manager which is a company called us Global was up tenfold and it was because portfolio managers kind of found a way they're like all right this this Market is getting underway gold asset managers can win in multiple ways in that they get both the appreciation of the existing asset base as the sector rallies but they also get inflows so there's a reflexive element to it that can make them go from you know say 20 or 30 million or 20 or 30 billion under management to 100 billion under management then all of a sudden you sort of put a you know a five percent of AUM multiple on that and you've got a stock that can go up five or six times where you're not taking geopolitical risk you're not taking specific taxation risk anything else from you're not taking specific Asset Risk where you know you have a a wall cave-in or something like that or a tailings dam break what you've got is just a very clean way to say is this a sector that I think is going to work expressed in a way that can potentially be very asymmetric in the interim I'm just you know clipping a four percent dividend and so I've got that positive carry with a convexity that's like it looks to me like it assets Could Fall by half and the stock would really not go down much from here one of the other things you said uh yesterday that is one of those obvious things but it takes a while to learn and it's it's easier said than done is the idea like like you said you're finding these Securities you're doing your due diligence you like uh cash flow free cash flow and that that gives you that dividend yield so there's your your equity and your yield but part of what you said too is if if you structure the trade properly and you're comfortable with what they're doing and you could create that positive convexity through that structuring that now your position size need to be larger and it's like the correlation between position size conviction or limiting or truncating the left tail to opening up to the right tail is like now you found over the decades that you need to take larger positions than you previously would based on like maybe the it wouldn't be volatility but you're figuring out a way to structure maybe lower volatility with positive asymmetry or based on like kind of like a sortino ratio effect it's really about the asymmetry right um you know what is my potential to interlook in in you know when I was a 25 or 30 year old hedge fund manager you know I the biggest step side had the biggest position in the portfolio you know now it's more about upside relative downside and you know that's that's just part of you know getting kicked in the teeth you know a couple dozen times over the last 30 years so then the next element of it is the short book and so layered on top of that is areas where I try and isolate specific risks for the portfolio whether it be in specific Commodities so if I've got a big energy book Running I'm going to look for ways that I can find a short energy position whether that be through you know companies kind of destroying uh economic value whether it be through you know and this is true across the book you know a lot of times I like companies that are destroying clearly negative cash flow and will be perpetually but I also like finding companies where you know unsustainable dividend yields are being paid and after 20 plus years of really understanding what's sustainable and what is not in the sector when you find the unsustainable dividends the the asymmetry on the downside when dividends have to be reduced or cut are fantastic uh and so you know we've had something work this year in the wood pellet space that I thought was a little bit of a kind of a BS green uh story anyway but there was a company involved with that that was you know paying double-digit dividend yield that was generating negative free cash flow and so you knew it could not last forever and when they finally did cut it you know the stock was already down 50 it fell another 70 that day um so that's that's where we try and create so that's part of the short book is directly within the kind of resource verticals we have sometimes it's more efficient to express like we're vulnerable to a turn a negative turn in the economy and so you know whether it's whether you can express that well by shorting more cheap you know copper companies or steel companies or whatever and we do some of that when we can find situations where we think we've got an edge but sometimes it's better expressed through other ways you know we have a little bit of a consumer discretionary short book on right now um also short a little bit in sort of subprime Auto Lenders and things like that where that is the sort of the the most vulnerable segment if we do have an economic slowdown that people would say oh no we're going to be consuming less resources you know energy companies might not be the most the ones that you know trading at four times cash flow and you know 10 dividend yields they may not be the most vulnerable to that most vulnerable to that is kind of consumer or you know some of these highly leveraged stocks that that really require consumer spending and consumer health to be very high you know look if peop if you think people are going to drive their cars less maybe they just can't afford the car so um so that's that's where I think um you know there are some other things in our book that are a little bit tangential to what we do and then the overlay on top of that when you mention the options you know this is a you know something that we've been doing for the last four years is sort of a long volatility overlay in areas where we think we can find cheap expressions of volatility that correlate well with the vulnerabilities of the portfolio you know sometimes that can be you know for a while we were sort of Long Dollar calls you know the weird thing was last year both long resource equities and Long Dollar calls actually worked and so that's uncommon but under normal circumstances a spiking dollar is something that won't resource stocks are vulnerable to you know right now we own you know um some out of the money puts on the emerging market index which is typically a group that trades pretty similarly to natural resource equities and it's just cheaper than buying you know puts on the oil service index or you know volt air is three times as high as it is in the eem there are some other places where you know this is always an evolution as and as we have become a bigger fund more instruments open up to us and so to the spaces that I think are very interesting for us to try to hedge with on a real macro basis are sort of the growth value rotation which we have a tendency to be a little bit vulnerable to because you know when when you know when growth is in favor and people are selling all their their resource stocks that's oftentimes that's you know either neutral or modestly positive for our short book in other words those stocks are going up instead of down and our long book is is suffering um but the other area that um that there are some interesting ways to potentially hedge in very highly convex ways is forward inflation expectations so clearly when inflation expectations are running high and you go into something like the five year five year forwards market and um and and be able to hedge whatever might cause inflation expectations to come down rapidly that's an interesting way for us to hedge our portfolio as well and again it's not a significant Capital allocation for us at any given time it's kind of one to two percent of fund equity but when we get those things right they can be very powerful counterweights um to negative and shock environments for our long book and you know one of the things that I another thing that I talked about yesterday was resource stocks are never going to get this slow and steady up into the right bull market like health care or technology because the environment that makes resource stocks perform well which is rising commodity prices which is typically a component of rising inflation you know that is inherently a very destabilizing force on the broader Market particularly a market that is priced for inflation never to be a sustainable entity ever again and so that's something that we want to be cognizant of I also think about like uh you get that amazing amount of positive uh asymmetry in options Market when those correlation flips like you said that long like if you're on the other side of that and historically like correlation's been negative or flips the positive or vice versa that's when you get some really explosiveness because people are just basing it on a short-term look back and if you can time those correlation changes that's amazing one of the other I thought brilliant questions that Chris Edward Messiah did ask you yesterday is like and this is a relation to the China about Road and Global macro and how you think about it it's like he said do you just hedge out and neutralize your Global macro arrest so that way you can you know really just look at them as idiosyncratic bets or like so how do you think about that yeah and that's sort of that's all part of what um you know the short book and the option book do is kind of addressing those current risks and it's it's never going to be a clean dollar for dollar 100 Delta kind of hedge but if we can find ways where we can inexpensively express that or you know look so if I'm trying to neutralize my falling oil book or my long energy book from falling oil prices I Express that either inputs or put spreads in the energy in oil specifically I can do that you know via puts one energy and resource indices I can do it via short individual equities and clearly for us the best is if we can find Alpha gender pardon me Alpha generating shorts at the same time that we can layer on top of a long book that we're very excited about which is you know kind of where we are today that's the best of all worlds and so it's just a matter of kind of looking at the at the entire you know spectrum of ways to be able to to try and say you know take a step back and say look I have to have a macro View um but my back review does not have to be correct and more importantly if my macro view is wrong how much am I going to lose and so you know one of the other you know there's there's so many wonderful things about this whole event but you know you you talk to someone like Mike Green who um you know is talking about some of the underlying um you know sort of net distribution that's happening and and you know the potential for a little bit of index funds selling and things like that A reversal of kind of the passive flows uh and it it it perks up your ears about the need to really be thoughtful about you know a risk of a kind of equity liquidation cycle is not something that I think there's much in the equity markets this price for right now and there are probably some relatively inexpensive ways to express that and so you know again that's another risk that if you can find a way to throw 30 or 40 or 50 basis points at it um you know they can potentially give you a 10 or 15 or 20 20 to 1 kind of payout those are those are bets worth making so unfortunately we're running up on time here but we don't want to miss our sailboat on this beautiful Lake behind us but I thought a perfect place to end is because you teased it earlier so I'll give the audience the morsels that it wants you tease like some of the opportunities in Europe right now like tell us about what you think is one of the more interesting trade ideas or interesting ideas you have like that could potentially uh be implemented in Europe yeah so I'll speak it about this at a high level because I'm actually still constructing it myself and still kind of getting positioned for it but what I spoke about earlier which was we have swung from Maximum concern to maximum complacency in the European power markets and so you look at some of the natural gas producers in the North Sea and some of the related areas that really feed into the European Energy System and they had this they had an unbelievable year last year I mean many of these companies generated their entire market caps in precache and what they did is they paid out debt they started Capital return programs and now the stocks are kind of 50 off their highs they're trading it you know two three four times cash flow you can construct a basket of these stocks with kind of different characteristics so you're you're spreading around your risk of specific uh you know specific jurisdictions specific uh assets and things like that and you can create kind of this interesting basket with a mid High single digit yield kind of nice growth component to it you're paying two or three times cash flow and expectations for European power prices are you know are are in the in the gutter and so you know I look at that market and I just I love in complacency intrigues me because these markets are self-correcting and it's you know they it it beats you over the head time and time again but when you're able to step into those and you know stocks have gotten blown out and they're kind of basing around and they're not acting poorly on you know bad news or concerns about windfall taxes or anything like that you know it kind of feels like this is an area to pick up cheap convexity and so and again with the Positive carry and so you've got kind of a six to nine month window where you know look maybe you know maybe we get another Super warm winter and you know these stocks you you clip your six or seven or eight percent dividend yield and you know maybe these guys retire a little bit of stock or yeah and and so fine you know six to eight percent my worst case scenario that's okay um but if we do get to a tight Market which I can actually see because of the availability of LNG because of sort of the turning on of some of the other European industries that were shut down last winter now you get the opportunity set for you know these stocks get double pretty easily um and so you know we've got a portion of our energy book is is allocated to that and we're kind of in the process of growing that so you had some other really interesting ideas around like carbon sequestration you had some amazing statistics around petrobras but for people to have those kind of ideas they're gonna have to come to the next Collective event you can't give away all the secret sauce but I want to thank you for this conversation I always love picking your brain about resources and also want to give huge shout out to Shannon and the collective for obviously giving us this beautiful place to have these intimate conversations where we don't have to worry about kind of the outside world and we can all kind of banter back and forth and iron sharpens iron that's what I love about these is like you have all kinds of experts in the room and people will really push back and collectively we hopefully find a better place yeah so once again thank you for coming on this has been fantastic Jason and such a wonderful event and um you know I say look my previous travels this month were you know I went to two different conferences a mining conference and a agricultural conference met with 40 companies over the course of collectively like six or seven days and so that's part of The Blocking and tackling of what I do the harder part of what I do is creating the world view and how to express it that enables me um to be a better portfolio manager not just the mechanics of the companies underlying it but really how to construct a portfolio that's going to weather the whatever the world looks like over the next six to nine months and this is that's why this this sort of opportunity set is so unique it's been it's been a lot of fun this podcast is provided for informational purposes only and should not be relied upon as legal business investment or tax advice all opinions expressed by podcast participants or certainly their own opinions and do not necessarily reflect the opinions of mutual fund their Affiliates or companies featured due to Industry regulations participants of this podcast are instructed to not make specific trade recommendations nor reference past or potential profits listeners are reminded that managed features commodity trading Forex Trading and other alternative Investments are complex and carry a risk of substantial losses as such they're not suitable for all investors and you should not rely on any of the information as a substitute for the exercise of your own skill and judgment in making a decision on the appropriateness of such Investments visit mutinifan.com disclaimer for more information foreign