0:00 the steepening of the yield curve is is
0:02 one of the most important Trends in my
0:04 view for the next year I think that
0:06 that's that's highly likely there are
0:08 indicators that show that inflation May
0:11 reemerge Global liquidity is ticking
0:13 back up government spending as percent
0:15 of GDP has been on an upward Trend this
0:18 may put pressure on the Federal Reserve
0:21 uh to cut rates if the fiscal side is
0:24 constrained this is according to
0:25 research from our next guest Tavi Costa
0:28 portfolio manager of crescat Capital who
0:30 believes that we may be heading into a
0:32 renewed inflationary period which may
0:35 boost commodity prices we'll be talking
0:37 about the implications investment
0:39 implications of his research findings
0:41 welcome back to the show Tavi David
0:43 thanks for having me looking forward to
0:44 this I'll be starting off by asking you
0:46 a very broad question did the FED make a
0:48 mistake with 50 basis points which is
0:51 what they did in September a 50 basis
0:53 point cut we spoke before September did
0:55 they make a mistake yeah it's not that
0:57 I'm trying to avoid answering the
0:59 question but not sure they had an option
1:01 um and from my my understanding of
1:04 looking at the government itself and how
1:06 much ER payments is going towards um
1:10 especially relative to GDP close to 5%
1:13 now compared to other economies you know
1:15 we used to say well the dollar is the
1:17 cleanest of all dirty shirts but then
1:20 Looking Back Now and saying well look at
1:22 Germany and Japan spending
1:25 0.5% or less than 1% of their GDP on
1:29 interest payments and most of the other
1:31 developed economies you know needless to
1:33 say that the Emerging Markets are also
1:35 spending way less than the US that gives
1:38 the the the the government or I should
1:40 say the Federal Reserve a sense of
1:42 urgency to reduce rates much more than
1:45 other economies and that has to have an
1:47 impact on the dollar itself so I'm not
1:50 sure that that the FED really had an
1:52 option A lot of people are seeing this
1:53 as look I think the FED has reduced
1:56 rates uh before really accomplishing you
2:00 know the the the end of an inflation
2:02 problem I don't disagree I mean I don't
2:04 think there's an end of the inflation
2:05 problem but I also don't you know I
2:08 think that saying that is also uh
2:11 Missing the fact that you know if you
2:14 were in their position you would have to
2:15 do the same you don't have an option
2:17 here would you keep rates at five five
2:19 and a half percent and you know and and
2:21 create a major burden for the government
2:24 when you know that basically majority of
2:26 the growth that we've had particularly
2:28 from a valuation differential of
2:31 companies in the US versus the rest of
2:32 the world is mostly attached to the fact
2:35 that we're able to spend more money
2:38 fiscally than other countries you know
2:41 then then you start reconsidering all
2:43 these things and and so if you if you
2:45 work under the assumption that the FED
2:48 is trapped and the FED has to lower
2:51 rates regardless of what's Happening
2:55 then you know you can you can kind of
2:57 come up with a lot of investment uh
3:00 potential investment ideas or investment
3:03 uh thesis that that are likely to unfold
3:07 given an environment where suppression
3:09 of rates is inevitable in my view
3:12 suppression of rates is inevitable so
3:14 interest rates are going to come down
3:15 we're going to talk about that in just a
3:16 minute uh that feeds into the next two
3:19 charts that I want to show this is from
3:21 your recent investment uh newsletter
3:24 here from crescat Capital uh very very
3:27 good resource by the way for investors
3:28 check out crescat .c link below Global
3:31 money supply has been going up according
3:34 to this chart that you put together uh
3:36 data from Bloomberg it looks like Global
3:38 money supply versus US CPI correlation
3:41 there that makes sense let's put these
3:43 two charts together what is the story
3:44 here that these tell well money supply
3:46 by the way this is prior to any I I I
3:49 put this chart out prior to anything
3:51 that came out of China from a
3:52 stimulative stem point in the Bazooka
3:54 that we came out which only adds to that
3:57 but that puts into perspective that the
3:59 level of grow were seen which is about
4:01 7% on a year-over-year basis OR7
4:04 trillion dollar because the money supply
4:06 is about 100 plus billion um we're
4:09 talking almost as much as we're kind of
4:12 in the same trajectory that we saw
4:13 coming out of the pandemic and really
4:16 there's not much going on right now
4:18 compared to what was happening at that
4:20 time and so when you think about this is
4:23 is you know it's not coming just the US
4:26 it's it's really globally China not as
4:29 much part of this as you would think and
4:31 China may even add tremendously to this
4:33 data um but but the the chart of CPI
4:36 with money supply I think the answer to
4:38 that is know those friends that we all
4:41 have that say money printing doesn't
4:43 create inflation you know that's the
4:45 person you want to share this chart with
4:47 and I'm not trying to be you know uh
4:49 hopefully uh rude or anything like that
4:52 but a lot of people like to get into the
4:54 technicality of what money print
4:55 printing really means the expansion of
4:58 money supply I mean it doesn't it
5:00 doesn't really change the picture you
5:01 know the money uh is being diluted in a
5:04 large way and that has to have an impact
5:06 on CPI particularly when you have you
5:08 know this level of monetary stimulus
5:10 along with fiscal uh which has been
5:12 something that combination of the two is
5:15 incredibly inflationary um what I'm
5:18 extremely concerned because back in 2021
5:22 and 2020 when we came out of the
5:24 pandemic and we've had all these
5:25 stimulative packages coming out of most
5:27 developed economies even emerging
5:29 markets that the same and all the muddy
5:31 creation that we've had um we didn't see
5:34 the dollar actually depreciate relative
5:37 to other FIA currency zone so that to
5:39 the US economy you know just looking at
5:41 the US economy alone that was actually a
5:44 positive factor that uh helped not to
5:47 make the inflation issue even worse this
5:50 time I am very know I remember in 2021 I
5:54 came out very strongly saying I think
5:55 10year yields are going to go a lot
5:57 higher I'm still of that view I still
5:58 think 10 year yields could could go a
5:59 lot higher I think the suppression of
6:01 rates is happening on the short end you
6:03 just want to be clear of that it's the
6:05 FED funds rate two-year yields and so
6:07 forth those the t- bills they're all
6:09 going to be suppressed in a big way in
6:11 my view now the big Trend that I'm
6:14 paying attention is not necessarily on
6:16 the interest rate side of it but it's
6:18 the impact of that on the dollar I think
6:20 the dollar is extremely mispriced we've
6:23 had a big depreciation of the dollar
6:25 versus other fiia currencies recently
6:28 and that actually we had has moved the
6:30 other way a little bit recently as well
6:33 and I think that that's not the real
6:35 Trend the real trend is that the US
6:37 dollar is likely to devalue much further
6:39 versus the currencies now I want to be
6:41 clear as well I've had that thesis about
6:44 hard assets for a long time too I'm not
6:47 talking about hard assets at this at
6:48 this stage I mean I I'm extremely
6:50 bullish hard assets for the near- term
6:52 and the long term I am being very
6:54 specific about the dollar versus all
6:57 their fear currencies particularly the
6:59 ones that are Emerging Markets I think
7:01 that's going to have some major
7:02 implications in the global economy and
7:04 we have as investors to think about that
7:06 especially for the next zero to three
7:09 years and I'm not here to also say that
7:12 this is the end of the dollar or
7:14 anything like that that's I'm not going
7:16 that extreme either I'm just saying
7:18 depreciation of the dollar is highly
7:19 likely for the for for the foreseeable
7:22 future and you know I think that's going
7:24 to be very important the dollar is going
7:26 to depreciate relative to other
7:27 currencies why because other central
7:29 banks are going to be more doish than
7:30 the fed or other reasons the other way
7:33 around I think the FED is going to have
7:34 to be more doish than other central
7:36 banks I think we all if other folks have
7:39 not uh learned a lesson about currencies
7:42 is that it's a relative game always it's
7:44 a relative game especially from the
7:47 economy standpoint from policymaking and
7:49 all those things and when I look at that
7:52 interest payment relative to GDP this is
7:54 the main thing I'm concerned about
7:56 because I I cannot see this being fixed
7:59 I'll side of suppressing rates in a
8:01 large way and if that's going to be the
8:03 the case here um then even the ECB and
8:06 even the boj is in a better position in
8:08 the Than The Fad in terms of the
8:10 interest rate policy now keep in mind
8:13 the the Japan as a country has a
8:16 much larger uh leverage in the system
8:19 than the US I understand that that's a
8:21 very very uh contr and view what I'm
8:24 seeing are very unpopular the fact that
8:26 I think that the doj is in a better
8:28 position than the US and I'm fully aware
8:31 of what happened with the Dollar carry
8:33 trade uh not too long ago but I do think
8:37 that the fat is in it's really boxed in
8:39 and it's going to have to lower rates
8:42 regardless of what's happening and so
8:45 we're going to get into that path moving
8:46 forward and you know what's going to be
8:48 interesting David is if inflation
8:50 actually really starts re accelerating
8:52 which is my base case right here I think
8:55 that base case was a lot harder two
8:57 three weeks ago to call now you're
9:00 seeing break Heavens much higher you
9:02 know the dollar I'm sorry the the crude
9:05 uh crude prices are much higher you're
9:07 seeing most agricultural Commodities
9:09 much higher we've had one of the largest
9:11 increases in food prices over the last
9:13 you know since since the Russian
9:15 invasion period in 2022 so know things
9:18 are lining up to a point that I think
9:20 inflation could re accelerate as the FED
9:23 is lowering rates and the FED is going
9:24 to be forced to ignore that that cannot
9:27 be POS that cannot be positive for the
9:29 dollar my view I want to come back to
9:31 the inflation side of the story and and
9:33 you've done excellent research on the
9:35 interplay between the fed and fiscal
9:37 policy so we'll talk about that but I
9:39 want to focus on China stimulus first
9:41 arguably the most important piece of
9:42 news in the last couple weeks for base
9:44 medals just today on Tuesday October 8th
9:47 uh the Hong Kong uh hen index saw its
9:50 biggest daily decline since 2008 because
9:54 last night uh the government of China
9:56 announced that uh perhaps the stimulus
9:58 measures weren't going to be as big as
10:01 initially projected take a look at this
10:02 article from Reuters China stocks rally
10:06 Fizzles a stimulus offer disappoints
10:08 okay h s saw its biggest it closed 99.4%
10:12 lower heaviest fall since 2008 uh
10:14 comments here ultimately for the rally
10:16 to be sustainable we need to see more
10:18 fiscal policy and more measures to
10:21 support the economy and the property
10:22 Market uh says analysts so uh the
10:25 Shanghai compos also fell basically uh
10:28 economic IC planner chairman uh told
10:31 reporters shinh high was fully confident
10:33 in achieving economic targets of 2024
10:35 but his failures to detail sufficiently
10:37 big or new measures rekindled Market
10:39 doubts about beijing's commitment to
10:41 ensuring the world's second largest
10:43 economy can climb out of its most
10:45 serious slump since the global pandemic
10:47 copper today fell uh by the order of
10:51 let's see here uh 3 and a half% 3 yeah
10:56 2% 3% in one day pretty big drop as you
10:59 know base metals like copper rallied
11:02 significantly um this was the
11:04 announcement by the Chinese Central Bank
11:07 here so what's next for base medals are
11:10 we still is the China stimulus story
11:12 still important after today's
11:15 announcement well first I don't think
11:17 mows really rely solely on this China
11:19 thesis I think the China thesis is very
11:22 much a potential upside to the story in
11:25 a big way and the reason for that is
11:27 because the amount of I want to be clear
11:29 one thing the amount of spending we're
11:31 seeing from developed economies outside
11:33 of
11:34 China whatever you want to call it
11:36 developed or Emerging Market the Chinese
11:37 economy but the amount of money on
11:41 construction on trying to fix the
11:43 electrical grids and and Green
11:45 Revolution all those those those things
11:47 that's not ending anytime soon the UN
11:50 Shoring and clearly that is yet to drive
11:54 even further demand for for the um for
11:57 the Bas Metals in particular and you can
11:59 see that as well I mean utilities are
12:02 leading way in the S&P 500 year today as
12:04 a sector what does that mean now either
12:08 a defensive sector is very negative for
12:10 the economy to see a defensive sector
12:12 leading or it's just the fact that a lot
12:14 of institutional Capital it clearly
12:17 understands that uh all these
12:18 Technologies and and macro trends that
12:21 we're seeing from on shorings in
12:23 particular uh are yet to feed a much
12:26 larger uh investment towards uh the
12:29 utility space and if we see that uh
12:32 that's has to also Drive the demand for
12:35 for the metals and so I want you know
12:38 that's that's number one number two I
12:40 think what's happening with China not
12:42 too long ago China was was uh reported
12:45 actually purchases of gold and gold was
12:47 doing very well on the back of those
12:49 those reports and then one one month it
12:52 basically reported that you know
12:54 unchanged Holdings of gold and gold had
12:56 a terrible day on that day um and
12:59 everyone was extremely bearish and
13:01 saying look China's not buying gold
13:03 anymore and and all it did was it didn't
13:05 buy for a month and all these
13:07 assumptions are made I don't agree it's
13:09 a to me this is very similar to that I I
13:13 disagree with this type of noise the
13:15 Chinese market went up massively in the
13:18 last few weeks everyone is extremely
13:20 bearish and op food it everyone had a
13:22 change their views and now after a
13:25 massive move it's absolutely normal to
13:27 see a volatility or a volatile day on
13:30 the downside we're seeing that today now
13:32 is that the end of it I wouldn't bet
13:34 against it I wouldn't bet against it at
13:36 all I used to be a China you know
13:38 hawkish per I used to write all the
13:40 papers about the the potential for a
13:43 Leman brother moment in China years ago
13:46 I'm not in that I'm not in that camp at
13:48 all I think that the time to be short
13:50 China was two to three years ago this is
13:53 not the time now you know things have
13:55 been cutting half you know some other
13:57 things are down 80 plus per already um
14:00 and if you don't understand that as an
14:03 investor I think you're missing the
14:05 point in a large way so I I I fully have
14:08 this this uh China thesis as a as a as a
14:11 potential for uh other things like gold
14:14 and and base metals and others I do
14:17 think that the Chinese economy or the
14:18 Chinese government is serious about um
14:21 stimulating their economy once again and
14:24 um while I don't see this being what is
14:27 highly dependent on the base ble skes I
14:30 think could be a very important upside
14:32 even for other emerging markets and so
14:34 you're seeing is sell off in in in crude
14:36 is sell off and a lot of other things
14:38 and if you look at technically speaking
14:40 crude is actually right in a support it
14:42 would make sense to have a weakness uh
14:45 right at that level that we're seeing
14:46 right now now those those types of I
14:49 shouldn't say support resistance those
14:51 types of resistances are are are are
14:53 usually not you know very strong you
14:55 tend to see a big break out of those and
14:57 I would I would would be betting on the
14:59 other side of this I actually think that
15:01 inflation will re accelerate I think
15:03 Commodities would do much better here in
15:05 three months from now and uh and that
15:07 can change quite a lot this this Dynamic
15:09 that we're seeing in a day like today I
15:11 think those things are quite normal if
15:13 you're an investor and you follow these
15:15 things and I want to say one more thing
15:16 every CH every thesis that you have that
15:18 you come up with will be challenged at
15:21 some point everyone I mean I've had my
15:24 own Theses that been challenged in the
15:26 past you know how many people told me
15:27 Silver would never ride how many people
15:29 told me gold would never rise and trust
15:32 me I've had situation with silver
15:33 trading $18 and I had to defend my
15:35 thesis while those folks that came out
15:38 recently and said China was was a trade
15:40 to be in and they got it right now
15:42 they're being challenged and what are
15:44 you doing that position do you just get
15:46 spooked and out of the the Theses or or
15:49 do you have the bases and the support to
15:51 really you know rely on it add to your
15:53 position in a day like today now I I'm
15:56 not an investor of of communism I'm not
15:59 an investor of those those companies at
16:01 all I want to be clear there too but I
16:04 would not bet against it and I do think
16:06 there's ramifications to the global
16:07 economy and I think that's going to be
16:09 very positive for emerging markets so
16:11 I'm a buyer of emerging markets and I
16:13 think that's that's really the the the
16:15 big Trend ahead of us going back to uh
16:18 your thesis here liquidity is going up
16:21 stimulus from China and stimulus from
16:23 other central banks so immediately what
16:25 what are we looking at in terms of
16:26 investment implications you like
16:27 Emerging Markets
16:29 Commodities uh these are your highest
16:31 conviction calls right now for bullish
16:33 assets that will react to this stimulus
16:36 yeah I I have you know I've been very
16:39 consistent over the years in those ideas
16:42 um my ideas have always been we've been
16:44 in a entrenched inflationary era um
16:48 where central banks worldwide are very
16:51 in a very limited position to fight
16:53 those Trends and therefore going to have
16:54 to allow them to uh continue
16:56 infiltrating the system and ultimately
16:59 it drives Capital back into things that
17:01 have been neglected for a long time hard
17:03 assets being one of them and also
17:05 Emerging Markets now of course I have
17:09 near-term um views as well and I I think
17:12 energy looks very attractive I think a
17:14 lot of people are are you know not
17:16 counting on uh on the idea that energy
17:19 can break out and change quite a lot the
17:22 uh the macro setting here and I think
17:24 that's a real possibility um you know
17:27 there's geopolitics that can play into
17:29 this as well as a premium to Energy
17:32 prices uh but also um yeah natural gas
17:36 oil all those look extremely attractive
17:39 um other implications that I think are
17:40 important when you have the suppression
17:42 of interest rates on the on the on the
17:44 short end but you also have inflation
17:46 running you know somewhat uh freely um
17:50 you can have a major steepener of the
17:52 yield curve and so the steepening of the
17:55 yield curve is is one of the most
17:57 important Trends in my view for the next
17:59 call it year I think that that's that's
18:01 highly likely we were highly likely to
18:03 see a steep steepener of or steep
18:07 steepening of the yield curve and um and
18:10 so those are those are important Trends
18:13 uh that are you know also uh still you
18:16 know likely to unfold here let's talk
18:18 about that steepening of the yield curve
18:19 the most important investment trend of
18:21 the next year uh why why is that going
18:23 to happen um for two reasons one I as I
18:27 said I think the fattest trapped that
18:29 they're going to have to reduce rates
18:31 more than other central banks and
18:33 they're going to have to act quickly
18:34 despite what's happening and that
18:36 doesn't mean we're going to see 50 basis
18:37 points tomorrow anything like that I'm
18:39 also not saying this but I think that
18:41 that that the trend of rate Cuts is here
18:44 and it's here to stay and so you know
18:46 this is my my view on the short end so
18:49 short end is likely to actually go lower
18:51 and then on the back of that we're
18:53 seeing inflation actually re
18:54 accelerating this you know with with the
18:56 fat acting that way uh but so with more
18:59 stimulus globally on the money supply
19:01 front uh we're seeing Commodities
19:03 starting to Trend higher if you you know
19:06 and if you are of that view that
19:07 inflation is re accelerating you
19:09 probably have the view that the 10year
19:10 yield will be challenged and the other
19:12 thing that I think not enough people are
19:14 covering and they were covering a couple
19:16 years ago and now this thing has been
19:18 sort of on the sidelines has been the
19:21 insurances of treasuries more recently
19:23 on the long end are starting to increase
19:25 again and I think that that drive Supply
19:28 much higher drives yields much higher as
19:30 well so I would not be want to be long
19:33 the you know the 10year treasuries or
19:35 the 30-year treasuries um and I do think
19:38 those yields are going a lot higher and
19:40 so if that's the case you know you have
19:43 uh a short end that is limited and it's
19:45 likely to go lower the long end is is is
19:47 has got a lot of upside so that means
19:50 steepening is is highly likely plus
19:53 historically when you have a deeply
19:55 inverted yield curve what do you see on
19:57 the back of that a abrupt moments where
20:00 the yield curve tends to un invert and
20:03 in a very significant way and so I don't
20:06 think this time is different I think
20:07 we're going to see that once again when
20:09 historically when the 10year minus
20:11 twoyear yield curve steepened in the
20:13 past which assets have historically done
20:15 very well oh that's a good question I I
20:18 actually did a full research on this
20:20 looking at um I created an indicator and
20:23 I actually did a a presentation at the
20:26 IMF um about this which is a I was
20:29 invited to because I created the
20:31 percentage of yield curv inversions so
20:33 instead of looking at separate yield
20:35 curve uh spreads like the two versus
20:38 stands that you referred to and others
20:40 uh that a lot of people tend to look at
20:41 I decided to actually create a little
20:43 bit more comprehensive way of looking at
20:45 this and and looking at all possible
20:48 spreads in the yield curve there's about
20:49 45 y uh possible spreads and then
20:52 calculating how many or how much percent
20:54 of those yield spreads are actually
20:56 negative and when you reach when you go
20:58 up above the 70% handle you tend to see
21:01 a recession uh and if if it's not a
21:04 recession which actually happened I
21:06 think one time um where Equity markets
21:10 you know did well despite all this uh
21:12 but one Trend that is very clear that it
21:14 tends to happen more often than not and
21:17 and and not only that but the
21:19 performance is very robust is that the
21:21 gold to S&P 500 ratio tends to rise
21:25 significantly after those you know very
21:29 large amounts of inversions begin to De
21:31 uh to un invert and so we are at the
21:35 process now if you look at the the gold
21:37 to S&P 500 ratio has been going higher
21:40 uh but not massively yeah because the
21:42 the equity Market has been holding up
21:44 well and you know gold has has has been
21:46 doing tremendously well I mean the the
21:48 surge we seening prices uh is really
21:51 what's been driving this ratio recently
21:53 but there's a lot more to happen here in
21:56 my view and so I would be uh surprised
21:59 if we don't see the gold just at p500
22:01 ratio uh be substantially higher in in
22:04 call it one two three years um because
22:07 of this this uh you know correlation it
22:10 tends to have with the UN inversion of
22:13 of the yield curve and so that's usually
22:15 the big sign now it depends to your
22:17 question it's going to depend on a lot
22:18 of things so if you are in the
22:19 deflationary era treasuries is a good
22:23 bat and so in the last 20 years or so
22:25 every time you were in the position
22:27 where Yol curve is is extremely inverted
22:30 and it starts to un invert as a
22:32 recession unfolds you want to buy
22:34 treasuries uh if you are in a more
22:37 inflationary era you do not want to buy
22:40 Treasures you're going to get in trouble
22:41 you want to actually buy gold and so it
22:44 really depends on where what type of
22:46 regime you're in and now I I have my
22:49 opinion on that I certainly believe
22:50 we're in an inflationary era and I think
22:53 you can measure that in many ways um
22:55 particularly how you know Commodities
22:57 have been Trading
22:59 uh we can get into that there's kind of
23:00 a rotation Dynamic that we tend to see
23:02 from a when you're in a commodity cycle
23:05 uh in very inflationary era and uh in my
23:08 view this gold to S&P 500 ratio may
23:11 actually work even more than we've seen
23:13 in the past so and pay close attention
23:14 to that uh because of this you know
23:17 development in the yield curve so we're
23:19 going to be in a bare steepener versus a
23:21 bull steepener meaning the uh uh the
23:24 shortterm will fall faster than the
23:26 longterm but that's going to be into
23:28 happening into more of an economic
23:30 decline is that basically your thesis I
23:32 am agnostic about bar bull steeper and I
23:35 I think that you interesting you don't
23:36 really have to answer that question um
23:39 as a as a unless you you want to answer
23:42 that question but um I don't think you
23:45 you need that answer I mean we have that
23:47 trade on in in our portfolio and we
23:50 don't have that you know I don't have
23:52 that answer I really don't know the
23:53 answer for that um and I don't have a
23:55 strong view because I don't know which
23:57 one is going to move Mo uh more honestly
24:01 if the fiscal side becomes a a a problem
24:04 and the 10year yield moves a lot higher
24:06 I'm I'm sympathetic with that view what
24:09 if what if what if we see labor markets
24:12 you know we I know we've seen some some
24:14 data recently on employment rates and
24:16 others that they'll support further Cuts
24:18 but let's see we do in a month from now
24:20 and you know a big change in the
24:22 narrative on the labor markets uh front
24:25 and now justifies the FED to cut much
24:28 further you know then then the short end
24:31 moves more than the long end so you know
24:34 I why I don't really need to answer that
24:36 question because I actually think the
24:37 trajectory of both sides or not both
24:40 sides but the the spread itself is is
24:42 moving higher regardless so what we do
24:45 is we keep always you know we we have a
24:48 duration adjustment of of the position
24:51 of that of those of those um of that um
24:55 of that idea in a portfolio and every
24:59 week or so we try to you know kind of
25:00 match that duration because the duration
25:03 uh the position would change because of
25:05 the movements we tend to see so as long
25:07 as we're haging both sides and and that
25:09 spread continues to be you know balanced
25:12 in the portfolio then that's you know I
25:14 think that you can be agnostic to that
25:16 question actually makes a lot of sense
25:18 I'm going to flip back to my screen here
25:20 you have in your report you said that
25:22 your primary concern however is that the
25:24 rising share of interest payments and
25:25 entitlement spending post a serious ious
25:28 challenge the sustainability of this
25:30 Dynamic I think you were referring to
25:32 the role of monetary policy here such
25:34 non-growth oriented expenditures have
25:36 surged significantly so by non-growth
25:39 you mean spending on things that aren't
25:41 infrastructure things are productive
25:43 you're just spending things on interest
25:45 payments on debt for example and that
25:47 spending from the government has been
25:49 rising sharply per your research what
25:51 does this mean for Cal markets this
25:54 chart yeah I I look I usually my letters
25:58 kind of long and I kind of build on them
26:01 over time and the prior letter was about
26:03 a research I did about you know the
26:06 average fiscal spending we've had since
26:09 the global financial crisis across the
26:11 globe and clearly the US is the one to
26:13 spend the most it makes sense we're the
26:15 reserve currency we can we can be less
26:18 disciplinary than other economies um
26:21 it's it's what comes with territory
26:23 right and and so that's what we did we
26:25 spend we meaning I'm I'm Brazilian I'm
26:27 not American Amer but that's what
26:29 Americans did they spend more money on
26:31 the government side that created growth
26:33 on the back of that that created a
26:35 Divergence of valuations of equity
26:38 markets in the US versus other places
26:40 imagine spending more every year than
26:43 other economies on a relative basis kind
26:46 of explains why you have such you know
26:49 froy valuations in the US versus other
26:52 places so that's number one now when you
26:55 dive into that 8% annual uh spending
26:59 that we see relative to GDP every year
27:02 right uh in in average um one important
27:05 aspect of that is is that the known
27:08 growth now how much of that is known
27:10 growth how much is that is entitlement a
27:12 lot of people say that oh entitlements
27:13 is see it's eating the lunch of spin
27:16 it's not I mean it is but it's it's it's
27:18 not as bad I mean it's actually been
27:20 very stable over the years believe it or
27:23 not yeah I I I I ask everybody to look
27:25 at that data look how much enam is is
27:27 being spent relative to GDP over the
27:29 years and you will see that line has
27:31 been going sideways recently now what's
27:33 not going been going sideways is
27:35 interest payments relative to GDP that
27:37 has been surging and now you know so
27:41 you're looking at that
27:42 55% of of us spending is no growth
27:46 because that's entitlements that's
27:47 interest payments now 20% of that is
27:50 interest payments just to give you some
27:51 sense so it's a quite significant number
27:53 and it's only going to grow from here
27:55 unless we take rates to zero tomorrow
27:58 which won't be the case either so you
28:00 know I do think that this is a problem
28:03 and it comes down to two potential
28:05 Solutions if you think about it one you
28:07 can suppress rates so the interest
28:09 payments can Decline and that's one
28:11 solution and I think that's going to be
28:13 part of it and number two is let's spend
28:16 more so that no growth aspect while May
28:20 grow over time um you know you still
28:22 have that other part uh the the growth
28:25 aspect uh that will still be coming in
28:27 in a in a more significant way at over
28:29 time as well so let's say instead of
28:31 spending 8% of or call it 6% of GDP on
28:35 on fiscal spending on deficit uh you can
28:38 maybe be spending 8% so but but that
28:41 those things are highly inflationary
28:43 both policies and I actually can see
28:45 them actually know working together not
28:49 you know not separately we can see a
28:51 suppression of rates with more spending
28:53 but what's funny about this David is
28:55 that if we see suppression of interest
28:57 rates that just means that the no growth
29:00 aspect that 55% may actually shrink
29:03 because you're suppressing interest
29:04 payments uh relative to GDP so you have
29:07 to think that way monetary policy is
29:09 becoming more and more a tool uh to
29:11 allow the government uh to uh to free up
29:14 some of that burden from the debt front
29:16 and and it's it's changing even the you
29:20 know the Mandate of of the FED itself
29:23 which used to be you know let's let's
29:24 try to create stability from the
29:26 inflation front labor markets and the
29:29 real in my view the real um issue here
29:33 is is how do we pay our bills tomorrow
29:36 from a government standpoint and so it's
29:38 it's changing the dynamic in a big way
29:41 uh and I think again it goes back to
29:42 being very very inflationary because all
29:44 these Solutions or potential solutions
29:46 to the problem they're not really fixing
29:49 the problem they're just you know um I
29:51 guess uh creating other imbalances and
29:54 inflation is a big one so uh I view this
29:56 as a problem and and I do think we're
29:58 going to see a lot more inflation uh and
30:01 this is not the end of it and it's you
30:02 know it's interesting that policy makers
30:04 try to justify these changes in interest
30:06 rates and other things um by saying that
30:09 you know inflation is back to normal
30:11 levels uh when I know first those that's
30:15 really coming from government data but
30:18 secondly you can you can look at
30:19 Commodities and commodities are not you
30:22 know I I wouldn't explain this earlier
30:24 but Commodities are in kind of a
30:26 rotation that Dynamic right now you know
30:29 you can see this clearly because every
30:31 month it's there's one commodity that is
30:34 the flavor of the day right it's like oh
30:36 now it's gold gold price is surging and
30:38 then the next no three months ago was
30:40 copper uh and then was orange juice um
30:44 and then it was energy you know you saw
30:46 oil and and natural gas back when Russia
30:49 invaded uh uh Ukraine um and then you
30:52 saw lumber prices coming out of 2021
30:55 ammonia prices went up a lot so you can
30:57 kind of see they rotate and that's
30:59 usually a signed you're in a commodity
31:01 cycle so I I would I would not play
31:04 against that I I do think that that's
31:06 that's a much longer Trend than most uh
31:08 think it will it will last you've
31:10 identified here something that I've
31:11 noticed as well um which I find very
31:13 interesting the relationship between
31:15 gold and base Metals you use copper here
31:17 as an example and you wrote that the
31:19 recent rally in gold prices that's been
31:21 happening all year long could serve as
31:23 an early indicator of what could be on
31:24 the horizon for base medals since when
31:26 have they started
31:28 moving together in tandem um logically
31:33 that wouldn't happen but here we are
31:36 well it's interesting because I think
31:38 all of us try to be you know very
31:41 specific when we look at Copper and say
31:43 well it's a very cyclical commodity and
31:45 tends to move more as an industrial met
31:48 therefore it moves more with the economy
31:50 and um you know when it falls it falls
31:52 more than gold and when he rises it
31:54 rises more than gold those things are
31:56 all true I'm not here to say they're not
31:58 true but clearly if you were in a gold
32:00 cycle you're probably in a copper cycle
32:02 look at that chart um and I think it's a
32:04 reflection as well of what happens a lot
32:07 in markets where the easy capital or the
32:11 easy decisions are made with things that
32:13 are safer right first and then as people
32:17 feel confident they start spreading the
32:19 risk uh and increasing going up on the
32:22 risk curve so in other words it's much
32:24 easier to take on a gold position at
32:26 first than a proper position but as when
32:30 gold starts moving they me a reaction of
32:33 any vast like are there other metals
32:35 that could move along with that and then
32:37 you start doing your research in other
32:39 metals and usually they're part of the
32:41 same cycle you know if you're an
32:43 investor in the gold space if you're a
32:45 minor a lot of the the gold deposits
32:48 also have copper a lot of the copper
32:50 deposits also have a lot of gold a lot
32:52 of the gold depos have a lot of silver
32:54 so they're all kind of in the same fr
32:56 the same in the same uh phenomena and
32:59 then you think about what is what really
33:01 creates a cycle for Commodities know at
33:05 the end of the day if you could pick one
33:06 thing what is it and it's usually cap
33:09 acts it's it's Capital spending of The
33:12 Producers when producers are spending a
33:14 lot of money in aggregate that's usually
33:17 the end of a cycle when producers are
33:19 not spending enough giving money back to
33:22 shareholders are not doing Acquisitions
33:25 and so forth that's usually the sign of
33:27 being at a bottom we're probably there
33:31 right we're seeing some Acquisitions and
33:33 usually they're happening between Majors
33:35 one major bu another or merging with
33:37 another major um but we're not seeing
33:40 any cap ax increases cap axes are still
33:43 extremely low relative to history
33:45 particularly if you divide it or you
33:48 adjust it by GDP which you should be
33:51 right 10 million spend on the ground
33:52 today are not $10 million you spend back
33:55 in ' 08 they're very different those
33:57 dollars will not get you the same that
33:59 you did back in in in ' 08 and so I
34:02 think it's all kind of linked and the
34:04 same way goes to this I don't know
34:07 ridiculous notion that is completely
34:09 unsupported by history that if we see
34:12 gold prices this time rise which has
34:14 been happening we're not going to see
34:15 the miners actually perform well I've
34:18 never seen this throughout throughout
34:20 history I I don't think that's supported
34:22 at all uh by data and if we do see gold
34:25 prices going a lot higher which I think
34:27 we will
34:28 it's just my opinion um I think that the
34:30 miners will also follow and also base
34:32 Metals copper silver Cobalt zinc
34:36 manganese you name it most metals should
34:39 should be moving in the same direction
34:42 and ultimately if the underline metal
34:44 price is moving higher then it means as
34:46 well that we're likely to see uh better
34:49 fundamentals for most uh mining
34:51 companies so I've heard this Theory from
34:53 some people and tell me what's wrong
34:54 with this assumpt what the underlying
34:56 assumptions behind this Theory gold
34:58 going up could signal um more volatility
35:01 ahead more weakness in the economy
35:02 perhaps basically gold going up is a
35:05 barometer of weakness in Risk assets
35:08 which could then signal slower growth
35:10 which means bad bad news for base medals
35:13 like copper basically gold going up
35:15 should mean copper going down a
35:16 Divergence from your chart what if
35:19 anything is wrong with that well David I
35:21 would uh to those folks that have said
35:24 that can you please forward this chart
35:26 to them I think that would be important
35:28 I think you should ask them the question
35:30 what happened in 2000 why did gold rise
35:33 so much and copper also was Rising as
35:37 much as as it did during that period
35:40 some people will say because of China
35:42 China was driving both markets really
35:45 what about today what are we seeing have
35:48 you seen how much spending we're seeing
35:50 in construction or have you actually
35:52 taking the inflation act and how much is
35:55 being spent even from the government
35:57 forget about private and compare that
36:00 with times like coming out of World War
36:02 II when we did you know nowhere close to
36:06 what we're seeing today even even the
36:09 Marshall Plan which was a global plan
36:11 not in the US was smaller than what
36:14 we're seeing now adjusted for inflation
36:17 or relative to GDP which is insane and
36:21 so the the the amount of money going
36:24 into construction is also likely to
36:27 drive copper prices and I think that the
36:29 whole idea of copper uh being more
36:32 industrial and also uh having this
36:35 connection with economy is true it's
36:37 very very true um and and and
36:41 potentially you know this is the
36:42 beginning of an era now maybe this whole
36:44 chart is wrong and the Divergence we're
36:47 seeing is is the beginning of a new era
36:49 where copper goes one way and gold goes
36:51 another way um that's not what I believe
36:54 you know this chart actually you go back
36:56 to the 70s was the same thing um and
37:00 usually this is just the case because um
37:03 paent funds and other large Capital
37:06 allocators uh they you know yeah gold
37:09 has a potential to be signaling a
37:12 weakness ahead if it's if it's rising
37:15 not every time you know look at the
37:17 early 2000s when was that you know that
37:20 was the teack bust right and still
37:23 copper did well look at that copper was
37:25 still you know going up it it it
37:28 actually had a little bit of a lag which
37:30 is the whole point of this chart right
37:32 yeah it's the arrow that is a little bit
37:34 ahead of it but it went up and it went
37:37 up a lot I'm just scrolling back to yeah
37:40 I mean you're you're you're absolutely
37:41 right uh good relationship between
37:43 copper which is right here the uh uh the
37:46 purple line and then gold the bar chart
37:48 um obviously there have been periods of
37:50 Divergence but if you just scroll back
37:52 into oneyear increments here um for the
37:54 most part except for uh 2019
37:58 um they've held on pretty well so now
38:00 would it shock you if you put
38:02 agricultural Commodities in this it will
38:05 also show the same link yeah and
38:08 interesting is that shocking I mean you
38:11 know you start thinking about it from a
38:14 just the rationale of putting Capital
38:17 into gold and then gold starts going up
38:20 you you start thinking about what are
38:22 some other hard assets I should probably
38:24 be considering should I put one of my
38:27 fund into agricultural Commodities now
38:30 that they're so cheap and they haven't
38:31 moved as much as gold yeah here's wheat
38:35 um moving quite well with gold yeah so
38:39 there's this is interesting yeah and and
38:42 so definitely there's a link in in in in
38:45 these Commodities and you know they're
38:48 usually all aligned so you know another
38:50 point that is important remember that
38:53 early 2000s all the way to 2011 where
38:55 gold prices basically went one way way
38:57 up despite the decline back in ' 08
39:01 which was brutal for investors but if
39:04 you if you're sticking with the trend
39:06 you did very well but um another thing
39:09 that tends to happen when gold prices
39:10 are rising Emerging Markets you know and
39:14 there's a reason why we tend to see at
39:16 times every couple decades a certain
39:20 type of leadership in the market
39:21 sometimes it's technology it's not
39:23 forever and then it changes to Banks and
39:26 it could change to emerging markets and
39:29 then it goes back to us companies are
39:32 leading the way to the upside and look I
39:34 mean back in in um in uh in in the early
39:38 2000s if you bought ebo Visa which is
39:41 the Brazilian index of equities the most
39:45 barring way to buy Brazilian equities
39:47 just buying an index it went up 18 fold
39:51 until 2011 right so that's like those
39:55 are the types of returns you can get
39:57 with you if you uh if you're if you're
39:59 being able to identify these Trends
40:01 early and I think that's the type of
40:03 opportunity we can have here um in a big
40:06 way so yeah I want to finish off we have
40:08 a few minutes left I want to finish off
40:10 on mining stocks here you have here
40:13 excellent chart cash flow of the gold
40:16 sector and gold companies of all the
40:19 uh of all the sectors in the S&P 500 it
40:22 looks like this one has the highest cash
40:24 flow margin uh is it by the the last
40:27 quarter that you're looking at yeah as
40:29 of September 17th um the GDX has just
40:33 started to outperform the S&P 500 year
40:35 to date it's up 25% versus the 21% but
40:38 the outperformance is recent now tvy uh
40:41 so what's next oh well I I think we're
40:44 not you know we're nowhere close to what
40:46 we're likely to see with the mining
40:47 industry in my view um level of skep
40:51 skepticism hasn't changed a lot of
40:53 people still think that you know the the
40:56 overwhelming view out there is that gold
40:59 yes I agree with gold of course you
41:00 agree gold is going up already it's so
41:03 funny how people tend to miss misses
41:06 things but but uh you know I think that
41:09 the mining industry has a lot of
41:11 Leverage to metal prices and leverage
41:14 works both ways in a good way and a
41:17 negative way if you catch the wrong wave
41:19 of gold prices and metal prices in
41:22 particular you're you're done right it's
41:24 going to be a very difficult period to
41:26 be in the mining industry if you catch
41:27 the right wave where things are going up
41:30 then yes C cost will also caught up to
41:33 you know will also rise at some point as
41:35 well and there's certainly a degree of
41:38 that linked to gold prices too but they
41:41 do have leverage and you start see
41:43 institutional Capital come in
41:45 scalability of projects um know things
41:48 can change quite drastically the whole
41:50 reason of this chart is is to kind of
41:53 prove the point that you know there is
41:56 there has been fun fundamental
41:57 Improvement in this industry uh and you
42:01 know margins have been improving it's
42:04 needless to say that gold prices have
42:06 been rising to degree that we haven't
42:07 seen um in history and uh and other
42:11 matters are yet to follow so um in my
42:13 view the next wave here is going to be
42:16 very much driven by the mining industry
42:18 and so I'm very focused on this because
42:21 uh gold prices have already showed the
42:22 direction and I think that the next one
42:25 um to uh to o benefit from this is the
42:28 mining industry and you know we're
42:31 seeing General investors become more and
42:33 more interested in the space uh but the
42:35 lack of knowledge understanding of of
42:37 this whole industry I think reflects on
42:40 the lack of efficiency that we have in
42:43 and how we price this this this secur
42:45 the Securities and you know in
42:47 efficiency is also a cool word for
42:49 opportunity in my opinion so uh this is
42:52 why I I you know I'm
42:54 always there's two things that I'm
42:56 really interested for the next you know
42:59 decade um one of them is you I'm you
43:02 know three things one try not to be too
43:05 cute with markets right I mean I don't
43:07 know when gold prices are going to go
43:08 down 5 10% or copper or any and not just
43:13 me but anybody now I have a strong view
43:16 that gold prices would be substantially
43:18 higher 5 10 years from now if that's the
43:21 case there's two trends that I'm very
43:23 focused on mining I think mining will do
43:26 very well well you could see energy you
43:28 can see other things do very well but I
43:30 think mining is going to be one of the
43:32 main ones and number two is emerging
43:34 markets and uh I think those are
43:37 extremely mispriced today and you know
43:40 talk to me in five to 10 years if I'm
43:42 wrong on that then you know I'm happy to
43:44 admit and move forward but that's that's
43:47 really where my my my allocation of time
43:50 Capital attention is is really towards
43:53 at this point well it's been a great
43:55 year for uh and precious medals in
43:58 particular so you've been correct on
43:59 that call so we don't have to wait 5
44:01 years to congratulate you you've already
44:03 been right on that uh good stuff Tavi
44:05 thank you always for your updates where
44:07 can we learn more about you and uh what
44:08 can we learn from your work learn more
44:10 about me on Twitter at Tavi Costa and
44:13 you can see some of my post uh and also
44:15 at crash.net where you can see some of
44:18 uh our research and pieces that we put
44:21 out there as well but thanks again David
44:23 always a pleasure speaking with you and
44:25 uh yeah look forward to speaking with
44:26 you
44:27 yeah thank you very much thank you for
44:28 watching don't forget to like And
44:30 subscribe follow Tavi down below
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