'Stocks To Suffer' As Cost Of Capital Rises But Earnings Fall | Tavi Costa

it's pretty clear that investors are betting on one thing today that we're going to see another 10 years of strong growth and low cost of capital when in my opinion we may see low or negative growth with higher than average cost of capital and so to me this is another reason why I think Equity markets may suffer [Music] welcome to wealthyon I'm Wealthy on Founder Adam Taggart with the debt ceiling Showdown over the markets are breathing a sigh of relief but should they today's guest Tavi Costa of crescott capital is concerned that the wave of mandatory debt issuance in the coming months could prove much more disruptive than investors are prepared for given today's adverse macro environment to find out why and how he recommends protecting your portfolio from this disruption we'll ask the man himself Tavi thanks so much for joining us today thanks for having me Adam hey it's a real pleasure Tommy and I appreciate you uh coming on the program on relatively short notice um I I read this fantastic report that uh you uh and your partner Kevin there at cresca put out recently um didn't catch just my attention a number of people I know it got their attention um including Bill Ackman uh who tweeted congratulations and kudos to you guys for great work they're on Twitter so congratulations very well deserved I wanted to walk our audience through the main insights of that report in this discussion if that's okay before we get to the details of that though um I'd just like to kick this off with a general question I always ask you when you're on the program uh just to kind of level set before we get into the details what's your current assessment of the global economy in financial markets well thanks for having me again and uh it's it's great to be here and I I think the current assessment right now is is that we've had a uh almost like the complete opposite of 2022 where I don't think I think we do believe 2022 was the beginning of something that may unfold for much longer term uh and this is not the end of it in other words this great rotation out of uh growth stocks and mostly technology companies into value companies I think will continue to be the case and I understand that recently what we've had is the complete opposite of that in fact with a lot of strength in terms of the mega cap stocks and other technology businesses and the AI uh popularity uh increasing and so forth we also saw Financial conditions ease up compared to 2022 we've had interest rates also uh not being as pronounced in terms of increasing yields like we saw in 2022 so a lot of things have helped to support that Equity markets but the economy itself is clearly getting into what we think is going to be a hard lending and at some point uh we're going to start seeing again prices begin to really reflect uh this deterioration of cash flows and fundamentals so we haven't seen yet in 2022 most of that decline in the 60 40 portfolios equities and bonds and so forth was really in my opinion more of a duration uh reflection more of a duration impact on those prices in other words interest rates Rising causing a lot of those uh also long duration assets to declining prices now do I think that's the end of it I don't think so that report that you referred to was a report that we went really deep into the treasury market where I think the treasury market is what holds the key for the entire Financial system in a lot a lot of ways is how we discount companies because of interest rates uh it's also related to how liquidity May a uh be impacting uh the overall economy it's also involved with the collateral prices of the banks if you remember what happened with the banking crisis itself was caused by the decline of collateral prices I.E treasury Securities uh that really were the big portion of that issue and so all of that together to me is is pointing to a direction where I'm not sure the treasury market is again the safer place to be uh putting your Capital to deploy Capital into a defensive asset I think that we're in a transition away from that uh where I think not only central banks but also large institutions the 60 40 portfolios will look more balanced and start allocating Capital to gold at the same time all of that happening we've had gold recently break out to new highs uh a form of a triple top and a lot of people lost faith in the short term it's this is a classic ShakeOut period in my opinion before we make uh you know a breakthrough uh record levels and way higher that we're seeing currently and so to me this is the the sort of state that we're in uh a lot of people are worried about uh you know gold how it would actually uh perform in a hard Landing scenario and I think this is going to play out very similar to the 70s in terms of Market correlations uh you know we can't use the 40s and I'll explain this later uh as an analog perfectly because in the 40s uh gold prices were packed against the dollar so the only alternative for most investors is really to buy treasuries but I think uh this is not the end of the treasury market by no means but the demand for treasuries uh will be in check and that if if the overall uh thesis for owning those Securities is really predicated on the fact uh that we cannot raise rates sustainably because of the amount of Leverage in the system I would say the gold is a far superior alternative and that's the whole point of that report and a huge part of my views for the assessment of uh of the global macro environment today okay great well then let's get straight into the report um as you mentioned it sort of all starts with the criticality of of the the treasury market um you you talk it in the intro of your report here uh that you know there is uh a bunch of mandatory debt issuance that's coming up soon and that that is going to have implications um so let's let's start there you've got some great charts you know kicking off here about the treasury market um and uh let's walk through your concerns on the debt side and then let's get to why you think that may Usher in a new era for gold and what's interesting right now is you you you you intimated that they're going to be some reasons where people might where demand for treasuries might go down but demand for treasuries right now is really red hot so I'm going to be interested to hear how you think that demand is going to cool yes and look I've also been a big believer in some of the deflation nissa's thesis which is related to also the demand for uh treasuries and the demand for for the dollar itself but I think there's a macro regime change uh on the way and I uh feel like in Business Schools we learn how to invest in those in the bond market and fix income assets by thinking about the interest rate risk the default risk and the inflation risk but we forgot about one thing that it wasn't the case for the last decades which is the issuance risk um and I think certainly that is one thing that is understated uh that will likely become a much bigger issue as we go Adam can you see my screen right now we can it looks great perfect so um maybe we can start with with this chart which was the leading chart of the letter and it's it's looking at one thing that I think a lot of people have been talking about which is the trash uh treasury cash balance that has been running very low and this is one important point of this chart is that this tends to happen every time we have uh we're approaching at that ceiling and and that is the case because the government runs uh an astounding amount of of deficit relative to GDP which by the way it's the largest deficit relative to how low unemployment rate is and so at the pace of of of the growth in in terms of the compounding of the debt problem is is really alarming in my opinion and I don't think this is just my opinion A lot of people have that view but as you can see as I point out in this chart a lot of the the the circle portions where uh cash was running really low you've also had a period where the treasury was not allowed to issue treasuries and so they couldn't really raise uh uh Capital at a certain degree but you can also see the red line where the debt is increasing after uh you have a debt ceiling problem so once things get resolved and the debt ceiling is is agreed on being lifted uh what you see it is a large Insurance of of treasuries that issuance of treasuries as you can see is gradually increasing over time so we saw 2015 2016 and 1.1 trillion dollars after 9 to 12 months 1.3 uh in 2017 or so 1.4 in 2019 two trillion dollars after 2022 and today uh some of the expectations is that we're going to see about 1.2 trillion dollars but I'm sorry it's very clear in this trend that this is going to be at least another two to two point two trillion dollars in my opinion that we're going to see so this speaks to the degree of how extensive the fiscal agenda really is uh but also what we're likely to see in terms of issuances real quick just if you can go back to that slide for a second um I just want to make sure that the treasury cash balance you're referring to that's pretty much it's the same thing that we here in the media called the treasury general account or the TGA correct that's right that's what the government uses to uh for its day-to-day operations um and uh given the deficit issue uh they are always forced to issue treasuries essentially in order to have that white line to be increasing so when you have the debt ceiling obviously the white line is unable to to rise uh given that issue and I'm talking about obviously not one every week or so you may have cases in a week or so where uh revenues I may uh may be larger than the spending side of it but overall uh the spending is certainly larger than the revenue and therefore why we've been having this chronic deficit issue in in the government that I think a lot of people know this is not news um but the problem is if you calculate let's just say a 2.2 trillion dollars or so which I think will be the case here given how extensive their agenda is given how the social programs are learning larger and running larger and larger you're also seeing other things such as the infrastructure developments and the need from uh almost at all costs to reduce the Reliance on on all four Theory regimes like China and Russia uh and and forcing those uh governments especially the us but other developed economies to really rebuild their uh their infrastructure for industrial issues and our industrial purposes and other things um that is also going to be a bigger part along with the Green Revolution of deficits and government spending uh and so those are important but the problem is that when you look at the demand side and and this seems alarming the foreign holders of U.S treasuries as a percentage of the total debt that number itself used to be at about 34 percent to speak it's now at its lowest levels in 19 years that does not mean that they are actually in that sellers of treasuries uh just want to be clear on that what's happening actually is that yes some players some large players like China would be one example have been net sellers more recently um I think there's lots of the ways of thinking about that but uh uh just just to make it clear uh foreign central banks are not necessarily yet selling treasuries what's happening is that the Assurance is so large relative to the amount of buyers that you're seeing this percentage to decline and this is a huge deal it's almost like they're net sellers because all the way back to the 70s um especially after the the break of the gold standard what we've had is that a period of uh I should say since the 80s a period of where central banks in order to create credibility of their balance sheets the most credible central banks were the ones that held a significant amount of U.S treasuries what we're seeing more recently is and I believe this is the next chart uh has been the fact that that we're seeing central banks is starting to buy gold instead so so there is a shift away from uh from from treasuries happening today in uh across most central banks and it's a shift that is not again being caused by selling treasury so much and this is factual I'm not that's not my opinion uh but it's it's likely to start happening at some point um and the point of of the assurances are not going to get any better from here in terms of the the underlying supply of those debt instruments and so as you see that growing it's a big question is who's going to be the buyer of those instruments would that be uh U.S banks uh would that be households uh would that be uh financial institutions or other foreign institutions and in our opinion um that need will actually fall on on the responsibility of the Federal Reserve at some point where they need to be the buyer of less Resort whatever you want to call this money printing monetization of the debt essentially we're gonna have to go towards that path as some point uh the fed's responsibility is not so much a job is stability and and inflation but really is the financial stability as a whole and that has to be uh on the dependency of making sure the treasury market is aligned with its demand and Supply imbalances and this is a huge deal so as you can see uh in this chart which I think it's extremely relevant a lot of people have been looking at the purchases of gold which is an important chart but to me it really Falls uh into the the idea of looking at the Gold Holdings as a percent of percentage of of international reserves because that at the end of the day is what creates The credibility of those central banks and we're at a at a stage right now in the global economy where most of the major central banks and most of the largest monetary systems are under pressure under pressure of uh showing that they hold high quality uh assets in order to back those reserves more and more regardless if it started with the crypto idea it really this is the case with the gold bug uh a thesis for many years uh where the idea of holding uh having a monetary system that really falls back on on the ownership of high quality assets and I think that shift away from treasuries is very very critical in this macro uh conditions and so in order for us to go back to a historical average where central banks go back to a 40 ownership of gold relative to International reserves we would have to add about 3.2 trillion dollars of gold uh purchases which that on itself is about 25 increase in the value of gold above ground which is as shown in the latter uh as written in the letter uh you know that would be uh you know enough to take gold prices to the record levels do I think that that's all we're going to see no usually when you have central banks making such a reversal of of of policies of owning gold relative to treasuries um what you tend to see is that other institutions tend to follow so the 60 40 portfolios the patient funds endowment funds the very large pools of capital are very likely to start owning more gold relative to U.S treasuries similar until we saw in the 70s but I think it's going to be even more in terms of the magnitude of those purchases hey Tommy just just a quick question there and just asking for a gut guess if you had to pick a percentage of um how much of the traditional private portfolio like that is currently allocated to gold right now what would that percentage be you're referring to 60 40 portfolias and so forth and are not 60 40 because by definition they don't hold but the ones that you're expecting to follow the central banks they would be increasing from what to something higher look I think it's plausible to have a 60 40 portfolio shifting away from those balances and having perhaps you know 30 percent equities in my opinion and we'll get into that equities are also the problem but just looking at the bond side of it I would say that at least uh portfolio should own about 20 at least of of that in the next 5-10 years this is a very conservative um you know thought about what we we think it's going to happen so 20 of those large pools of capital uh that is not including central banks at all um so I don't think it's the end of the you know a lot of those institutions required to have some sort of fixed income assets um so um you know corporate bonds and others although today a lot of corporate bonds actually yield almost less than risk-free rates which is mind-boggling mind-blowing yeah but uh outside of that I do think uh uh you know call it uh I think 20 to 30 percent is going to be a a very good range uh where where gold can start becoming a larger portion of those portfolios over time uh especially as they see central banks perhaps owning now 40 of their assets which would be just in line with historical average all the way back to the 70s prior to that actually was much larger as as most people know so right and that that's a mind-blowing shift and we'll talk about that later when we get you get really into the arguments for gold but but just real quickly I'm going to ask the question again what do you estimate their current percent gold Holdings in their portfolio to be are we talking less than five percent less than one percent less than half a percent like ballpark what do you think well looking at the volumes liquidity and and other um metrics that we can sort of understand and also institutional interests in the space um I'm an investor of the gold miners industry and I can certainly speak for that and I think that my my my guess would be educated guess would be that it's probably less than five percent um if not less than three percent or so uh for most institutions we speak with some of the 60 40 portfolios and when I see 64 proposes I'm talking about you know 80 90 of their portfolios look like a 60 40 uh a style of positioning and certainly what you know those folks folks are not Believers of the gold market and majority of that has to do with prior performance of the last decades or so although gold has been now performing treasuries even in total return terms meaning uh yields have not really in price appreciation has not really uh outperform uh the metal uh over the last years but you know if I go to the next chart as you can see here it kind of shows that that idea where you know really the performance of gold relative to trash has been in a decline all the way back to the 80s so again going back to your question if it's less than three five percent uh I think it has to do with the this idea that majority of of the bearish case for precious metals in general has been look look what it's done in the last um you know 20 years or so and I think that's just backward looking that's not what we were likely to see in the next uh decade or so which will probably look very different from now given those big changes in uh in in in this macro regime uh question yeah it does that's where I was going which is basically right now the current holding of these you know private portfolios is low in Gold you think they're going to watch the central banks follow the central banks increasingly increasing their exposure to it and so I don't put words in your mouth correct me but my guess is that you're going to see you're expecting a pretty substantial increase in their percentage holding of gold as a as a portfolio asset I'm going to guess maybe some multiples right above where it is right now if it's only three percent you probably think it's you know a high single maybe double digits going forward eventually so basically you're just telegraphing you expect to see a big shift in increased ownership of this asset is that correct that's right I think the multiples of what they own currently is is correct and I I think it's whatever it's 20 30 at some point depending on the the profile of risk of each of those institutions I think would be would be likely the case um especially when you have Equity markets at those prices that they are currently and you also see the price of of fixed income one thing I noted there uh as as is is this you know when central banks actually made the the choice of starting to own treasuries which you can see in this chart look looking at Gold relative to treasury so it's just gold prices or uh relative to to uh uh to uh uh to Gold to U.S treasury sort of return you can see the same here in this chart as well so basically what you're seeing is that 1978 1980s was really the peak where central banks begin to actually buy U.S treasuries uh over time and that was that was a good call uh you know Treasures were cheap at that time uh very very cheap they're paying very large amounts of of yields depending on what curve you're in in terms of of maturity um and that was certainly a good call to be to be invested it's important also know that about 40 percent of the US debt today will actually be um have to be rolled over so forty percent of that data so if you look at the overall debt in the US uh average interest rates about 2.6 percent um so you know for most of the money market funds and other other other potential places where it could actually bring that Capital into the treasury market those folks want to earn at least five percent yields right now and so we would have to be the reassurances of those strategies in other words rolling over those instruments at a much higher interest rate than they are currently and that would also add pressure to the treasury market so as you can see here during gold Cycles um which I think we're entering another one today and I'll explain that in a few uh you can see that the gold to treasury's ratio is likely to rise substantially from here this is a very important change in the way we looked at especially how uh correlations working market so recently in the last 10 20 years there has been a very strong correlation between gold and real rates and people love to extrapolate those things and they say well that's how it's going to be for the next 10 years and that's not the case usually in the 70s it wasn't like that in the 70s if you look at a chart of 10-year yield versus gold it's the same chart so in other words 10-year yields are rising and gold was Rising as well that's that's also mind-boggling because a lot of people would say there's no way that would happen today Market correlations change when you add the risk of default when you asked at the risk of inflation and the interest rate risk where the FED has to have leave interest rates higher than historical standards at least for the last 20 to 30 years um that really adds pressure to the Treasury Market along with the issuances of that that flood of issuances that we may see along the way as well so to me it's pretty clear that this this correlation between golden interest rates may actually look quite different in causing gold prices to rise as treasury is actually either suffer or really underperform the metal over the following years um going back to the 40s because I think we all like to look at analogs I I love looking back in history and seeing what is the macro regime today relative to other times and I'm a firm believer we're entering an inflationary era and I will answer uh or actually go deeper into that in a minute but really if you'll go back to the 40s which is a good time to uh or a good analog for the debt problem certainly as you can see in the first panel this chart looking at the public debt relative to percentage of as a percentage of GDP we are a very similar level than we are today that was the debt necessary in order to finance the World War II today we've had other things not only covet but really he does debt problems being Rising regardless of in even prior to the covet problem and uh as you can see back in the 40s majority of the institutions if you're running money during that time believe it or not you didn't have a lot of Alternatives you couldn't really a lot of uh individuals decided to buy U.S treasuries um uh there was the war bonds call there was a nationalism uh sort of uh wave where folks were willing to put their Capital uh uh provide their capital and finance the war uh and as a way of uh of of rising up and and getting together in this in this world movement um and also at that time as you can see in the in the bottom line of this chart uh U.S debt was at about uh well I'm sorry gold prices were basically it was were packed and so you didn't have that alternative for most investors to be flocking into an asset that could potentially uh really help to uh uh uh to defend uh all over those those issues that we had at that time the second thing that happened as you can see is after the 70s um we've seen that that problem increase uh over time almost exponentially it went from 30 all the way to 130 percent today and to me when we think about gold prices it's very difficult to say what really caused gold prices to rise some people like to really try to uh uh to to pinpoint one or two aspects maybe inflation maybe it's just monetary dilution uh maybe it's just related to uh uh even deflationary uh aspects uh may cause gold to rise uh ultimately it's the debt problem as well it could be uh risks in the markets it's really hard to find out what works but one of the things that's clear in this chart note that since the 70s gold prices and the debt New Balance kind of move the same direction so making a bet against the metal today to me is making it that that the debt problem was actually going to be resolved relative to GDP and I don't believe in that Adam I don't know if you do and if you know anyone who believes in that I would love to speak with those uh folks but I just don't understand what the case is where the debt problem is going to get resolved and I ask people to look at one example uh when you're when you're thinking about this look at Japan Japan today is twice this amount essentially it's about 250 percent or so debt to GDP in terms of public debt not over all that um and if that's the grow map for for the debt problem then I you know I can confidently and I don't know anything about the markets I don't have a crystal ball but I have confidence in my thesis that gold prices are likely to break the 2000 level and go well above those levels along with the debt problem getting worse so those are important aspects of the before you just go back to that for one second Tommy um so I would say the one piece of the puzzle that I might be able to add is that you know I interview five to six people a week uh over the course of wealthians two plus year history you know I've interviewed hundreds and hundreds of experts I do not know of one who has said oh yeah uh don't worry about the debt uh I I have a outlook for how it's actually going to get resolved from where it is right now yeah so I I think that the bet on the debt continuing to mount from here is probably one of the safest bets that you can be making on the macro side right now going forward I also have a question for you on this which is you're right the the gold price roughly does track the increase of debt to GDP here um what happened in the past decade uh to cause that that you know uh trough that multi-year trough in gold in the gold price um because we had a lot of debt issuance during that period something decoupled for that decade it's now recoupled but but what's your what's your best explanation it's probably multifactorial but I think there's a lot of things I think number one with uh we came into that peak in 2011 of a very um I would say almost like a bubble type of of environment in the gold space we've had a especially you can track that on takeouts of most of those exploration businesses in the mining space were being taken out at about 60 percent of the value in the ground um today and the average historically is that you know a company that has a high uh a degree of of resources in the ground would be taken out about 20 percent of that value in the ground so certainly there was a level of speculation uh that caused that pause and those charts are not really logged uh so that dip that you're seeing actually looks much more pronounced than what actually it was but certainly was a bear market we've had a a lot of spending uh in terms of most of the the mining businesses were uh really uh you know drunker Sailors in terms of capital bleeding and so forth and that has completely shifted in the last uh in the last uh year uh or less uh five years or so we're seeing now Capital conservative uh conservatism uh being uh very pronounced across the industry in terms of capex aggregate has been in a historical lows um also you can point out to the disinflationary environment although we've had a dilution of the monetary system by the increase of the balance sheet of the Federal Reserve uh we didn't see on the other side of it that inflation on goods and services if you look to the commodity prices for instance uh during that 2011 to now there was a secular decline in commodity prices during that period so a lot of things in the tangible assets realm uh were at a peak level during that time uh and uh for other reasons that I think are caused by the long-term uh cycle of the Commodities commodity businesses in general and we're in the other side of that today people making that call today I think they're out of their mind I I just don't see the the same metrics that were pointing to a peak level of tangible assets and commodities are almost the complete opposite today on top of Green Revolution it wasn't the case we didn't see uh there was a globalization uh Trend actually improving from that period all the way to that whole deep that you see uh dip that you see during that time that you're referring to today we have the globalization Trends intensifying over time um you know we've had an inflation problem that has begun in my opinion for many reasons uh you know wages and salaries growth Reckless fiscal spending uh chronic under investments in in commodity businesses uh and the intensify of those the globalization Trends on top of it so all of that is playing a role into uh almost uh creating a floor for gold prices uh if you think that way and it's a main reason why I think that if you are of that view where there's almost a floor for gold prices you want to take leverage uh in terms of not debt itself but understanding what are other ways of expressing that view that gold prices will rise because gold prices won't make you necessarily rich just by buying gold but there are ways of expressing that opinion in markets today that could potentially get multiples of of your money uh and really creation of wealth uh if if you get that movement right in gold prices which I think we're you know very well set to uh to see that unfolding in the following uh in the following years um you know one thing I pay a lot of attention to uh uh Adam is is yes I I think the macro thesis for precious metals is extremely uh uh robust I think if you looked at back in the 70s or so for the last 50 years there were really two important bull markets during those those that entire era uh in the 70s was one of the bull markets the second was the early 2000s and both of them lasted about a decade and if you know notice uh there are macro drivers that are very different during those two periods the 70s was perhaps caused more by inflation and other issues uh and then you have the early 2000s which in my opinion was really caused by uh China entering the WTO and really preparing and and building up its economy to become the manufacturing plant of the global economy as you see that occurring uh it created at least really a a commodity cycle which uh Commodities and gold are almost all in the same place when one start moving uh all of them are really always interconnected so you tend to see both moving in the same direction so but one thing that you saw during those two eras of the the gold uh bull market in in the 70s and early 2000s was a decline in Global Production of gold and that is certainly what we saw in the 70s and our 2000s and what we're starting to see today um it could be caused by Metals uh you know most of those businesses shifting their focus away from gold into green Metals which sounds classic classic you know bad move from most of those major companies uh at the wrong time uh just given the fact of how uh you know potentially there's so much institutional uh attractiveness in terms of capital chasing battery Metals lithium and and and forgetting about uh you know gold as as uh as a potential uh you know uh uh asset that could really outperform most of the other assets in this uh tangible asset realm as well so I think there's a lot of explanations for that but where you are today if you look at this chart is that we've had a triple top uh triple tops usually don't tend to hold um you know what you see is a major resistance uh once you hit that level and this is certainly what we've seen over the last weeks so uh basically we've had a the 2020 Peak um and then after that we came down uh and then we saw the the sort of War scenario once the Russia invaded Ukraine uh we've had another period where gold prices reach new levels and then declined again and now now we're hitting that level again but as you can see in this chart uh the the candles uh you know we're starting to see gold prices actually stabilize at that level although we've seen some volatility recently gold prices are stabilizing at that level almost like getting ready for a major move to the upside is that what is it was is that that ceiling uh agreement along with the potential for the FED having to uh you know step in and and be the buyer of less Resort of treasuries uh the beginning of the very large movement in Gold potentially is the Fed having to ease monetary conditions because of a hard lending uh also be another uh trigger there's so many potential triggers that could in my view really cause gold prices to uh Surge from the levels that we're seeing right now is central banks buying those uh instruments going back to the 40 and adding 3.2 trillion dollars of inflows being the Catalyst potentially so there's no shortage of of those and I think the train is leaving the station and once it does um you know I think a lot of people will follow there's a sense of lack of liquidity and volume in the mining space which I think to me it's almost like a soccer game we're all watching a soccer game between uh you know it's like a World Cup final between treasuries and gold and uh and essentially where you're seeing you're in the penalty kicks and gold is about to go for the last kick to win and if they do everything will follow right everything will follow you're just going to see probably institutions chasing not only gold but looking for other ways to make money potentially looking for the miners potentially looking to take more risk and go to explorers and so forth so that's really to me what you know most of my thesis is is in this chart I I do believe gold will break out from these levels and you know uh I think I think this is going to be a big change in the thesis over time hey Tommy let me just ask you a question there for a sec um so uh if we get time in this conversation we'll address it I'm deliberately trying not to interrupt your flow here too much um but if we have a hard Landing like I believe you said at the beginning that you expect a hard Landing um could there very well be a period of time where capital is Flowing both into treasuries and into gold I think um potentially yes and let me just clarify that because I want to I want to does your thesis depend on Capital rotating from treasuries into gold or there are catalysts here that could that could pop gold higher even if capital is still going into to treasuries say as a safety trade that's it that's a those are good questions because the rotation from Central Bank perspective is not happening yet all we're seeing is that new money added to the balance sheets is coming to Gold versus treasury so that's an important uh difference will that happen probably I I do think it will um why am I not short treasuries today given all the thesis I gave you why am I not sure Treasures today there's one part of it and I don't have this chart here but anybody can see this in the CF cfdc website you can you can pull the positioning for Treasures today people are Ultra bearish treasuries right now so as a as a fund manager I think yields are going to be poised to go higher and in fact I mean given how positioning is so extreme on the on the on the bear side it's almost like why wouldn't treasures be rallying right now and it's it's just you know there are so many big forces into that market uh that makes it so difficult to uh uh to be bullish or bearish um the bearish side I think it's pretty clear I just presented the bearish side of it and and I you know if this was just what I know uh or what I knew I would certainly have a very large percent of the portfolio short treasuries right now now I do understand that the system cannot sustain higher rates either um I understand that the system is required to have Financial repression I understand that if that's the case for treasuries to be owning uh treasuries today is just because we cannot sustain rates being higher then I think gold is by far a much better alternative here uh because it's not tagged against the dollar number one we know that the debt problem is very very likely to continue to get worse over time um we know that the the secular inflationary forces in the way here as well and they may decelerate like we've seen recently but likely continue to be uh you know forcing things to be uh to be more inflationary than we've seen over the last years and we also know one important aspect which is the fact that tangible assets are really cheap relative to Commodities which I think it's unlikely to be the case in the following decade I think we're going to see tangible assets really outperform Financial assets being equities uh and bonds at you know both in combination are extremely expensive especially relative to history so um would I be buying bonds here in the in a harlins in The Lending scenario like you said no that's not my call I would not be doing that at all I think there's it's much more plausible to be owning gold in that environment and I know people will say 2008 was different Tavi don't didn't you see that in a way gold prices decline and I'll answer to those folks look at the 70s look at what happened in the 70s look at what happened in the early 2000s oh wait wasn't the only crisis we had through all history and gold actually performed well during other turmoils it really depends on what type of macro regime you're in and in this case today um I I think that folks are going to start favoring uh those types of tangible assets that also carry a very look at the downside volatility between treasuries and gold today I I had a chart like that I was supposed to put it in the letter just didn't uh it was getting too long but if you look at the downside volatility of treasuries versus gold um you're gonna see that gold has just recently become a much more attractive asset relative to that uh treasuries um like with never seen in the last 30 to 40 years aha so if you're running a fund and you're worried about downsiding you buying treasuries because you want to have a defensive asset that when things go through a turmoil treasury's rally well recently that hasn't happened so and gold has actually done the office look at 2022 Gold's performance relative to any other asset so there's a significant break of correlations happening today uh that to answer your question I think gold will actually serve as a safe haven relative to treasuries in a very significant way as well okay great thank you so inflationary waves um you know I think inflation has been you know I put out this chart of maybe a year or two ago uh of talking about inflationary waves and so forth and I think this has really gotten around this whole idea um and in periods like the 40s and 1910s we've had more sporadic types of inflation uh in the 70s they kind of built on its on itself and and it's so gradually higher waves as you can see here first wave second wave and the third one and then we've had this decileration of inflation and I think in in December of 2022 I put out a tweet and I said you know that we will likely see a deceleration of inflation and unfortunately a lot of people will think that that's the end of inflation and it probably won't be and here's what we are this is exactly what we're seeing today a lot of folks um think that inflation is at its ended it's not going to be a problem anymore but when you think about the the forces that are behind behind that issue you know and we have not fixed if anything tightly monetary conditions have created access for Capital become very difficult for most of the uh metals and Mining energy companies and so forth so we're not seeing an increase in supply of of most of the the natural resources that we need to uh to make the Green Revolution the infrastructure develops and so forth so all that is still the case has not been resolved anything got even worse recently um the second thing is the wages and salaries growth which is something very important because that is evolved with the fact that we may see corporate earnings uh that you're reading over time we may see a lot of things of margins being contracted and mostly is because of the the labor costs relative to profits uh has been in a secular Decline and recently has started to increase and as you see cost of living Staying High not continuing to grow but staying High it will likely Force especially need to lower or what I call the not I called it but it's called the non-skilled jobs are likely to be more and more expensive when you think about what's happening in terms of the job openings and the very large amount of job openings relative to other times in history most of those jobs are non-skilled jobs and when you see the lower income folks starting to demand higher wages and salaries look I come from a from an Emerging Market Brazil um and certainly when you have the lower the bottom 50 percent of your of your economy in terms of of economic class of your households uh earning more there there's a reason why they stay at the 50 range is it has to do with their indisciplinary way of of spending Capital meaning they don't have discipline they don't know how usually how to spend money like it or not like it is unfortunately the case they tend to spend more money than the richest parts of the society when it comes to the percentage of their Capital not the no minimum amount and that is usually what also has an impact on this wage prices spiral that causes inflation over time which we saw in the 70s I think we're going to see this time especially because profits are too high margins are too high and you're likely to be compressed as we see uh you know inequality issues emerging and other things that not emerging and they've been happening for a while but uh they're starting to uh to create social programs and other things to try to uh really address those issues uh number three is uh the Reckless amount of fiscal spending that we're seeing uh Reckless amount of fiscal spending today we're about 7.3 percent of GDP in terms of deficit that's not including the current account problem but just or or the trade balance but when you look at the deficit now compare that with the 70s just just for curiosity and you you're going to find is that the 70s today at 7.3 we didn't see anywhere close to deficits like we have today so there was certainly a general sense of understanding that government spending creates inflation in the 70s today that notion is is out of the window I mean not not a lot of people understand what we I mean for sakes we just passed a inflation act recently do you think that would have happened in the 70s no way uh by the way called the inflation reduction act even though it has a ton of spending associated with it yeah there's nothing you know there's no reduction uh in in that package if anything the government's spending level is almost undoing what the FED has been doing right the FED is is attempting to you know reduce inflation by raise interest rates and do QT which recently reversed and now it's back on in terms of the balance sheet side but let's just assume that the FED is trying to reduce inflation well the government is doing the opposite the government is spending more if you look at the deficit problem recently it's been actually increasing and there's a lag of that on the inflation problem the lack of a year or so where that Capital starts to create inflation as well and don't blame this on interest payment because that's only 50 of the problem there's another 50 percent of problem that comes from social programs as I said the Green Revolution manufacturing and other things things that are happening and by the way defensive spending as is at historical lows right now so you know you want to make the case of anything here I do believe defense spending is going to be a much larger percentage of the economy today is less than three percent back in the in the in this in the 60s not even other periods 60s was about nine percent so can we go back to six percent five percent all that is going to have an effect on deficits and end of that problem as well so again I think inflation is is here to stay yes we're decelerating on inflation we're probably closer very close it's hard to pinpoint when but getting closer to uh a period where uh and this can get delayed if we have a hard Landing there's you know things can get delayed here in terms of the the second wave but I don't think this problem is going away you know five years from now a few very comfort that we're going to see another wave of inflation coming back and I know five years is a long time uh but that that could happen literally next year or so uh if depending on how things unfold so well one thing I think a lot about is industrial production aspect of of the US you know back in the days us was always an economy they had a very large percentage of manufacturing relative to GDP you can see the growth in this very long-term chart all the way back to the 1920s to now and you can see this 80-year period of exponential growth in industrial production uh and then recently from 2000 to now we've had a stagnant period right it's volatile but stagnant um and you may say what happened during that period Well China entered the WTO and and also became to uh you know the a large exporter of goods uh in terms of I think it's it's as close as 30 percent of the global exports today is coming from China that was not the case back in early 2000s that increase has certainly caused uh not only this Reliance on on on on on their economy in terms of the G7 economies too uh but also the the fact that we're starting to see the relations between the two countries to deteriorate significantly and I think it's it's it's going to be the case where most economies at almost all costs cost the prices being higher uh in of their of their uh goods and services in in their own economies domestic economies uh but but the cost of reducing uh the idea of reducing their dependency with with the ties with China and so do I think that this is the beginning of a manufacturing revitalization era yes I think that's going to be the case now think about this if one economy cause a commodity bull market back in the early 2000s that was China what would that do if G7 economies G7 economies start doing exactly the same today and when I think about that it's hard to believe we're not going to see base metals and other things doing very well so all that's going to play a role um Leslie I can go on and on Adam if you if you don't stop me but um I'll talk to you when I need to but keep on going one thing I think a lot about is is how the gold cycle is very much in line with uh the valuation of equity markets cycle so if you look at the top of this chart and again this is going to play a role here in the Commodities idea and so forth you looked at the where we are today in terms of total market cap as a percent of GDP which is the first part of this chart and you can see periods where we're running up on that inflating all the assets and valuations relative to their fundamentals and you said the peak of the tech bubble which today were exactly at the same level slightly above that and we've had this everything bubble that I've marked back in 2021 2022 when art Investments and no no uh completely money losing businesses begin to uh to lose value uh as as uh as a measurement of their stock prices uh fixed income corporate bonds and so forth all those things Begin to Fall that Mark in my opinion a big change in in correlations and and situations so today I think we're in the deflating process of that um now I know recently we've had AI uh becoming uh uh you know something that a lot of people like to point out as a potential uh Catalyst for things to continue to be frothy uh that is not my view if anything what AI is doing is an enabler of capacity for most uh uh companies especially smaller companies uh to close the gap of their valuations relative to Mega cap companies in other words I think AI is almost like that perfect assistant that you need for free chat GPT is it's my assistant I work with that all day long and what I can tell you is is it's almost like I have a hundred analysts working for me creating the best variable the best formula that I can use for my day-to-day business uh better writing everything is is I work with that with that tool is it's it's incredible everyone should be using it but if you think about from a macro perspective it really closes the gap between a smaller business versus a larger company and so if you think about today the valuations of big companies versus smaller ones is that a level where they haven't seen in many in many decades in fact it's larger than what we saw in the peak of the attack bubble and I think that that Gap not only caused by chat GPT or Ai and other things it will start getting close by other reasons as well because you know there is a cycle of of businesses where you also have valuations being too frothy and very difficult to be sustained over time think about from another degree as well not only small versus large companies that enabler of making small businesses able to catch up with larger companies in a big way in a lot of tasks that they might be attempting to perform you can think about developed economies like the US where Equity Market it's a very frothy versus other Emerging Markets why would the Gap be so large you know there are some gaps there that I think will be closed over the next 10 years especially commodity-led economies that may take advantage of not only those breakthroughs in Technologies but also uh the commodity space as well that might heat up and help those economies do much better so going back to this chart you see that the inflating period of those asset bubbles is also aligned with the fact that gold begins to underperform US Stocks during those periods so you saw that in the 90s um and then after that fact when you peaked in those levels what you see is that gold starts to perform better than overall Equity markets that's not just gold Commodities also a bit better tangible assets did better um go back to the 70s and look at housing market relative to the equities which one perform better the housing market um was where Equity markets expensive at the time no equity markets are not expensive but it was a period where uh you've had tangible assets performing better than than uh than financial assets today I think we're in a very similar environment where we've had gold prices underperform equities for a very long time everyone is stresselating their thesis everyone is skeptical about the metal um you know whatever if it's crypto your thing or or growth stocks or any or AI um you know I know the I've heard that argument before I've seen it and I don't think that will be sustainable over time I think that I believe in cycles and what I think is happening is is a gray rotation out of those growth stocks out of those expensive technology companies at some point will continue to materialize and causing value companies but along with commodity businesses outperforming those companies and so I think we're in the process of that this is not going to happen all at once the last two to three months have been certainly going against that Trend um but I think that this is owing line and you know Adam I had a uh an incredible uh pleasure of actually presenting to the IMF uh three months ago about this chart that you're looking in the screen um the IMF contacted me because I was the person who created the percentage of inversions chart so um when I looked at yield curving versions rather than looking at two versus ten year yields or three month versus 10-year yields I think some people have seen a chart going around which calculates a more comprehensive metric of all the percentage of yield curves uh and how many of those are actually inverted and so basically look at the percentage of those and over time what you find is that when you go above 70 you tend to see a heart Landing okay fantasy meaning every time since the 70s we've had a heart lending the reason why I wanted to create that metric is because when you looked at separate spreads like the two versus stands the three month versus stand so forth you're gonna see different signals during different different times in in the 2006 era it took two years until we saw hard lending in 2000 was writing a line in 7374 was writing line was the version happened the decline in equity markets happen the heart lending happened as well but that mix of signals is critical if you're running money and to me that was just nonsense how we are all Reliant in this metric when it just doesn't give you a perfect uh way of of really a trajectory of how to invest in in the following years after seeing those inversions and so that caused me to go deeper caused me to understand are there other spreads that are more important than two versus stands and so forth uh should I be looking at this in a more broader way so that's when I created the all possible spreads in the yield curve and looking at the percentage of those that are actually inverted and IMF contact us uh myself actually and said hey uh you know we love that research I know you've done empirical analysis and what assets to own when you have that 70 and that was certainly a presentation here is is regarding that empirical analysis so you're seeing here is the green line which is looking at the Gold to S P 500 ratio which by the way is the best way of of protecting your portfolio during periods of after that 70 handle of the yellow curving versions I looked at oil I look at treasuries I looked at Gold itself S P 500 I want to understand how do assets do after you see such a large level of distortions in the treasury curve and what you find is that the position of owning gold and selling the S P 500 in other words being long to go to S P 500 ratio is by far uh the best success ratio of of during those periods for the next two years and so in the yellow line you're looking at the average performance of the gold to S P 500 ratio uh after after you heat that 70 handle a percentage of inversions um it doesn't matter if the ratio goes to 90 uh all you need is a signal after um of of going above that 70 and that's when it starts tracking the performance of different assets and you can see a 72 percent return happens in many ways sometimes his gold prices rising sometimes it's Equity markets declining sometimes is both legs of that trade working but more importantly is that their ratio Works um the blue line is looking at times with both flags of that trade worked in which one ones are those 73.74 and the tech bust does that sound familiar and are we not in an estaclationary environment where technology is expensive relative to GDP relative to overall Equity markets you got Mega caps you got AI just like the internet literally everything sounds so familiar to the blue line if you ask me I think we're going to see returns similar to what we saw with the blue line where uh uh which goes up about 150 percent in that ratio where both sides of this trade work very well um I think this is going to be the case it's kind of in line with the own intangible assets and and selling Financial assets it's kind of in line with commodity business uh really outperforming other Financial uh parts of the economy such as um you know technology businesses uh treasuries and other corporate bonds and other things everything is so frothy today that I just find it hard to believe that we're not going to see this racial working especially today so to me this is the most important metric when I think about 60 40 portfolios and ways to manage your portfolio to me this is almost uh you know as critical as as it sounds to uh to be to be looking at it well hey Tommy real quick just back to that slide for a second first off congratulations on catching the attention of the IMF and being invited to present to them um so I was going to ask you so when this time round did we hit 70 of the yield curves being inverted looking at your chart here um assuming you put this together relatively recently it looks like it happened somewhere right around the start of the beginning of this year is that is that accurate uh uh it's actually November was was the was the the hit uh and so November starts just a little bit uh outdated but it's it's basically tracking that the yellow line recently okay and by the way sorry but just just ask those key questions so if history repeats itself here we should be seeing really by the end of this year Q4 of this year you know a real material ramping up in this ratio whether it's gold going up in price s p going down or both happening together absolutely and look at the blue line by the way I mean the Blue Line had some big run ups and some pretty significant dollar moves too which scary a lot of people right if you're along the blue line as you can see not even the yellow just the blue line where both sides of that that trade work the aura period of three to four months where this just doesn't work and can you I mean this sounds so familiar to today what we're seeing right now which recently gold has really underperformed some of the equity markets um and in my opinion that's just unsustainable so um yeah those that's a good point I think that we're getting to that stage where uh it's approaching uh that something is going to happen with this ratio to the upside and that might be in line with the gold triple top chart it just feels like everything is aligned here or a slow fully aligning and you know we may see this ratio move up we may see gold prices surge well above that triple top we may see Equity markets uh you know maybe move lower given the fact that we're seeing uh this this level of uh of euphoria towards AI um so to me it just feels like uh this is just my feeling obviously uh that with empirical analysis done uh we're getting close to some sort of resolution uh that may actually end up being very positive for the green line to continue to rise all right great thanks uh do you want me to keep going because there's there's a lot more and I can probably uh uh yeah I can keep going and please stop me when if if you think I'm going too long sure so I'm sure the audience would shoot me if I said stop so yes definitely keep going uh I want to mark that we're about an hour in mostly just to be respectful of your time so you figure out what pace you want to go through the remaining charts with but we'll we'll hang with you as long as you've got material here okay so let's look at this chart which is important now we're seeing uh starting to uh Divergence between basic and diluted EPS in S P 500 um note that the white line going back to the 50s has this range as you can see where earnings kind of staying in this range for for many many uh uh decades as you can see and every time I go up to the very top of that range uh of the upper side of that channel really um you tend to see uh you know earnings contract significantly um a lot of people and analysts and investors especially the last seasoned investors the younger guys they tend to extrapolate what happened in the past if we think about what has been happening recently we've had in 20 2010s that decade of 2010s coming out of the global financial crisis was the strongest growth in corporate earnings that we've seen in history in real terms strongest um prior times in history that we've had significant increases really other two times the 1920s okay in the 1990s both of those periods preceded a decade that really uh in a subsequent 10 years basically we saw major contractions of earnings meaning we've had the great uh depression in the 30s uh or late 20s that then kind of work it through the 30s and also we've had the tech bust uh in the night late 90s and also uh I should say really it was in the early 2000s that really lasted for two to three years and then later on we've had another bus which was a global financial crisis at the end of that decade in 0708 uh that also caused corporate earnings to decline uh drastically and again go back to those times that were also very important technological breakthroughs uh that occurred during those two periods um do I think this is very similar to now yes I think it's very similar in that sense I think we're going to see um you know this idea of this trepolation of earnings for most analysts to me is makes uh no sense I think will take a long time for things to really materialize on on bottom line improvements of those businesses to continue to beat that case I think there's other things happening uh along the way meaning the pressure from most of the uh if if we're going to see robust earnings uh you can I can almost guarantee you that we're going to see a very large pressure from workers to make more money and this is this is almost like what will happen in the 70s but we're starting from such a much larger amount of profits and also a much larger and uh in terms of of the margins that we see today that is unlikely to be sustainable and so if we look at this chart at this critical juncture of this 70-year channel upper channel of earnings where diluted EPS has already started to contract I feel very strongly that we're just at the beginning of that construction of earnings and if that the case you have to ask yourself what are what is the right multiple to put in equity markets if you looked at in the last 120 years of history there are really two types of decades where Equity markets underperform uh valuation problems and inflation problems okay while people think inflation is good for the markets it could be but what it tends to happen is that there's a compression of multiples during those periods sometimes it's caused by fundamentals improving but ER but but the price is not really doing very well so you see a compression of multiples the average compression of multiples during inflationary periods is about 47 percent we have both evaluation and an inflation problem in my opinion and I'm not talking about you know I know that there's has been a deceleration of inflation recently but prices that's a deceleration of inflation growth the prices of things goods and services remains really high and that alone is likely to be also foreseen the squeeze of those of those margins over time I think the compression of multiples by the way the compression of multiples we've seen in the past didn't really start from the valuations we're seeing today from those inflationary periods the difference of today versus other inflationary appearance is that when you look back the equity Market wasn't inflated relative to fundamentals at all and so to me this is uh you know when I hear you know Stanley drug Miller and some other folks saying I don't think the performance of equity markets will be as robust or maybe we won't see uh any positive performance the next 10 years I think it's very very uh reasonable having that thought I think if I was having my own nine to five job that's not related to finance and having to work and and have a 401k what would I be doing with my money I would probably be owning tangible assets believe it or not even with the housing prices where they are I think housing prices will drastically outperform Equity markets in my opinion um on a relative basis um given this idea where tangible assets Rising prices cost of building maybe a lot higher 10 years from now I think I feel very strongly about that um I think all those things are going to play a factor and and so in my opinion this is going back to not only looking at the valuation side but this chart really shows the fundamental risk that we're running in in this environment and then the next thing that you can look at is that we've had a contraction of earnings that already started so the last time I measured this was a decline of about 13 usually during hard Landing scenarios you can see you can see a decline of 57 71 percent in earnings if that's the case boy those multiples are off uh in in today's Equity markets because uh you know things are certainly not reflected in in that environment now notice that the red line is basically uh leads the white line and the the red line is earnings that's bottom line the white line is revenues Top Line so Top Line has been actually very resilient recently we've had earnings and the story for me was that you can clearly see guidance continues to be very strong but also revenues continue to be strong and a lot of people are seeing this and saying boy this is I was expecting much worse deterioration of of fundamentals and I'm not really seeing that is that normal um and it is normal um what you're seeing is really bottom line is leading the way it's already down uh if we get to a hard lending scenario you would expect things to get a lot worse fundamentals uh wise and on top of it I think Top Line is going to follow the same path um recently we've had this run up in prices which you know when you think about what what's been happening and the breadth of the market and mostly driven by the mega cap companies and smaller businesses all really uh not showing the same strength that we're seeing small caps look at the relative performance the technology relative to small cap companies micro cap companies are also showing a lot of weakness um different sectors of the economy are also showing the weaknesses too but mostly if this is as you can see in this chart it's pretty clear to me that everything is predicated on 10-year yields also Financial conditions those last year or so even before when we started seeing the peak of the market uh Financial conditions are really uh worsening at a time when 10-year yields are rising and Equity markets begin to really suffer and more recently we've had the opposite of that that's why I said at the beginning of the interview how 2022 2023 has been the complete opposite 2022 but I don't think this is sustainable I think cost of capital will continue to be higher for longer I think the FED is going to have to leave rates higher for longer I also think we're going to see a pressure from 10 year olds to be higher for longer um so you know when I think about this overall scenario it's pretty clear that investors are betting on one thing today that we're going to see another 10 years of strong growth and low cost of capital when in my opinion we may see low or negative growth with higher than average cost of capital and so to me this is another reason why I think Equity markets may suffer when I look at the fundamentals of the thing stocks or the the companies that are holding up the the stock market today you can see the rep this is the nominal terms by the way not not even um really adjusting for inflation and other things but you can see here despite this idea of of AI and all the sephoria towards technology businesses particularly the large companies you can see the the decline in in Revenue growth and by the way I've had people when I post this chart to say why did you only go back to 2005. go back to the the only reason why I do that is because the decline would be even Crazier by the way so you're welcome to do that on your own but it looks like an insane chart so you know just for illustration purposes I went back to that period and honestly you can see the picture very clearly here that when you grow to a certain degree of the economy like Mega caps have grown in terms of relative to GDP which is larger larger than what we've seen throughout history when it comes to the size of those businesses relative to the overall economy you can't really grow much further you kind of hit a you know a limit in terms of growth and that is reflected in this chart the problem is is that multiples are getting more and more expensive along with the deterioration of growth I don't think that's justifiable so to me this is one part of the market that potentially could have issues the second part that you can see is commercial industrial loans have been contracting uh we've seen this in other periods and now with the banking crisis things can get more intensified remember we're also over a year now into this tightening policies too in the in in the Federal Reserve and so tightening policies have a lag effect um are we about to see the lag effect is starting to play into the economy here soon I think so because my belief is that the banking crisis has nothing to do really with the tightening of monetary conditions as far as what the FED did it had all to do with the collateral prices of U.S treasuries is Treasury is declining in price to cause the problem going further now if we're going to see a massive issuances of tragedies that maybe can drive treasuries lower or at least not you know cause Treasures to Rally significantly from here giving that that upper pressure and Supply I think that this is also going to cause Banks to also lend less especially given the new regulations and other issues that we're seeing so commercial and Industrial loans are likely to continue to contract and as you can see those are also periods that you can see other higher lendings like the tech bus and the global financial crisis I think this is going to add to that thesis that is um also very negative um banking failures uh look we've seen some banking failures but usually as you can see in this chart once you start seeing one or two you can see that looking at the the orange line then it starts to become almost like a Cascade effect a domino effect one causes the other I don't need to be right about this but throughout history certainly did that happen so I would at least be cautious that you know maybe some of the other Banks May create some other problems as well maybe we're not out of the woods in terms of that issue itself um that could be caused by treasury markets that could be caused by fat tightening policies that could be caused by the the delay of those monetary conditions beginning to cause issues here as well um and other uh just uh normal slowdowns in the economy caused by most of the the small caps and one thing someone said Adam that I thought was really important back when I posted a chart of Mega caps versus small caps I think was Peter bookvar which is a shutout for him for for saying that I thought was really smart uh basically what he said is that a pay attention that most of the small cap companies that are not performing very well and diverging from the mega caps are actually uh clients of those of those Mega cap businesses and so pay attention to those clients actually starting to really underperform because those are important signals that tend to perceive large shifts of of of allocation in markets meaning peaks of maybe similar to what we saw in the tech bubble and so forth uh the macro Outlook you can see different ways I show the yield curve inversion problem I've shown other situations about uh the commercial and loans I've shown corporate uh markets beginning to or should say corporate fundamentals beginning to contract look at the Soft Data as well because it's important that is what executives are thinking about the economy and are likely the ones that make the decisions of maybe doing more or less cap acts maybe doing more or less employment and so forth and you can find here clearly by many different Soft Data this is one that I I thought was interesting because it goes back to the 70s every time we've had such a big decline in this Philadelphia fed business Outlook we tend to see also a hard lending scenario so things are adding up to this whole thesis you can also see credit spreads now as I said earlier being lower uh than or being on the negative side meaning corporate bonds are yielding less than than risk-free uh risk-free rates which is in my opinion also insane to think about it the why would you take that extra level of risk of owning those instruments when uh really you can just own a risk-free rate instrument that well risk-free is is is also a questionable Boba but really questionable is is why would you buy those corporations with deteriorating quality of their own fundamentals and also uh the risk of cost of capital staying higher and they having to reissue those those debt commitments over time and causing rates to move a lot higher so pay attention as well to the risk the corporate spreads where they were back in a way it was they were not negative they searched all the way to eight percent today they're negative and so you know we're talking about maybe another rise of or hike of of interest rates recently that's going to cause us go even deeper in this negative Camp of this corporate spreads I don't think this is reflecting an environment that we're might be entering of a hard lending if this is a hard lending scenario you do not want to own this Securities in my opinion I think meaning corporate bonds I think there's a lot of risk there as well great hey two quick questions on that just real quick um so uh first off love this chart um because it shows how aberrant this current condition is right you go back to 30 plus years in this data series we don't see this happen right um and presumably if we get a hard Landing would you expect to see a repeat in the spreads where we would slingshot from out of the negative to some much higher number here the way that spreads blew out you know going into the GFC I think it's very likely we're going to see a blow out of this of the spreads um but uh I think about markets in a probability way um and looking at negative numbers it's at least uh just a responsible uh uh sense of of really having exposure to a potential for spreads to widen much further note that this has 30 years of history and the reason why it doesn't go back further as well it has to do with the history of corporate bonds we don't know corporate bonds are fairly new we don't know how Corporate bonds would behave in inflationary regimes we don't know our corporate and I'm talking about the the magnitude of this Market relative to other decades is is much larger with there's a lot of businesses as I said earlier that will be rolling over their debt we don't know how that's going to behave as well as they roll those over investors are likely to demand higher yields and so forth and so that on itself can become reflexive and cause other issues um I think when you think about the equity markets you're really thinking about valuations where interest rates are which is really cost of capital and also earnings I look at the three aspects of that and all of them look really scary valuations are very uh pronounced so you got you got interest rates in terms of cost of debt for for each of those businesses forget about risk-free rate for a minute just think about I mean the whole reason why this this number is negative today it's not because corporate bond yields have been declining has been mostly because the FED funds rates have been rising and so and in my opinion uh we're yet to see corporate bond yields really rise a lot further and begin to reflect those issues in the economy that we may see again most of the issues we've had in 2022 were duration risk that we haven't seen yet those cash flows uh you know weakening of cash flows and so forth and contraction of uh of of of of margins and other things really be reflected in prices and cost of that yeah and that may be the thing that that could occur in the following six months or so one thing I noticed as well Adam has been in the labor markets because labor markets are kind of hard to to really look at I mean if you start seeing the permanent job losses increase it's something very alarming I mean yes we've seen this in other times in history usually they also tend to be during hard lendings but permanent job losses are happening across most of the technology businesses you're seeing other others as well other sectors that are seeing uh large financials you know banks have have been uh actually laying off a lot of people and those are really good jobs in the economy those are jobs that high paying uh salaries and and tend to be uh have an impact on the demand for goods I also have an impact on consumption in general which yes in a way could accelerate inflation over uh short term but also if that's going to be the case we're also going to see a very significant contraction in in fundamentals and given where prices of most of most are today certainly that is not in line with with those potential issues and to me the job market is almost obfuscated being obfuscated by this this increase in non-skilled jobs and in this chart you're seeing the population ratio ratio for people that have less in the High School uh diploma and and that is surging recently right so basically you're seeing lots of people taking on jobs in that in that camp a lot of people being employed a lot of people a lot of demand for those and you've had other businesses that are also trying to hire those folks to work for them but we're not seeing as the red line shows high paying jobs which is also in line with the permanent job losses um you know in in a in a very good uh scenario as you can see there's been also a secular decline in the red line but more recently it's been rolling over as the other line of of of non-skilled jobs have been surging so to me the strength of the labor market has been obfuscated by the strength of the no non-skilled jobs uh which is in a way is is also a little alarming when it comes to the overall economy as well yeah and and those unskilled jobs that are all the growth there most of those are short-term positions or part-time positions right so not only the unskilled but they're they're part-time they don't come with Benefits that type of stuff correct that's my read of the BLS data not only that uh Adam but if you go back to the prior chart and you looked at temporary jobs losses you know it's a very different chart so which is writing line with your comment right so non-skill jobs uh or Etc unskilled jobs apologies for my my English uh but uh unskilled jobs are the ones that are uh that are really uh really inflating the jobs Market when you look at job openings and so forth um and this is going to be a continuation of the upper pressure in wages of those that part of the market so you may see uh wages come under pressure and other things come under pressure of skill jobs but unskilled jobs may actually continue to go higher in terms of wages and sellers given a demand that we're seeing uh the continuation of that is well which is is another thing to think about as well um so you put it all together all those charts and you think about this one because to me this is the most important chart it's from a friend of ours uh Roni from increment and Ag and they do an incredible job themselves in terms of research um I love reading their stuff and they put this chart together uh years ago and it's called the Commodities to equity ratio and it really shows the secular moves from tangible assets relative to financial assets shows the the picture of valuations of those Equity markets and and bond markets uh relative to uh to the to uh to Commodities it also shows how we've seen the flow of capital going into technology forgetting about the basic necessities of the global economy such as natural resource Industries um it shows this this globalization period that we've had since the global financial crisis and even before that that really helped to keep costs low uh and not have a lot of eruptions and Logistics and other things there's so many things you can think about the great rotation of value to growth you can think about 60 40 portfolios favoring Equity markets over Commodities and this is being reflected in this price so a lot of things um really boiled down to this Commodities to equity ratio which as I said in other interviews with you and I think this is the most relevant chart of the next 10 years is something I think a lot about how do I uh how do I really capitalize on the trend of this lab going higher is this buying Emerging Markets how do we buy Emerging Markets is it really commodity-led economies are bricks going to be different you know China is not an Emerging Market I want to own it's a commodity importer India is not a commodity is not commodity-led economy either um do I want to own Russia with uh so much geopolitical risk oh wait a second but there's Brazil geopolitical neutrally uh uh speaking is is is very very neutral there's not a lot of issues um it's also an economy that is got exposure to an energy agricultural Commodities metals and Mining um you know almost all sorts of things it's likely to pay a key play a key role in the global economy as most of the G7 uh uh countries start really chasing uh minerals and and natural resources to rebuild their own economies as well so some something I've been thinking a lot about is this chart and and you know to me this is probably the most important thing investors should be considering finally just to make a point and I'll end on this one is that sometimes we like to say well copper is a very uh cyclical commodity um you know you can do the same with agricultural Commodities by the way and we like to look at the commodity space in a more segregated speaking meaning uh they're all independent they're not they're very interconnected once you start seeing there's such a small Market still relative to in terms of uh exposure of most of those large institutions when you start seeing Capital flowing into the space everything goes up and so that is also how we see this throughout history so you can see gold prices versus copper and they're basically the same chart so yeah you can get it wrong for six months or 12 months but over the course of 10 years if you're right about a gold cycle at its its early stages most likely we're going to see copper prices leading the way as well to the upside too along with silver prices I'll along with agricultural Commodities along with energy a lot of things could actually move in the same direction as we see things unfolding here so to me this is something we kind of uh Overlook a lot of times because of the cyclicality nature of some of the Commodities versus others but at the end of the day once those markets begin to really get this not discovered but favored relative to others everything is interconnected and you tend to see what we would we often call a Commodities uh cycle and I think we're at their early stages of one while we may see decelerations and periods when things can get a little rough energy was just the beginning of that in 2021 and 2022 and I think we're going to see a lot more of that unleashing in the following years so Adam maybe I can stop here because I think there's that's uh a very long presentation wow but it's been wonderful uh Tommy yeah it has been a tour or the force here and um uh here you let me see if I can uh stop your screen sharing here so we can see your face um so first off thank you that was just magnificent um and you have absolutely uh made the your case with a ton of data here um and uh I I do want to wrap this up because we've taken so much of your time but um you know presumably you look at that and you think okay so how to play that uh that that commodity to equities upswing right when you showed that key chart there near the end um how we're still very close to a historic trough here and and if history repeats itself that ratio should should really start shooting up um so uh obviously own a basket of Commodities precious metals and energy agriculture softs Etc you've named them all look to uh countries that are going to benefit from the strength and commodities so big producers like Brazil that you mentioned um I I presume in terms of owning the commodity exposure um some of them are easy to own directly like you can buy some gold and silver no problem hold it yourself if you like um a lot of other ones are harder and and so the way to play those I'm presuming are more the mining shares um you're not as I'm saying all this but I'm just putting all this on the table in the shortest period of Time how can you kind of tell people your approach to positioning to take advantage of of this major you know macro upswing that you expect I like to use a thematic approach of that so I I looked at a themes that I think will win this year from the short side I think Mega caps you know are are risky part I mean I I don't think that the overall market and the breadth of the market is is um is is is telling you something that tends to be preceding a a peak of the market and you should be worried about it um I wouldn't I wouldn't have a larger location there uh number two uh private Equity Funds and other other businesses that have private Equity valuations I think that those are yet to show very large mismarkings of of their assets uh because they get Sports to Mark to Market yeah so you get four supermark to Market I think you're coming uh there's a lot of pressure uh of of different Regulators uh recently in that in that front I think that that's going to become an important part of the market I also think that corporate bonds look really uh troubling as well so uh those are going to be important ports portions of the market I think volatility is suppressed unjustifiably I think there's uh uh certainly a case to be made that we may see uh that become an issue and I look for companies that will have problems with high costs of capital so that is one of the things in terms of shorts and things like that certainly is has been the focus of ours is to look for companies that will have that cost of capital problem uh moving forward regardless if it is causing their margins to be squeezed they're rolling over of their dad um and other problems that may be emerging because of the uh the the cost of that being elevated um on the long side well I think the Global Financial the global fee at the basement is is a real thing I think uh you know regardless if it is owning a defensive asset like gold uh for you or if it is owning um you know to me is really owning a lot of exploration assets the reason why I think that way is because gold prices are basically near all-time highs about to in my opinion break to that level and as we see that a lot of huge influx of capital is likely to come into the market of of the gold space I think that the major companies lack Vision that's just my opinion I don't think they're focused on growth or don't I think they have deteriorating assets and so when I think about owning high quality assets into space I think developers and explorers are the way to go uh we like explorers because we have a niche with an exploration geologist but I think both sides of that market are much more attractive from a symmetry perspective but also um just just the the quality of the assets relative to what they what the majors own uh do you plan to own them because they're going to their share prices are going to rise higher as the underlying metal prices go higher and capital goes into those companies or maybe it's an and are you owning them because you expect the majors who you say lack Vision will just go and acquire them once the gold price starts going up I like optionality when I buy something I like optionality optionality means having a large number of ways to be right and in my opinion what you mentioned about Majors acquiring those businesses is just one of them uh they are swimming in cash basically they're being Ultra conservative um which I think it's the wrong approach when you see gold prices at their levels and you know you're not producing most of the businesses barrack in Google um Ken Ross even Newmont have been in a secular decline in terms of uh of gold production they're gonna have with the tier rating grades as well at some point they're going to have to come in so that's one thing the second thing is just Market uh or the industry receiving Capital over time I mean if you see gold prices go up significantly from here it is just natural that any institution looking for ways to capitalize on this will look for other things that are linked to gold prices they have not moved yet and this might be the first time in my career that I've seen gold prices at near record levels and the valuation of exploration development stocks near record lows yeah and so you know that's you know it's just sometimes it takes a trigger for that to happen and I think the trigger is gold prices breaking out we're all watching that match that the the treasuries versus Gold World Cup final once that finalizes I think everyone's going to be cheering on 60 40 portfolios large institutions endowments uh funds uh uh central banks everyone is seeing that happen live and as we see that breakout not only on gold itself but also gold relative to treasuries I think we're it's going to attract a lot more Capital interest to this overall industry so it's just just waiting for gold to sink that penalty kick is what you're saying yes I think that's just one uh way to be long Commodities the second way would be uh outside of owning gold itself of course outside of owning Commodities I would say electrification Metals is is a real thing I think um you can apply the same strategy with copper deposits in development phase or or also an exploration phase similarly we're seeing prices of Base models being elevated with historic standards and at the same time the valuation of those businesses are extremely low gold is even more pronounced if you think about it but base metals are also that way and there is a real institutional attractiveness in terms of uh of of folks seeking exposure towards those things and I believe that that's going to be an important part of the thesis um and sorry but but as part of your enthusiasm there too the the Tailwind of fiscal spending that is going into infrastructure projects to Electrify grids the revitalization of manufacturing era that's another one the fact that economies have to cut the rely is with China Russia and other authoritarian regimes um just the the whole idea of the influx of capital into gold that tends to drive other Commodities they're all interconnected uh the 60 40 transition so many things will play a role into this movement towards those metals that are also going to benefit from the Green Revolution itself and so to me that's an important aspect here that I think uh I would not ignore um energy shortage I think that's that's an important theme it's not necessarily shortage in that sense but certainly we're not seeing companies on a rush to increase production of oil and I think there are those businesses today in terms of the terminal rate of them are being pricing the markets like they're going to be out of business in three to five years you can see that by just looking at the free cash flow yield of those companies I think that um you can own those companies over time uh they're going to last much longer than what the market thinks they will and I think they're one of the cheapest parts of the market still and we've had a two years of significant increases in prices of those stocks and then we've had it last year of literally going sideways if we have a hard Landing scenario I think we could see those those stocks get hit but it would be an incredible opportunity so obviously you know be careful with the cyclicality of the base metals and the energy side but there are uh clear winners of this decade in my opinion um so uh number four agricultural Commodities I I I think there's ways to be nichy here there's ways to be to go deep and understand those markets well understand agricultural Commodities have a shorter time frame as far as the supply curve uh you can get supply fixed much quicker than Metals mine uh metals and Mining metals and Mining can take you know 15 years 20 years especially a lot longer if if the government gets in the way which that happens literally every time and so um well to me the the now you'll go back to the 70s and you understand that agricultural Commodities perform incredibly well during that period as well again I'm not claiming this is the 70s I hate when people say that and it's not that it's just understanding Market correlations first and foremost I understand that that problem wasn't the case in the 70s and other things but when you just looking at Market correlations look at what happened agricultural Commodities in the 40s and 1910s and you see clearly that there those are very very good Investments too so I wouldn't count them out those are good places to maybe deploy Capital um and I can't think of I love South America in general I think South America is a place that has been um you know maybe ignored over the years for many reasons Commodities have not performed well what happened with Venezuela what's happening with Argentina um recently we have had Brazil uh you know having a big shift in terms of the present leadership that I think is masking the opportunity D everyone's looking at that and saying oh my goodness it's going to be another Venezuela I cannot invest in this but the prices of assets everything has a price to begin with I don't think this is going to happen in Brazil if I look at the I'm from Brazil the political environment there has never been so segregated by the way it's been uh the first time in many uh decades that we're seeing a real right-wing party challenging the left-wing party and that is a huge deal as far as popularity as far as uh policy making uh decisions and other things that may occur in the future and I think that that's going to play a role into uh making things a lot more difficult to develop on the left side and if that's the case uh people are going to lose their focus towards the politics which is always going to be a problem don't forget when Brazil outperform other markets in the early 2000s and the 70s as well there was also political issues and so everything has a price and Brazilian banks are really cheap Brazilian commodity businesses are really cheap I think it it deserves a certain level of allocation you don't need to go big but you know I think folks that understand the commodity markets folks that understand Emerging Markets especially Brazil and other other areas of South America are going to be in demand that knowledge will be in demand and I think you know I I spend a lot of time on there as well um I think one part of the growth Market that has nothing to do Commodities to equity ratio that I'm excited is the biotechnology industry that's a conversation for another time maybe but it's a small very small percentage of our portfolio but uh the only reason why I like to own that is first is a good hatch on a lot of other things we own but also I understand also I would say that there's going to be need for that in the future there's a true Revolution happening the difference between biotech and other technology related Industries is that the valuation is completely opposite I mean those companies some of them are trading well below their cash balance um to me that's a no-brainer um and understanding that industry very well would be also in demand so you know we recently hire a scientist to understand that better that was the beginning of our gold strategy that was the beginning of a commodity strategy so I can see that developing over time I know it's a separate topic but it's something I wouldn't you know I wouldn't ignore either you know if for folks that understand that market well I think that that would be an interesting place to be invested as well in the future all right Tommy this uh short and long breakdown these sort of thematic breakdowns super super helpful thank you so much for for sharing them um and on the biotech folks let us know how interested you are in that topic down in the comments section Tommy if there's enough interest I think there probably will be would love to be back on at some point to do a a discussion just on the emerging opportunity that you see there um all right I'm going to have to wrap it up here um just out of respect for your time and and uh uh looking at my calendar to another interview um but this was phenomenal so Tavi for folks that have really appreciated this really enjoyed this for the few that didn't know you beforehand got to know you a bit through this interview where can they go to find out more about you your work and uh we won't have time to go into them in depth today we've talked about in the past but to go learn about crestcats funds where should they go for all that uh crescott.net is the website you can find a lot of information over research letters information about our funds and everything about our business and also I put a lot of research out on Twitter at topicosta uh you can communicate there with me or also communicate in there contact us page on the website too but thank you again Adam it was a pleasure to be here thank you for providing the time to uh to share all this information so I appreciate the uh the opportunity uh it's always wonderful having you on okay folks so uh really quickly Tommy when we edit this I will put up um the URLs to chriskit.net and your your Twitter handle on the screen so folks know exactly where to go we'll have links Down Below in the description as well uh just a quick reminder to folks if you want some help in taking action on any of the themes that Toby mentioned here highly recommend you do that following the guidance of a professional financial advisor but not just anyone one that really understands the macro issues that Tavi went through in immense detail here if you've got a good one who can do that for you great work with them but if you don't or you'd like a second opinion from one who does consider scheduling a free consultation with the financial advisors that wealthyon endorses that the guys you see on this channel with me every week to set up one of those free consultations just go to wealthyon.com only takes a couple seconds to fill out the form there's no cost there's no commitment to work with these guys it's just a public service they offer if you'd like to see Tavi come back on the program again soon folks please voice your support by hitting the like button clicking on the red subscribe button too as well as that little bell icon right next to it Tavi it's just been wonderful again can't thank you enough really look forward to having you back on the program again soon thanks for having me Adam all right everyone else thanks so much for watching thank you

Channel: Wealthion

Views: 28,240

Keywords: stockmarketinvesting2023, recessionproofyourfinances, commoditiesinvesting, tavicosta, stockmarketcrash

Id: 0QofRgn-MZg

Length: 105min 46sec (6346 seconds)

Published: Thu Jun 08 2023