The Slow Approaching Recession, the Dollar's Rampage, and the Global Quest for Lithium

[Music] hey everybody welcome into our first segment here on the Mining stock daily long-form episode happy to welcome into returning guest Mr Brent Johnson of Santiago Capital Brent uh welcome back to the podcast I promise you once again we will not talk about mining stocks unless you want no no no it's all good all good thanks for having me back uh look forward to catching up I'm going to turn off my uh email real quick so they don't get a bunch of things and bells and whistles and stuff during the we're talking oh well it just shows you how popular you are uh hey uh there's a number of things we can take this conversation I want to get a general sense of what is happening in markets what is happening in in in the world of macro uh yeah I think the story this week There's multiple stories from this week but it can't it has been proven that one company can lift the entire tide of boats and that was the video uh yeah artificial intelligence really is you can call it a bubble you can call it a fad I don't know where I would describe this but uh 30 up in after hours after their uh quarterly financials and then the tech stocks continue their rally it is just reminiscent of 2020 2021 all over again here Brent yeah well I think I think there's like I think there's a bunch of things going on and they're all kind of intersecting at the same time um and I think like AI I mean there's no question this is a bit of a Mania around III the thing is is that with AI specifically it's probably a little bit more deserved in my opinion than many other fads you know um I don't I think this it actually could be a game changer I'm not saying it is but I don't think you can ignore it um you know I've always said that you have to always be prepared for some emerging technology that you're not ready for to just kind of upend everything now whether AI ends up being that I don't know but I think the the user adoption rate the fastest in history um the the number of jobs and the number of things that it could disrupt I think is is is big enough that you you have to pay attention to it now do I think it means that Nvidia should be up 30 in the day probably not right um and my guess is that we're probably gonna see a little backfilling on this big rally that we've seen so so that's part of it I think the other thing is that when you get into an environment like this and there's not that much growth I mean markets for the most part have just been grinding sideways for the last year two years have they've been up they've been down they've been up they've been down but basically the s p is right now the same place it was a year ago same place it was two years ago so when you get into in that environment and there's just not a lot of growth around and you will then get a high concentration where there is growth in other words in the one little area where there is growth people will gravitate to that and it kind of becomes a self-fulfilling prophecy so I think we're seeing a little bit of that with technology um the other thing is that technology will typically do better when interest rates are lower and so the fact that interest rate expectation interest rates are still high and and they've been rising over the last year but over the last six months the expectations for them to rise further have started to come down and so I think that's why you've seen our performance of the NASDAQ this year over the s p the Dow but if you look at the breath there's not that much breath in other words it's all in five stalks right five or you know six stocks and so to me that's not the sign of a super healthy Market and then you throw on top of that that we've got this debt ceiling uh debate hanging out there and everybody's waiting for Clarity on that and then you have the fact that not only do we have the debt ceiling out there but they've raised rates dramatically over the last year and I think everybody not everybody a lot of people are saying that that is going to prove once those rate hikes start to actually get priced into the real economy that's going to be bad as as loans come due and things have to get refinanced at these now higher rates it's going to be a dramatic you know drag on the economy and we're going to see a pullback recession however you want to Define that and so the way I kind of uh an analogy I've kind of started using is imagine you go skiing and it's a beautiful day for skiing and the you know it's I don't know five inches of powder and it's it's fantastic however you can see at the top of the mountain that all of this snow has built up and it's just going to take one little breath of wind for all that snow to come rushing down the mountain in an avalanche right and it's not that just one or two people see this like literally everybody sees this massive snow on top of the mountain that's just waiting to come Crashing Down but it hasn't come crashing down yet and so the fact that everybody sees it a lot of people aren't out skied they you know they can see that there so they don't want to go ski but those who are skiing they're having a great time because the crash hasn't come the Avalanche hasn't happened yet um and so you know that I kind of equate those to the NASDAQ people right the NASDAQ people the people that are buying the fangs and the nvidias and you know they've had a lot of fun over the last two or three weeks maybe even a couple months um but you can't in my opinion you can have a lot of fun in this environment but the problem is is that you are taking a lot of risk to have that fund and at some point that Avalanche is going to come down the hill and that's kind of where I feel like we're at so um we've been very cautious over the last couple of months and I plan to stay cautious over the next couple months it's not that I don't recognize that there's not opportunities it's not that I don't see that you know AI could be a game changer but I'm just not you know I'm certainly not going all in on it and the exposure that we do have is is basically hedged at this point because I think you know the next couple months is going to be a lot more volatile than the last couple of months uh you basically just summarized all the bullet point items that I wanted to ask you about print I want to ask you about the debt ceiling I want to ask you about these rate hikes and where we're at with this you know where is the recession I also want to ask you more about this Ai and maybe let's stick with AI because obviously yes the topic at hand you know one thing that we haven't seen is this Rush of new specs in AI it almost kind of feels it's similar to the case you know obviously I always equate this story to you know Ford comes out with the Model T but it was the oil producers that made the most money so it's not like the technology companies they're doing well with AI but it's the things driving the AI the chip manufacturers that are really getting massive bin and I I think that's maybe an equitable analogy to make here but it also has gotten so frothy in the last couple weeks it's hard for me not to look back and ex think about all the experience of the last three years and be like man this bubble is still blowing up if they're trying to find something to put into it yeah well and and that's the thing and that's why to be honest I'm struggling with this a little bit because I believe in the AI Kind of Revolution I I think it is here to stay but chasing it right now today is a little tough for me so you know we have exposure but not a lot of exposure and I think that we will get a pullback over the next couple months and depending on how big that pullback is and and why we get it we'll determine whether or not you know we increase exposure to equities or not but um I just think that in this type of an environment well you kind of have to Define what your goal is to I mean of course everybody wants to make money but when I when I'm talking I'm talking about I'm talking as a fiduciary manager of other people's money so I work with a number of high net worth individuals I manage their personal portfolios the primary goal for all of these people is to protect the first and primary goal is to protect what we have you know let's not have a big correction let's not lose a bunch of money so that's the primary goal secondary goal is let's make as much as we can but within the risk parameters that we've set right and so you know if your goal is to become the richest man in the world and you don't mind taking a lot of risks in order to do that well then you should probably be in Nvidia in some of these uh you know crypto exchanges and all this other kind of stuff but you know that that's not my primary objective and so I know that in this type of an environment in this kind of a quote-unquote Mania you can make a lot of money the problem is you can also lose a lot of money and so I you know I've been through this enough times I started my career in the late 90s so I've seen the.com bust I've seen the real estate you know bust I've seen the global financial crisis I saw the Euro crisis in Europe you know we saw the covid crisis I I've seen these things happen before and they typically don't end well um and so you know I just think we're in the and then we've you know as you mentioned we've got the debt ceiling coming up right um to me there's just a heightened possibility for a really bad outcome so I am being prudent as opposed to being super aggressive right now in that risk in the debt ceiling is getting heightened almost every hour now Brent there's no resolution in sight in fact I did see that the White House was challenged a little bit as to President Biden going to Camp David in Delaware on the holiday weekend listen June 1st that date that Janet Yellen has engraved in our minds is six days away and half of those days our Hall is a long holiday weekend all right uh I don't know what the Vegas odds are like right now for us to default on June 1st but I would assume that they're getting higher and higher every hour yeah you know the the I guess the way you would bet on it is the credit default swap for the United States and it's it's trading about as high as it's ever traded before so you know the people are certainly worried about it here's the interesting thing for me when it comes to the debt ceiling on the one hand I'm not really worried about it because in my opinion it will get resolved um however you it's a big enough issue that you can't ignore it you know again it's kind of like that Avalanche up on the hill uh or that the the potential for the Avalanche up on the hill and so the interesting thing with the debt ceiling is that in my opinion other than the initial pop that we would probably get from just them announcing it so in other words if they come out in the next couple hours and say we have reached a deal I would expect Equity markets to Rally risk markets to Rally right or if that happens next week although upon the initial announcement I think that would probably be likely however um the interesting thing to me is that uh the um the weather regardless of whether they raise it or they don't raise it it should be a net drain on liquidity and what I mean by that is okay so let's take both Stars let's pretend that they don't come to a resolution and they they don't raise it and the US has a technical default first of all I don't think that would last more than a day or two but let's say it lasts a week right okay so in that week the people that own treasuries don't get paid right and so they don't get their interest payments it's very possible that the people that are planning on receiving those interest payments that's the cash that they were going to use to pay their bills right so they don't receive their cash so then they don't pay their bills and the people that they owed money to they don't get paid so that's a that's that's net draw on liquidity lack of liquidity right well then also all the government uh vendors you know the the people that the government pays money to other than just the treasury holders they don't get paid people don't you know so the vendors they don't get paid the vendors don't get paid their employees don't get paid employees that get don't get paid they don't make their car payment so you can get into this massive dollar shortage scenario very quickly if if the governments stop paying their bills right and so you you have to be ready for that so in that scenario that would be you would think that that would be a negative for for financial markets um before before you go to the next scenario is this potentially why we're seeing Safe Haven excuse me lack of Safe Haven assets uh the only Safe Haven asset I was seeing Rising is the dollar everything else is following I mean it is it's ugly so treasury bonds so it's not treasury bonds but short the short term treasury bills and the dollar are rallying because people want liquidity right and treasury bills have the they're the shortest maturity and they have the best liquidity other than cash right okay um the reason you're probably saying other things fall other than the NASDAQ is is is for the same reasons right um now and so so that you would think that it should they to have that technical fall at least for a couple days you're going to see the Vic Spike you're probably going to see the dollar Spike um you know whether treasuries longer term treasuries would Rally or not I I don't know I think they probably would but I don't know for sure but you'd be you'd have a dollar shortage in that in that in that instance when people don't get paid there's a shortage of dollars um but look the interesting thing is if you take the other side of it let's say that they do raise the debt ceiling well and I think a lot of people say okay that's bad for the dollar because now they're taking on more debt they're never going to be able to pay it off they're going to have to print more dollars to pay off that debt eventually that's bad for the dollar that's correct in kind of the long term but in the short term what raising the debt ceiling means is that the treasury can now go issue more bonds the reason that's important okay is for the last call it six to nine months since about November even though the FED kept raising rates and the FED kept doing quantitative tightening which means they're they're they're selling the bonds back to the market they're they're they're draining liquidity from the market the FED is at that same time Yellen the treasury secretary so that's that's the FED doing the the quantitative tightening okay their counterpart at the treasury they are still spending money but because they've bumped up against the debt sailing kind of in the November time frame they are no longer issuing treasury bills at their or bonds at the same rate that they were and what that means is that they're spending the the the government the treasury is spending the money that they have in their TGA account that stands for the treasury General if you ever see the term TGA stands for treasury general account it's like art it's like it's like your checking account or my checking account that's the government's checking out she's been spending that money into the economy typically what happens is when the government spends money they're putting money into the economy that's that's positive for liquidity but typically what they're doing at the same time is they're selling treasury bonds and in exchange for giving the market bonds they're taking cash back out of the se but since we're up against this debt ceiling they haven't been doing that since let's just call it November okay so it's been a positive flow of cash into the economy which has kind of been offsetting everything that Powell's been doing you may have seen some articles like this over the last six months about Powell and yelling or treasuring fed kind of being at odds this is this is this is what they're talking about so now we get into a scenario where they raise the debt sailing well you know six or nine months ago that the TGA was called 500 billion now it's 50 billion so it's it's come down a lot they want to get that back up to 500 billion a trillion whatever the number is I don't know exactly what their goal is but they definitely want it higher than it is now so that means they're going to be selling bonds into the market and they're going to be taking cash out of the market and putting it in their TGA account so that's a drain on liquidity so as you drain that liquidity from the market that means there's going to be less dollars available than there was yesterday and that's typically a positive for the dollar and if you look back historically at the you compare the dollar Index to the to the national debt typically when we bump up against the debt ceiling and we can no longer issue debt the dollar goes sideways to down because they're typically providing liquidity but once the debt ceiling is raised and they start issuing more bonds and start draining that liquidity back into the TGA account you typically see that the dollar will rise and so that's what I would expect to see again over the summer here um is that if you know if they raise the debt ceiling although maybe the first couple days or a week is uh you know dollar weakness and risk on I think it's very possible by the time we get to you know the FED meeting or later into June and July we're going to start to see some volatility show over the markets because I think it's I think net net it's going to be a negative for liquidity um someone maybe describe it as a seller new sell the news event yeah yeah exactly yeah I think if you got a big pop off of the the debt ceiling being raised that would be a selda news event in my opinion no I I all things equal right you got to kind of figure out what what's the reason they came to an agreement how long is the agreement how did they get to it you know what else is going on but just you know by and large I think the the raising of the debt ceilings probably a settle in this event yeah um prior guess this week gave it a 60 40 odd that they'd get this thing resolved and I said I don't really like those odds I'm very good the the funny thing is is it's kind of like uh well you're a gold investor I'm a gold investor the reason we own gold I mean there's many reasons but one of the main reasons is that when things really blow up you want that insurance policy right and this this what we're talking about like we're talking about basically the system itself kind of coming into question right and so even though I think it will be fine I understand that the consequences of if I'm wrong are big enough that you you have to be ready for it you have to plan for it well which goes back to and just makes I've been scratching my head so much this week why is gold just falling so much as we this deadline is getting closer and closer and you know not that I want you to well maybe pull out your crystal ball Brent why is it really the algorithms with the US Dollars the dollar rise the Algos are just pushing gold down I don't think that that's not my take on it so my take on it is that twofold one is that I think in general the market even though they know it's getting up to the deadline these things typically get resolved I mean the reality is it doesn't matter whether you're a Democrat or you're a republican you want to spend money if you don't raise this debt ceiling nobody gets to spend any money so it's kind of a prisoner's dilemma type thing right everybody wants to get the best deal but at the same time they both want to spend money so they will come to a deal where they can spend money now how much theater plays out between now and then what the political headlines they get to throw out between now and then I don't know but these things typically get resolved because both sides want to get want to get paid or want to be able to spend money so I think that's part of the reason you don't see gold rallying and harder um but the other part of it is that and this is this is one thing that I I often have to talk to the gold investors about is that typically in a dollar liquidity crunch a liquidity event where there's a shortage of dollars and it's a risk-off event and those types of events everything gets sold it doesn't matter what it is and gold since the gold is the most liquid thing in the world or one of the most liquid things in the world it typically gets sold in a crisis I mean that sheer security you know that that's your insurance policy when when you know when the when the disaster happens you sell your security policy and you you cash it in and all that selling then leads to the price going lower the other thing is that you know when you get into that environment a lot of times gold is traded on margin right majority of gold trading doesn't take place in the physical Market it takes place in the Futures market futures are done on margin so when you see the price start to come down you know and it starts to go against you it's leveraged so you don't have the same you know staying power that somebody who just bought physical and put it in a vault somewhere and so they they kind of get forced um to sell in that manner and another thing is that uh you know margin clerks and those types of scenario they make the decisions right it's you you don't necessarily sell what you want you sell what you can so that's part of it but then the other part of it is also that if you look in the U.S the U.S has positive real rates and I to me gold is often a trade on on real rates you know when real rates are negative gold is going higher when rail rates are rising gold is typically going lower and real rates have been rising with with the FED raising rates as much as they have over the last year and with inflationary pressures even though they're still high they're coming down you're actually in an environment now where real rates in the US are positive and I think that it's the only place in the world where real rates are positive maybe they are somewhere else and I just haven't seen it but um so I think that's part of it and again if if you can put your money in a t-bill which has great liquidity you know the government's going to pay you or at least pay you eventually right and it's liquid um you know or you put it in gold and you have to pay to store gold well the higher the interest rate you get on your t-bill the more enticing that is you know it's zero percent to take gold right but at five percent you kind of start thinking about it well I get five percent for sitting in a t-bill you know maybe I don't buy more gold right now so I think that's part of it as well okay uh I want to ask you about interest rates here because the the interest the the Futures have changed on speculating on If the Fed would raise next month or not it literally went from close to basically zero percent chance from their last meeting too I think I saw 30 or 40 percent chance of another 25 basis point hike in July um it was interesting it was like a soft pause the other week with pal up there obviously non-committal as he's been non-committal for the last I don't know four or five years uh but you know if You observe and I've had this conversation with a lot of people on the podcast the last couple weeks here Brett if they're their main objective is to slow down the economy and and slow down demand they're doing a very poor job of it and I know we can talk about the inter you know the the rise of interest rates needing to trickle into the full economy and that needed to take some time months perhaps and then we maybe will feel the effects of all those rate hikes but um you know just observationally I've I'm looking around uh and you might enjoy this the Nebraska Colorado football game is like the second most expensive sporting event to buy tickets for right now including the NBA finals wow that is interesting is the deal crazy yeah yeah prime time yeah uh we're my my wife mentioned to me the other week that Brandy Carlisle tickets we're going for eight hundred dollars and I know how much you love Brandy Carlisle Brett but what you spend eight hundred dollars I mean so like all these things are still particularly there is no Crush of demand people are spending all this money that they flush into the system yeah then that's the thing and so I think in the same way that again I don't know for sure but I think in the same way that you know the FED thought inflation would be transitory so they kept the spigots open and it didn't get inflation you didn't get inflation you didn't but and then all of a sudden you just got a ton of it right it's like the ketchup bottle right you're trying to get the ketchup out of the bottle and you can't get it out and then finally it just comes out and it's all over your plate in the same way that that happened with inflation on the way upside I think we could have it the other way as well so you know the fed's been raising now instead of keeping rates low they've been raising and raising and raising into your point people still have money they don't know what whether they saved it or whether they're buying everything on credit cards now they are still the economy is still moving and as there is the result of the economy still moving the FED is Raising and raising and raising in the same way that they stat stood patent stood patented patent now they're raising and raising and raising and we're probably going to get to a point where the economy just hits a wall and rather than slows down gradually we it has a crash right or some kind of a hard stop um and so I think that's because we've been raising rates for a year now I think but I think a lot of that stuff it doesn't it doesn't show up right away because as an example they let's say they raised rates in September let's say you have a car payment or you have a business and you have a Term Loan that resets every five years now they've raised rates a lot over the last year but you've been locked in because you've got a five-year rate right but now you know you took this loan out in 2019 and now you know later this year it's going to get reset right now your interest payments are going from I don't know five percent to ten percent so you know the the double and that's when it hits is when your loan finally comes due and you have to refinance higher I think there's a lot of that out there right um in some cases you know the the Wall's not going to get hit until the refinancing takes place and because the right the Rave hikes have been severe but they've been in a very short period of time like I said it's really only been a year so I think as we get into the second half of this year those rate hikes are going to start to show up across a number of different industries that they just haven't shown up in Mass yet and here's here's the here's the funny thing about interest rates raising rates until you hit that wall higher rates are actually sort of stimulative and what I mean by that is if you have money in your brokerage account sitting in a money market fund you're actually getting paid on that now so you more money is showing up in your account right if you bought a t-bill three years ago and you sat there you got nothing but now you get five percent and there's a lot of you know so so the government is putting more and more money into the economy in the form of higher interest payments and as long as the game is still playing as long as you know money is circulating it's a net stimulative but you will come to a point where everything will stop and then it's not it's not in that stimulative anymore and then they've got the cut rates and then so it's possible we get into a situation where they have to cut just as quickly if or if not quicker than than raising now I don't know if I actually am of the opinion that it's going to take longer to get there than most people but I fully acknowledge that it could happen tomorrow um a reedalia put an open-ended uh note on LinkedIn last week uh regarding the debt ceiling and it was pretty interesting because he said basically the thesis of the his editorial I don't know if you read it or not but um whether they come to an agreement or not there still is a matter of a fact that we're running so much debt there's going to come a time where the United States government literally just doesn't have the tax revenue to pay for the debt right and he actually thinks we're at a Tipping Point like now uh how do you respond do you feel like similarly as Ray dalio are we at a Tipping Point and even if they do raise the debt ceiling you know we know we're not going to raise taxes because that's a killing that's going to kill anybody politically yeah uh so it's a double-edged sword here I mean is this a are we are we do you feel like we're on the cusp of a sovereign debt crisis here so yeah so my thesis for a couple years now actually for four years now has been that we're we're heading into a sovereign debt crisis and it you know you kind of got to give these these monetary authorities in government politicians credit because their ability to Kick the Can down the road is really incredible but I I do think we're heading up on this where I slightly probably disagree with what dalio is saying well I should say I actually don't agree with what he's don't disagree with what he's saying I do think the U.S is is a PR is is in trouble right it has all these problems where I see things a little different um than him and some other people who have made these predictions is that the rest of the world is in the same situation so Canada is in the same situation Australia's in the same situation Europe Japan China Australia South Africa Brazil Argentina Ghana Ecuador I mean the list goes on and on and and because in a weird way as those economies come into question before the US's economy comes into question and liquidity leaves those countries I think it will come to the United States now there might not be a lot of liquidity left in those countries but the little liquidity that there is I think comes to the U.S or comes to the U.S dollar comes to treasury bonds comes to treasury bills as a safe haven a relative Safe Haven again you got to think in relative terms that not necessarily a good safe haven but relative to all the other choices you know it's not too bad and so I think in that scenario that allows the U.S to quote unquote get away with these ridiculous policies and these ridiculous debt levels and you know spending as a percent of GDP however you want to measure it I think it allows the US to quote get away with this for a lot longer than the rest of the world so while I don't disagree with Dalian anybody else that says you know the chickens are going to come home the roost I just think for a number of reasons that the U.S is in a better relative position than the rest of the world and as a result you will see all of all of the dire predictions that people place on the United States I think you will see them be manifest in other countries before it eventually happens here um before we let you go uh can I ask you about the commodity complex not just precious metals but in general in Commodities it's really it's really been a fascinating couple weeks I mean oil it's kind of boring it's been sitting around this mid 70 range yeah um coppers just falling through the grave so Dr copper if you believe Dr Copper's foreshadowing what's happening with global economies it's not looking pretty yeah but we're also kind of into that early spring time where agriculture products from Eastern Europe should be hitting the market and obviously we still have a war in Ukraine um you know watching all these pressures you know what is the Commodities complex kind of screaming at you right now so it's interesting that you bring this up because uh a week and a half ago maybe two weeks ago it was I think it was last week um I finally after two years started buying some of the grains um we bought wheat we bought corn like soybeans oats and not because I necessarily think they're going to rock it higher right away uh but for a couple reasons one is I unfortunately I think in the over the next couple years I think it is going to be a more fractured world not a less fractured world so unfortunately I have a pessimistic view of where the world is headed as opposed to a an optimistic view I I would love to be wrong but I just I don't think I am it's hard not to Brent it's hard right and so and because of all the stuff that we just talked about with the potential for you know a dollar shortage or you know volatile markets I have not been as bullish on the and I'm actually not bullish on the industrial Commodities you know so I've stayed away from things like copper and steel and nickel and you know some of the other like you said the industrial uh commodity space but um you know a couple years ago a year and a half ago two years ago the grains made a huge move right um and you know they they went parabolic almost and and I missed it and I was so mad at myself for missing it but in a similar way that it's hard to go by Nvidia right now because it's up 30 in a day it was very hard for me to go buy corn and wheat soybeans because they were up you know 100 or whatever it was you know in a month or two months or three months and so I told myself that I was going to keep watching them but I was going to be very patient I had to wait like a year and a half right but you know last winter was for the most part a pretty mild winter um and I think that's part of the reason um why things haven't been as bad in Europe um as they otherwise could have been and you know they didn't and that's why gas prices came down a lot and oil prices came down a lot in Europe but it also allowed there to be kind of bumper crops around the world and so so far we've had good uh we've had good um what's there anyway yields on crops are looking the yields on crops this year are looking to be pretty positive and because of the warm weather um you know planting got done fairly quickly and you know the there's a grain deal with with the grain from you know Russia and Ukraine and they extended that for a couple months so that grain is coming to Market and for all of these reasons you know the grains have just gotten crushed I mean they're down you know 30 40 percent in some cases more than that they're near there two or they're they're near their two or three year low um the the relative strength on the charts is horrible um this I track some sentiment indices and the the sentiment indices are as low as I've ever seen them and typically when you buy something with that low of a sentiment even if you're not right for the long term you at least get a bounce out of there so I thought it was time to start buying those and so I think by the and then finally you know later this year in the next years in the El Nino year and then in El Nino years you typically get let's just call it higher volatility of weather and patterns right right and I just I I have like to me like the last year was kind of a perfect scenario for for for agricultural commodities and we've had we're going to have a I think High crop yields I have a hard time believing that we're going to have a similar year over the next year and and I think there's a number of factors that could lead to it being much lower you know whether it's due to the geopolitical situation in Ukraine whether it's due to weather whether it's due to disease or you know drought or whatever it is I think Supply um could could be much lower next year than it is this year and with demand people have to eat right so it's really hard to crush commodity or you know food demand and so I just think a year from now prices could be a lot higher in the grains and so that's why we've started to buy them I think we're probably a little bit early um you know they're kind of right where we bought them right now maybe they'll go a little bit lower over the summer but if they do I plan to buy more uh could be another wave of inflation if that happens yeah yeah all right Brent uh I want to be cognizant of your time thanks so much I really appreciate it uh yeah all this Insight it's always a pleasure to chat with you and I hope you have a wonderful Memorial Weekend long weekend and uh I tell you what when you see that same negative sentiment in the copper and base metal space will you ring me up I will I'll let you know all right John that's Brent Johnson from Santiago Capital everybody uh we're gonna take one break and come back with Chris Berry talking about this Ford lithium deal stay tuned welcome back to our second segment here on our Friday long from episode on Mining stock daily uh we're going to turn to the electric vehicle car manufacturing space lithium has been obviously a hot topic for I would say a number of months now and so who better to welcome in in his day job he is the man over at House Mountain Partners uh and once in a while we get to pull him into clear commodity Network to also host the power current podcast none other than the man Chris Berry Chris welcome welcome back to Mining stock daily Mr T it is always a pleasure uh I gotta I will say we've gotten a lot of good feedback on your power current podcast well job well done thank you and and I have you to thank for a lot of it as the the brains behind the uh the front if you will but yeah it's been terrific I mean the the um the people that kind of come out of the woodwork that want more information or want to follow up on what have thus far been a pretty random assortment of topics along the battery supply chain has been really interesting so it's terrific I'm looking forward to really watching it grow yeah well uh not necessarily random but there's just a lot to put into it and so that's really sure the point of the podcast and so I would recommend anybody listening uh you can find the power current with Chris Berry on uh iTunes podcast and also Spotify go hit that subscribe button a lot of great content that's already been published more on the way but the reason Chris we got to have you on here is because there was huge news here earlier in the week while Canada was on their holiday uh on Monday Ford announced a just massive lithium supply deal with not just one not just two I think there was three maybe four uh lithium producers fives jeez oh my gosh five okay five to provide lithium Supply to their supply chains for a number of years now deals included work with apple model sqm uh and then all I mean let's hear from you I mean tell us about this deal and what is it we can talk about significance here in a little bit but give us a sense of the breadth of this deal yeah this look in some ways just the the number of uh deals that were announced by Ford in one single day is is unprecedented I mean usually some of the bigger off take agreements that we've seen thus far coming from major oems like for example General Motors or Tesla or kind of like you know they're one-off deals and what was interesting about what we heard on Monday was meant to coincide uh with Ford's investor day and so they have struck I guess would be the best way to um describe it five distinct lithium off take agreement deals and obviously look there are a lot of pieces of this puzzle that are sort of left out I mean we know certain things about uh tonnage and duration of the contracts for specific players but for some of them we don't and that is just the way that quite frankly a lot of these deals are negotiated uh you're absolutely right two of the five are existing producers today Alba Marlin sqm and that Albemarle deal interestingly enough is for a total of a hundred thousand tons of lithium over the course of uh the life of the contract which I would which I think was designed to go from 20 26 to 2030. so look we can get into a lot of the details here but suffice to say that Ford is in some ways I think playing catch-up or trying to LeapFrog some of their competitors in terms of locking in a lot of the supply I think if there's a a challenge here or maybe a danger it's that for three of the five players that they have locked in deals with they are not in production yet today and in many cases have limited operating experience so again it's just a something that might be thought of as a little bit further out there on the risk curve but these deals really aren't going to kick in until 2025 2026 and again I think that that really speaks to Ford's view that you know look it's probably a well supplied or they they think they will be well supplied with lithium to save 2025 and then from 2025 onwards it's a little bit of a riskier sort of proposition and so this is them kind of saying listen we will show up with the checkbook and enter into these deals and um you know uh hope for lack of a better phrase that these suppliers can supply enough lithium to help them achieve their goals we've heard a number of of stories about these car companies coming into a number of mining conferences here and so that's been a huge uh theme for the last year and so I'm wondering if how do these oems understand the risk profiles of an of working with not only current metal producers but the very much higher risk developers here because we know you and I know Chris that not everything in mining goes right all the time in fact it rarely goes right and so how is a company like Ford kind of managing that risk when they go out and and give money for these off takes right off the bat before it's even produced sure I look I think that uh Ford doesn't have a choice and to be fair neither does General Motors or Tesla or you know Daimler or or any other major Western automotive manufacturer um we're not in a situation where lithium demand is going to grow at five or six percent per year anymore it's going to grow at 20 per year over the course of this decade that's my personal View and so the The Leverage and the Pendulum if you will has really swung in favor of the lithium miners so if your Albemarle or sqm or live event yes you're going to expand capacity aggressively to try to maintain an increase market share but not to the point where you run the risk of seeing lithium pricing come crashing down because of that the Fords the major oems even the battery manufacturers have been forced for lack of a better phrase to look to your point a little bit further down the risk curve looking at lithium mining companies or you know you could say the same thing about nickel or copper or Cobalt players that do not have production experience and are not likely to be in production for the next several years again we're seeing this across almost all the battery Metals but again lithium is what I like to say it's call it as the bell of the ball right that is the one that you can make all kinds of different chemistries of Lithium-ion batteries you can use less nickel less Cobalt no Cobalt that type of thing but you really cannot produce you know an optimal battery for Mobility applications cars trucks and buses without lithium and so that's why you're seeing this huge rush and you know hindsight's always 20 20. I'm sure if you were to talk to procurement managers at Ford or General Motors or any of these companies they would have said yeah we should have been making these Investments three or four or five years ago because you'd just be that much closer to locking in some of the supply but that's not the case and so as I mentioned before what we've sort of seen with Ford their announcement on Monday is basically saying okay we're going to try and and LeapFrog or competition or try and catch up just to make sure that they have adequate supply of lithium in particular and then you know one other thing I would say is this story not just for Ford but for other players goes beyond lithium you're starting to see oems again like Ford enter into investment agreements for nickel in particular regular Ford and a Chinese player called Hawaii Cobalt and a group out of Indonesia are working on developing or have planned I should say to develop nickel capacity coming out of Indonesia which interestingly enough is not an IRA compliant provider of the material so I'll stop we need to open that up Chris because the IRA the inflation reduction act that was passed got what last year two years ago um that act really Corners American companies into where they're going to get these materials supplied from it can only come from the U.S or U.S Allied countries and so if you if you're narrowing down the supply just based on law and now it's getting narrower just based on these deals do we I mean I guess how tight is Supply going to get here if we just stick with the lithium here how tight can supply get in the midterm yeah and the other thing in terms of narrowing Supply that I would just add to what you said is there's also this ESG component now where you're not you can't just go and mine lithium from Hard Rock sources or from brine sources in the manner in which we all used to be able to do so the process and the processing for lithium in particular is set to get more um narrow if you will I think would be the right way to put it and so look the IRA is um and it just with respect to the battery business it is an incredibly um I think economically beneficial uh piece of legislation as it's written yes there are some question marks now around foreign entities of concern and sort of who that is and what that means I think we all know that that is designed to focus on China and Russia in particular um but you know here's the real challenge uh one of the real challenges I think in terms of how to interpret this law and again to your point how to get the oems to benefit from it um so the IRA basically says that in order to access the total of the 7 500 tax credits the raw materials a certain percentage of the raw materials have to either be mined refined or recycled in North America or from a free trade country the recycling is just North America but actual processing and extraction of the minerals can also come from the free trade partner okay the U.S has 20 free trade agreements in place today and only five of those agreements or five of those countries have anything to do of any significant size with the battery Metals market right it's Canada Mexico chile Australia and South Korea so those are major players which is the good news but um pers you know just sort of dovetailing with our nickel conversation a minute ago Indonesia Asia does not have a free trade agreement in place with the United States and so what you are likely to see happen I think going forward is countries that are blessed with these natural resources whether or not it's lithium or nickel or what have you but we do not have a free trade agreement in place with you're likely to see sort of a a subsequent agreement if you will not a full piece of legislation like a new Ira but as an example the United States and Japan have effectively agreed to honor the spirit of the IRA uh despite the fact that the United States and Japan do not have a free trade agreement in place so you're going to see in my opinion you'll see that happen with Indonesia you'll see that happen with Argentina as well in particular another Ally of ours that would be you know a perfect source of lithium that we don't have a free trade agreement in place with so you're going to see the IRA I think the interpretation of the IRA and where these minerals come from evolve but again it's it's unlikely that um the foreign entity of concern designation is going to change and that really is going to Center on China uh it's kind of a left curveball question here Chris but is this at all reducing inflation I mean it sounds like that this kind of deal actually makes it a little bit tougher to yeah no it that the inflation reduction Act is not appropriately or accurately named in my opinion I think and I would have said that even before the IRA came into being I mean anytime you you know to your point um shrink Supply or even try and Shrink Supply supply lines you shrink the number of suppliers that you can utilize and leverage to lower your costs it stands to reason that your cost structure will either stagnate or arguably increase and so you know it'll either be technology that saves the day to try and manage the lower costs or or somehow you know we figure out a way to extract and process raw materials at a lower cost but it's it's really challenging I would not say the IRA will will reduce costs um anytime soon if if ever okay well thank you for that Honesty uh where does this stop you know we obviously this is happening in the lithium space big deals being done you mentioned nickel I mean could we see something like this happen in the copper space I mean that's a much bigger product for you know manufacturing not just the electric vehicles obviously but could we see something like this being expanded into the other resources maybe into like manganese or tungsten or or the like I think a lot of it depends on pricing volatility in the market you know lithium the spot price and lithium um in October of 2020 and China was around 6 000 US dollars a ton it went to 85 then you know came way back down to 22 today is at 35 or 40. um you know that's the number that gets all the press the bottom line is those contract prices are slightly higher but we saw insane pricing volatility in lithium you saw insane pricing volatility in nickel last year partially because of shenanigans on the lme but um part of that I think was demand driven at least and so look if we get into a situation where you have 10 or 15 000 per ton copper and that similar volatility that we saw in these other metals feeds into copper or molybdenum or tungsten you will see the automakers and you will see governments um get more involved we haven't really seen seen it yet because I think to your point everyone's expecting copper to explode higher I mean I can't find I can't find the other side of that trade everyone thinks we're going to ten thousand fifteen thousand dollar copper in the next couple of years um and I'm certainly bullish on it as well but I don't think you're going to see I'll just make up a General Motors or a Ford you know do a multi 100 million dollar deal for copper Supply until you see the volatility start to affect their ability to access the raw materials and also pay a lower price yeah um what is a what is a demand crunch do for EVS here what if we hey we're waiting for this recession to hit here Chris any day we've been told this is this is a challenge the average electric vehicle I think here in the United States the last data I saw uh which admittedly was a few months ago the average EB has a price tag of around 66 000 US dollars a ton or a ton per EV okay um that is not a car that is really affordable to the mass market right and this is what we're all trying to do I mean Tesla's always talked about the 35 000 model 3 and they're not able to get there um even I think necessarily with the subsidies although to be fair you know it probably takes a little bit more digging to confirm that um the price of the EV has to come down um even without the subsidies and the price of the EV comes down when you lower the price of the battery which is 30 percent of the cost of the EV and you do that by accessing uh cheaper raw materials okay and again depending upon your battery chemistry and depending upon you know when you struck these deals it's going to be pretty difficult honestly to lower the battery cost anytime in the next couple of years certainly if lithium stays elevated which I think it will and you start to see some pricing volatility in some of these other metals so um it's a it's a real Challenge and then you know the other issue with the inflation reduction Act is everyone's so focused on these tax credits excuse me and they should be because they are beneficial but there are also income levels now associated with accessing these tax credits so if I have an adjusted gross income as a single individual of 150 000 US dollars a ton or I keep saying per ton wow it's been a long week you've had a long week what day is it Wednesday um 150 000 dollars per year in terms of salary if I make one dollar over that number I'm not eligible for those tax credits it doesn't matter what the price of the car is and and you know there are obvi there are other nuances for you know um filing jointly and all that kind of stuff so the bottom line is look it's going to be difficult I think the IRA is going to benefit minors refiners and recyclers first okay also it will benefit cathode and anode manufacturing um because of some of the some of the benefits of the IRA away from the tax credits they have nothing to do with that but just um tax credits on on your Opex and all that kind of stuff it's very very beneficial I would argue to produce batteries here in the United States and so it's going to become a scale game and how hopefully through scale even with elevated Metals prices that is how you ultimately lower the cost of these EVs and make it affordable to the masses so it but this is not an overnight thing this is going to take a while right all right uh Chris thanks so much for your time I'm happy we could wrap up the week here with you uh he go over to House Mountain Partners to find Chris and uh and his work also go check out the power current with Chris Berry because it's a great podcast I'm happy we could get this thing launched and if you like this conversation man you're gonna love everything he's been putting out Chris have yourself a great long holiday weekend and all the best to you in the family will do foreign

Channel: Mining Stock Daily

Views: 340

Keywords: lithium, gold, silver, nvidia, artificialintelligence, markets, nasdaq, interest rates, Ford, electric vehicles, copper

Id: 2Gr1ee6CLjE

Length: 56min 30sec (3390 seconds)

Published: Fri May 26 2023