Unprecedented Multitude of Macro Forces Driving Gold and Commodities.

uh when when when the there is a resistance on the price in the same level three times you usually see a breakthrough that that that resistance and that's when you have a real uh upper movement that tends to uh you know break to new levels in terms of uh of of of metal prices and I think we're going to see that in the following months and

that's going to drive the influx of capital into this industry that has been very unloved and and I would say completely ignored by financial markets in the last in the last years and so I've been trying to be ahead of that curve and and accumulating assets in that part of the camp my neck was 64 here home of alternative economics and contrarian views today I have

the pleasure of speaking with uh Tavi Costa again he's a portfolio manager at Crest Capital it's Avi how are you great Monaco how are you I I'm doing well thank you it's a beautiful day here in London it's finally getting warm and uh it seems like the markets are very uh giving mixed signals in my opinion and that's why I wanted to talk to you because

yeah I think you were in the best uh macro analyst and uh maybe we could start with your view of what the FED is doing or what the FED isn't doing whether they know what they're doing uh yeah and then we'll move on to some other topics um I'm of the belief that also that the FED is uh well look I've always thought that the FED

is going to have to keep rates a higher uh for longer in terms of uh of uh especially where we are currently but but I also believe that in terms of the the hikes that are being uh supposedly uh likely to happen in the following months are very unlikely to happen and so um I think I think we're yet to see some more issues economically speaking

there's a lot of things in the sidelines that I will likely play a a bigger role here those are related to the monetary tightening situation that has a lag on we've been in a tightening uh conditions uh camp for over a year now so likely see some severe slow down in the economy caused by that we've had an Euphoria thords AI which in some companies perhaps

it could be somewhat just justifiable to move we've had but it as he tends to do people start strepalating crazy uh earnings estimates and fundamentals growth uh that are unlikely to happen and so we're seeing a lot of that it almost feels like well it feels very much like a bubble in general we've had a a total segregation in terms of the leadership in the market

in terms of the mega cap companies relative to the overall Market I think that who is telling you the truth is really the soldiers when you know generals are leading but the soldiers are not following and that's usually a bad sign for Equity markets in general we've had even the money supply situation cause somewhat by the Banks recently and so forth causing money supply to be

contracting significantly and that's that's going to add further pressure into this most of the Soft Data that we look at and I'm talking about the ism and most of the executives that get survey over every month pretty clearly as well you can see that there has been large deterioration in that data more or hard data points if you look at the earnings picture especially in the

think there's a combination of aspects there it's the wages and salaries that remain sustainably high and mostly in unskilled jobs not very skilled jobs actually which tends to be highly inflationary we still have the problem of material costs being elevated as well um deglobalization continues to play a an important role here in terms of making it difficult for Logistics and other things and we're starting to

see other themes beginning to unleash which is construction spending beginning to Surge uh we've had nominal numbers coming out recently they are literally on a vertical line going moving forward and so uh clearly that is also going to play an impact on Commodities and other tangible assets that tend to do very well during those those players during those times and so a lot of things to

think about but uh that's that's essentially where I am I think the cost of capital cost of debt given the fact that the FED is going to have to keep somewhat rates a little bit elevated and I'm not referring to you know uh five six uh or should say seven percent or so but just staying above four percent or so that is um also problematic that

is usually where you see a lot of the companies um because if if risk-free rates are high the cost of that for most of the the companies are in the junk space those that have very low credit ratings they're the ones that are going to have to roll their their debt moving forward I'll give an example Avis uh is is a great uh company that that

or I should say a great company a great example of a company that would be rolling their debt moving forward um and unlikely to some business models are not going to work in this environment because that is too high interest payment is too high and things are getting squeeze in a lot of ways so on the short side I've been looking for a lot of companies

that fall into that category yeah and I I was just looking someone sent me uh some data that U.S totaled that if you add government public household corporate just went over 100 trillion and uh also unfunded liabilities is like 191 trillion so there's so much debt and liabilities out there that it just seems strange to look at the chart of the uh NASDAQ and s p

and it looks like it's they want to go test the old-time High the all-time high from last year and uh at the same time you've got the dollar now starting to turn down uh as per the dollar Index even though I I mean I don't put too much uh create not Credence but importance on the dollar Index but short term it's showing that the dollar is

weakening uh but at the same time you've got bond yields today like down seven basis points so it it feels like uh the market is saying uh we know if something happens bad you know the the FED will come in and just start pumping uh the system up again that's what it feels like uh to me because they did that in March when we had the

bank troubles and that they paused yesterday and it's interesting that they had to say we pause but we might raise again in July and to me the message to the market is yeah don't worry guys we got you're back you know we want to be tight but if something happens we won't tighten uh is that how you see it yeah I think the sequence of facts

and what do I know but as as a portfolio manager I'm thinking about the sequence of facts in terms of asset price behavior and I think if anything we need to see some sort of Correction in in equity markets that would cause the FED to really uh pause and do other things I mean we're seeing the supposedly deceleration of inflation in in the government data but

interestingly if you look at Commodities especially agricultural Commodities they are on fire and they've been diverging from world food prices for instance so we know that natural resources are highly interconnected and and once one start one commodity starts moving others begin to follow along so um you know it seems to me that you have leading indicators and inflation starting to uh accelerate again and government data

is decelerating still I think Import and Export prices are deeply negative now uh which you know it wouldn't be in line with some of the the things that I'm referring to and you can also see a large Divergence between Commodities equal weighted index and agricultural Commodities again everything is inner connected once you have one of those Commodities moving high or at least really accelerating to the

upside that usually tends to uh to lead to other movements as well so I think that's going to play an important role but uh in terms of equity markets yeah I mean it's uh you know some valuations I mean even if you look at Nvidia for instance or Nvidia is is the right way to say it Nvidia is a company that um you know it's it's

about probably you know the the Reddit heart of the AI situation and you have you know a free cash flow estimates for two years out the quadruple literally quadruple um they have to you know I I think that there's some narrative to that but even with that quadrupling there for cash flow it still trades at 44 times those free cash flows supposedly in two years from

now um I I think that's absurd I mean this is probably the best play in Ai and and looking like that so now to me it's um I think we're getting a little bit uh greedy in a lot of those those names and that you have most of the the if you look at current earnings uh yields today so just taking or you can actually even

better uh take the estimates of earnings divided by price so you get earnings yield estimated earnings yield two or one year out whatever you prefer uh and looked at that relative to risk-free rates and you what you're going to find is that you know a lot of things are inverted already in terms of risk-free rate is actually uh giving you better yield than than buying some

of a lot of those those companies uh overall Market is is really expensive even relative to risk-free rates so I think you know at some point you start seeing the capital moving away from those things into something safer and you know that's when you have the correction but um you know clearly most of the the General market is already moving towards that because we're not seeing

the same level of appreciation everything's being driven by a very narrow leadership and so um yeah those are those are the things I think there's a lot of short opportunities volatility the VIX Index seems unjustifiably um suppressed I'm not sure that's really the case and one of the most no-brainer uh at least uh I would say disciplinary ways of of protecting your portfolioism credit spreads I

mean junk bonds is is one thing that I think it's uh it's it's really uh you know poised to uh to move a lot lower in other words junk yields jump on yields should be uh moving a lot higher which that just just means cost of debt should be moving a lot higher um especially when you have you know major issuances of treasuries underway uh and

that is just because we just agreed on on extending to that limit and we're gonna see a massive amount of issuances in in treasuries moving forward and if that's going to happen in 10 years five-year yields everything is going to push higher because the supply excessive supply of those instruments will probably also add further pressure in corporate bond yields to move higher so corporate bond yields

is probably the best way to short treasuries in my opinion yeah and we also have a lot of countries like the brics especially trying to move away from the dollar and yesterday there was even a headline I don't think it's been confirmed that macron asked the uh the bricks to to attend The brics Summit in August but I don't know uh I guess last year we

had the worst year in uh I think since the Great Depression of the 60 40 portfolio do you expect that to continue like to underperform Commodities going forward and uh I I wanted to show you uh something that you uh tweeted the other day and wanted to look at Brazil seen that both you and I originally from Brazil but we have a bit of an interest

there could you talk about Brazil and this chart and then I wanted to show you also the Brazilian real because the dollar seems to be breaking down against the Brazilian real yeah those are all important questions I think they're sending the mechanics of the market is important in relevant part to understand this Dynamic and usually what you tend to see is large movements so you know

we've had uh just for some background we've had 30 years or so where 60 40 portfolios have performed incredibly well where the correlation in markets have played a role here as well in terms of lowering interest rates inflating the valuation of equity prices and that made a lot of sense every time my Equity markets decline treasury is actually uh did very well so that was a

perfect portfolio to be invested and so those 60 40 portfolios are are very overvaluing think about it 30 years of that working think about where the valuations of both those things are when people were buying bonds back in the days the p ratio of those you should just take the yield and and uh divided by one it's actually one divided by the yield what you're going

to find is a p ratio of a bond um the the price to earnings uh ratio and so back in the 80s when people were starting the 60 40s idea uh those things are trading at what 13 12 times uh or so and today were absurd multiples just like the equity market so um you know when things get really frothy evaluations it doesn't mean things are

going to blow up it just means it's very difficult to make money so you got to be looking for other things that are cheaper um and I know a lot of people like to buy things high and hopefully sell them higher but usually in the markets what you want to be doing is Buy Low and sell High that's the better idea in my opinion and understanding

there are value traps there are things that are undervalued for a reason so answering your question going back to the Brazil Market because it's such an important aspect it's completely off the Raider I mean Brazilian equities are now outperforming U.S equities year to date and you look back in 2022 that also happened in 2022 and you know this was a period of Elections bolsonaro was in

place it's almost like the equity markets does not care about who is leading the country and it's really what's going on because it's the Lula leadership is basically masking the opportunity everyone is focused some some of that concern is rightly so as far as you know I don't think he's a good leader I don't think he's good for the markets at all that's not my point

however everything has a price and things are really cheap uh in terms of commodity-led economies that are geopolitically neutral and the brics is an interesting aspect because bricks are everywhere you've got commodity import orders you have geopolitical mass like Russia and you have you know things like Brazil where uh kind of have exposure to almost every natural resource industry but also are very geopolitically neutral where

they sell to the US and China and Russia and so seeing France or macron trying to engage with the bricks and especially with Brazil and South America is an important aspect because it's a huge part of the thesis here if we're going to see most of the G7 economies continuing to move towards onshoring their economies by revitalizing their manufacturing plants over time it's going to take

a lot of construction and that construction is going to require stuff and stuff is Commodities and so South America will play an important role here and it's extremely mispriced in my opinion it's probably one of the best opportunities here for the next five to ten years and so you know looking for businesses that will benefit from that maybe you know in the Brazilian side I mean

we like the banks we like uh a lot of the commodity related businesses we like the miners we like to buy properties with natural resources in the ground so I think there's you know there's more to do that I mean Bolivia is another one that is really cheap today relative to the opportunity so those Partnerships with South America are going to play an important role and

why is that why it's not Africa why Africa is not going to play a role here as well well Africa has got a lot more influence from China yes South America has it too but Africa is is is is way uh you know more corrupted in terms of the the Chinese Capital so it's going to be difficult for Western companies to increase exposure there in a

large way I'm not saying that couldn't happen so I'm thinking from a probability perspective a probability of South America playing an even higher role given evaluations to me is a lot more attractive and knowing that despite the fact that you have Lula playing um you know being the leader of of the country uh which to me is is a populist is a person who could potentially

create a communist agenda and it always had a communist agenda we all know that um however the Brazilian politics uh scenario has never been so segregated in general we've never had a you know a right-wing party in in such a strong manner like we do um you know back in the 90s or even early 2000s when Brazil performed extremely well relative to U.S Equity markets uh

which is shown in that chart that you were shown before um evaluations are really cheap along with the commodity cycle uh you know nobody cared about who was leading the country and so you know I think that that's uh that's you know people are overstating the risk here um and things are way too cheap for for for someone to not be deploying Capital there yeah I

I agree with you and um I think uh Brazil could do relatively well because of being the commodity space despite Lula uh Lula everyone's maybe like uh you know expecting too much of a disaster and I've heard that in Brazil yes he's in power but the the Congress in Brazil is balances it it out as well and I wanted to show distract because this is the

dollar versus the Brazilian real and uh you know uh the dollar Rose to almost six here during the covet lockdown but now we're back below five which I'm surprised and we've kind of broken like this Channel and to me that screaming Commodities are going to do well is that what you you see from this chart too yes I I do and I think um look the

commodity markets uh marketing General is very very thin it's small it's uh it's difficult to get exposure to you if you start getting those why 60 40s are so important because majority of the capital has been into that and so if you're a large institution you're basically running a large book on on equities and and bonds and you're not really paying attention to tangible assets and

that has been the right call but the problem of most of the counter argument towards Commodities is is because of the prior negative performance and that is precisely the reason why it should be a narrator for investment is the the fact that it has underperformed and the fact that we know that they usually and and very uh usually actually the they very often they tend to

uh to play uh have a lot of cyclicality and we've had a year you know a long period of them underperforming Financial assets and now reaching the point where and I think it's Apex evaluations and majority of financial assets which makes a lot of uh of strong reasons for why the influx of capital into that space and and especially out of those the transition away from

most of the financial uh assets that look incredibly expensive and you can see that in so many ways you can just look at uh Equity Market evaluations you can look at the valuation of the track treasury market you know think about the risk we're taking on the treasury market today the default risk the inflation risk the interest rate risk the supply risk that is also a

big role there as well all those things are important and relevant factors and the same happens with Equity markets I mean knowing that majority of companies are trading Below in terms of earnings yield or free cash flow yield below the cost of of capital and the free in the free in the risk-free supposedly Market which is fed funds rate um you know that is absurd that

is not a time when you want to be you know it's not at the beginning of a market so um you know it's just I I see a lot of risk in that in that in that side of the of the of the global market and it's it's difficult to uh to get excited it's why I think a lot of legendary investors have also uh noted

that as well oh and I'll certainly point out that you know it's unlikely that we're going to see the same level returns that we had in less 10 20 years in the following decade or so and and I'm fully on board with that I really think that that won't be the case and you know from a fundamentals perspective as well we've had in 2010 the strongest

growth and fundamentals in history in real terms and so you know it can we have two back-to-back Decades of strong growth and earnings you know that never happened before it could potentially happen but usually when you have a long period of growth what's what's normal is to see analysts and folks on Wall Street really making crazy estimates and that's precisely what we're seeing right now and

even with those estimates things are expensive like I said with Nvidia probably the best company position to perform well in this environment is also in the bubble territory and so you know it's very um I I think I think a lot of people are understating uh the or you know the risk is is being um really understated in my view in in most of those names

while you have the opportunity to buy things that have had again you know Commodities had a a big movement in 2021 uh some of them moved still in in 2022 2023 it's been a challenging Market um and that's normal you know things don't go up in a straight line and and a lot of people are losing faith towards uh that side of the market and when

you should actually be accumulating assets on cheaper prices I mean oil companies they're printing money um who cares about the share price recently I mean you know you're buying them in in much cheaper uh valuations that we've seen in the past and for folks that are worried about the recession environment that maybe could hurt some of the cyclicality or the cyclical commodity uh uh that are

you know copper and oil and others um I would I would pay attention to uh to the 70s where you know you did have tangible assets businesses despite the fact they were cyclical uh still performing very well uh in an environment where recession was was occurring so the 08 kind of analog may not be uh as as important here uh such as other you know inflationary

regimes like the 70s or the 40s when tangible assets really outperform Financial assets during the Whole Decade yeah I think uh most analysts on Wall Street still think we're like back in 2010 um and that rates are going to go back to like one or two that CPI is going to be under control and we still have the 10-year yield below four which I think uh

we should go a lot higher and I guess when people realize that I think we could see the market markets turn and like you said they don't seem to think they always think that if we do have a recession Commodities are not going to do well they don't seem to learn their history uh and uh with that though uh I wanted to end on like uh

our favorite at least on our channel the our favorite uh medal I mean we like silver too but I really uh liked your analysis here I've looked at this chart many times before but you've done a good job of talking about the fundamentals and also showing the technicals uh there with the chart maybe you could uh go over that for us well thanks for bringing that

up I I think this is an important chart for all of us that our investors in in a space of precious metals and no we really had two gold Cycles in in throughout the in in the past and those two cycles happened for many reasons uh you know especially the the production falling uh and some other uh things that really could happen there I mean in

the 70s production was falling you've had the lack of discoveries occurring as well so not a lot of the the major companies are finding discoveries so uh the new Supply was very constrained at that time um and central banks were accumulating gold as well uh and then in the early 2000s and as you can see in that chart that first cycled lasted about 10 years the

second cycle also did last about 10 years falling production was also the the uh a common uh driver um and you've had the gold S P 500 ratio being also a driver which is essentially metal oil prices being really cheap relative to how expensive Equity Market was and that was really driven by the internet bubble and so forth and then it's important to remember that in

the 70s we didn't see this commodity Demand Being really uh caused by an economy a large economy becoming the manufacturing plant of of of of of of the global uh economy in general and that was China was driving the demand in the early 2000s they entered the WTO their exports went from three percent of global exports to about 15 and so most economies developed economies began

to really rely on Chinese uh on Chinese manufacturing plants and so forth uh and and that drove the second uh cycle of gold prices but also a cycle of Commodities today I think there has never been uh such uh you know a long list of a multitude of macro forces driving go old and and not only gold but Commodities and you know falling production globally is

happening again most of the major companies are in the secular decline in terms of production uh of our ounces of gold um and most and with that you can also have central banks accumulating the matter which wasn't a case in the early 2000s they were sellers not buyers back in those days and today just like the 70s you have central banks uh basically uh exchanging treasuries

for gold and and that is an interesting dynamic because usually uh as is part of my my bullet points the 60 40s are looking for alternatives for for Haven assets and guess what 60 40 portfolios and large institutions they tend to follow what central banks do with the lag and so starting to see central banks lead the way most likely those institutions will also do the

same and start allocating Capital towards uh gold as as a form of uh of of a defensive asset the unsustained high debt and deficits that we have this was not the case in the early 2000s early 2000s and the 70s that that problem was never never an issue in fact in the early 2000s deficits actually turned into Surplus at some point fiscal Surplus um and and

so today we've got this compounding issue of the debt problem uh that is in a I think an alarming Pace um the other things that are happening today have to do with the deglobalization trends uh that we also didn't see maybe you can argue we saw some of that in the 70s but to the degree that we're seeing today in terms of the move away from

globalization towards uh something that will look more a lot more difficult from a logistics perspective and countries going above and beyond in terms of cost issues to develop their manufacturing uh side of their economies and production of developed economies relative to China and authoritarian regimes like even Russia um you know we're definitely seen that today and and that's going to create more inflationary regime and likely

uh force uh this need for owning a neutral asset uh owning an asset that is not related to the US or any other economy and and likely gold will be that uh alternative um other things I would I would point out have to do also with the lack of new discoveries of gold uh we went through a period I can't recall last time we created a

new large gold producing asset I mean this has been uh you know ages since we've had those those times the times that we've had a lot of discoveries happen at the times as well the gold prices peaked that was the 80s and the 90s we've had major discoveries happen during those periods those two decades and that has to do as well with the capital spending cycle

of the majors the majors of ultra conservative they just don't want to spend Capital into uh into either finding new discoveries or their growth in production so we're not we're seeing aging assets deteriorating quality uh and no Focus whatsoever on future production growth and that's going to create an m a cycle as well that is important to uh to know and so you know you've got

this Trifecta of macaroon balances happening with the debt problem of the set of the of the 40s the inflation of the 70s and the valuation problem of the late 90s and late 1920s um at a time when gold prices are about to make new highs again it kind of did that recently and kind of form a triple top which if you're a technical analyst you uh

basically know that triple top uh very rarely work uh in other words when when the there's a resistance on the price in the same level three times you usually see a breakthrough that that that resistance and that's when you have a real upward movement that tends to uh you know break to new levels in terms of uh of of of metal prices and I think we're

going to see that in the following months and that's going to drive the influx of capital into this industry that has been very unloved and and I would say completely ignored by financial markets in the last in the last years and so I've been trying to be ahead of that curve and accumulating assets in that part of the camp and I've never seen a time in

history where gold prices are at all-time highs and you're able to buy a property with natural resources in the ground that are really high quality and likely to become the next majors of the of or next uh major producing assets of this gold cycle are still trading at historical low valuations and so to me that's where the the biggest opportunity is uh in the markets right

now yes and you spoke about the uh like the debt and the fiscal problems and and I heard Stanley drucken Miller uh before the debt sailing situation was solved he said that that saving situation was like a 20-foot wave uh approaching Santa Monica uh Beach but the uh the real problem was a tsunami of the national debt in the next 10 years that we could be

the fifth go up to 50 trillion and I think that's uh pretty scary and and I think you're doing the right thing by being ahead of the game in in in hard assets and again to the viewers this is just our opinion and uh Tavi's opinion is not advice and uh so Tavia thank you for your time and uh any uh Last Words uh for the

viewers my last words would be go back you know a lot of people hate to look at the 70s as an analog because we didn't have the debt problem and I agree by the way I don't disagree with that point and maybe the 40s is a better a better time to look at and because of the debt problem back in those days to finance the World

War II but during that time gold prices are packed to the dollar and so you didn't have any move whatsoever and if you're an investor at that period you really couldn't hatch against anything that was happening at that time if you look at the debt level and that imbalance relative to gold prices especially since the 70s they kind of move in the same direction a bet

against gold to me is about it that you know that that imbalance is going to improve and not get worse and to me that seems pretty clear my opinion that that issue is going to continue to compound especially given how deficits continue to also increase and so you know that that is an important aspect of this overall thesis and why I think you know we're at

the onset and likely of of a gold secular movement so um you know uh the train is leaving the station in my opinion and this things are going to get really interesting here great thank you very much uh Tavi have a great uh weekend I mean I know it's Thursday but tomorrow's Friday and I'll talk to you later thanks again you're welcome