Talk Your Book: The Bull Market in Real Assets

16:06Michael Batnick:And then you want to layer on top of that on-shoring, right, or reshoring, excuse me. Reshoring is effectively, what we're doing is we're dismantling global trade where we're going to build now, right? We're going to build in the future what already exists now for more expensive. So what we're talking about here is a decade-plus long CapEx cycle that's going to drive the need for critical minerals, metals, infrastructure development, a lot more energy. And I just want to push a little bit more on this energy thread. We're not just talking about the energy that the technology uses. If AI does what a lot of people believe it will do, including us, it's going to drive productivity.

16:46Michael Batnick:That productivity is going to drive global growth. That is going to materially increase the quality of lives for millions and millions of people. When it does that, people are going to require a lot more energy, right? Rich people consume more energy than poor people. And we're talking about rising living standards here. We're talking about a world that needs a lot more energy, not just for the technology, but for the outcome of the technology.

17:07David Schassler:It's interesting because when I think about like a gold boom, I don't generally think of prosperity. But the story that you just painted sounds pretty positive for humanity.

17:17Michael Batnick:I view this as a positive story. I really do. I don't like to get into the term inflation because it's kind of like a, it's a trigger word for a lot of people. People have a lot of strong views on inflation.

17:28David Schassler:Yeah, Ben, Ben, cover your ears. Ben's very sensitive to the I word.

17:31Michael Batnick:No, you're right. It's true. It gets people angry. It gets people upset. It really does. In 2020, we came out early and we told people that we were going to get a lot of inflation. It was going to last a long time and it was going to change. It was going to change asset allocation. Assets within a bad scarcity were going to perform and we were going to be in this different regime and people got upset. And the reason why they got upset was really simple. We came in and told people they were going to get something that they historically haven't gotten, right? We were telling them that they were going to get something very, very different.

17:58Michael Batnick:The easiest story to tell people is tell them that tomorrow is going to look like today. But if I tell you that tomorrow is going to look nothing like today, you're going to get a lot of resistance with that.

18:08Ben Carlson:Well, you're right because I've looked at this and Michael and I have looked at the data on this. If you look at the decades, stocks and gold usually go in the opposite direction. Like the 70s was really good for gold and bad for stocks. 80s and 90s, great for stocks, not great for gold. 2000s, great for gold, bad for stocks. And then this is the first decade in the 2020s where gold and stocks are both doing well. They're both doing really good. So I guess my question is, because you're looking at it from a government perspective for spending, and that makes sense to me for it being this longer-term macro issue.

18:35Ben Carlson:But I guess, is the risk to your thesis on the AI front just that these companies have just, they keep pushing out more and more capex, and eventually the stock market is going to slap their wrists and say, no, we're not going to take this anymore until you show quicker ROI. If that ROI doesn't come to fruition and then they pull their CapEx back, is that a risk for you that the technology companies all say, all right, we've overextended here. We have to pull back. Our investors aren't liking this anymore. Is that a risk?

19:01Michael Batnick:Yeah, maybe I could explain it this way. So the way that we describe AI is in three phases. The first in the build, and we're still obviously in that section. phase two is adopt phase three is automate phase two is clearly what you're seeing now where companies that come out and they talk about big spending and potentially getting paid back five years from now they get punished but companies that are actually incorporating this technology to immediately drive productivity right and giving giving you a direction on global growth get rewarded we think that that's where we clearly get to really quickly but we do think the adoption is going to be faster than people expect.

19:40Michael Batnick:We think that this AI cycle will be quicker than people expect, right? AI is a general purpose technology. It's going to change the world. It's very different from other general purpose technologies, though. Other general purpose technologies were designed to drive, to improve human being productivity. If you think about what AI is, it's designed to mimic and improve upon the human and effectively replace. Once you combine that with automation. You're talking about mass scale disruption that's going to drive productivity. It's going to happen faster than people expect, and it's going to be more profound than people expect.

20:14Michael Batnick:But at the end of the day, all roads are leading to more productivity, more global growth. It doesn't mean you're not going to get hiccups, though.

20:20Ben Carlson:I think what you're laying out is, I think so many people for the last, call it 18 to 24 months, have been preparing for what does it look like when the AI bubble bursts, right? And it does seem like in the last three months, that has shifted a little bit to like when we see Claude come out and all this stuff and software stocks get hammered. And I think people are now starting to price in a scenario of, well, what if the AI bubble isn't bursting? What if it really is just this immaculate handoff from CapEx and spend into actual productivity? And so I think that's probably, you're right, the scenario you're painting is one not a lot of people have considered, actually.

20:52Ben Carlson:I think everyone assumed, okay, we've seen the history of the dot-com bubble and the railroad bubble and all this other CapEx, and it's going to burst just like they all did. Everyone who's read a history book could see that. But you're saying, well, what if it doesn't?

21:02Michael Batnick:I am saying that's probably not going to go in a straight line. That's going to get bumpier than people. It's going to get bumpy. And that's fine, right? That's the path of markets. There's going to be winners. There's going to be losers. And guess what? The winners have not yet been crowned. And the winners may not actually be in existence right now. So it's going to be different than people expect. But what we are saying is that we do believe that technology is going to work. We don't believe that it's overhyped. And we do think it's going to happen faster than a lot of people expect. If you think about, just think about the internet and go back, you know, go back 20 years and think about how different your life is now.

21:40Michael Batnick:It would be hard to fathom 20 years ago how different your life would be now. But because it happened slowly over time, it dripped on you, dripped on you, dripped on you. We accepted it. We accepted it. We accepted it. We're saying that happens a lot faster this time. And when it happens a lot faster this time, it's going to be way more disruptive. That's the difference. technology compounds on top of each other. Let's bring it back to real assets. If you want to make money in this regime, you've got to clear the bottlenecks. The most obvious bottleneck right now is the critical infrastructure needed to facilitate and build this and energize it, full stop.

22:14Michael Batnick:That's why real assets are largely running. And you got to realize when we go back to this fund, think about it this way. Two-thirds of our real assets are growth-oriented real assets. Old world building the new world. One-third of them or how are we going to pay for it? And what we're saying is that if you run into a scenario like this and you're full to the gills on debt, well, it's got to come from somewhere. We do think we're going to grow faster. Yes, I get that. But off the back of a lot of CapEx. And regardless of what Scott Best is saying and love him, think he's a brilliant person, we don't think, you know, this is a 18, 24 month cycle here.

22:50Michael Batnick:We think that this is going to be an extended, extended duration cycle as it relates to CapEx investment need to build this out. We don't build things fast in this country. That's not going to change overnight. It's not going to happen. And guess what? The bill always comes in a lot higher than we expect, right? You get the bid and then you get the bill at the end. The work orders, the work change orders kind of pile up.

23:11David Schassler:Don't ask about the plumber in my house last week. Unbelievable. All right. In terms of portfolio construction, what does that look like? Is this actively managed? Like, where does the 4 % in natural resources come from? And not that specifically, but you know what I mean.

23:28Michael Batnick:Yeah, so this is what we're trying to do. We are trying to create the most stable mix of real assets possible. We believe that we can borrow from each discipline of investing, right, to create the best reproduct. I said originally we're quantitatively driven investors, but we've been talking about macro now for the last 15 minutes. So we're taking macro thematic drivers. We're taking fundamental understandings of the assets. We're taking quantitative portfolio construction discipline, quantitative risk management discipline, putting all that together into one unified approach. That's the idea here.

24:01Michael Batnick:So when we think about what are the right real assets, that's quantitatively driven. What responds to inflation? What assets actually pay you to be there? So that's step one of the process. Step two is quantitatively driven. Maximize depreciation by targeting the lowest fall portfolio, which merely just means we're going to own a lot of gold. Real assets that have a strong correlation to each other, we're going to take that into account. And we're going to build the most stable mix of assets possible.

24:34David Schassler:So we're 20-something minutes into this conversation about real assets, and we haven't even spoken about the dollar. Where do you all fall on the de-dollarization story that's out there? Because yeah, the dollar is weakening, but it's like, I don't know, it's not like crashing or anything. How do you parse that out?

24:48Michael Batnick:I think about that differently. I don't think about, I think about purchasing power. How do you know money's broken? Money's broken because every time you reach into your pocket to spend, you buy less and less and less. I don't, I'm not thinking about how much the dollar buys me versus the euro, et cetera. This is a fiat currency issue. It's really about abundance versus scarcity. We're in a period of fiat abundance that benefits assets with embedded scarcity. If I take any individual asset class and I start to measure it in units of scarcity, i.e. units of gold, the performance of stocks, clearly not as attractive.

25:30Michael Batnick:Bonds, you've barely made any money regardless. Now you're down a lot, right? So think about the world in units of excess, fiat excess, versus units of scarcity, which is units of gold. And that's the way we're thinking about asset allocation right now.

25:45Ben Carlson:But if I'm going to push back on the inflation piece, we had a huge spike in early 2020, 2021. And now we've been sub 3 % for the past 18 months or so. So inflation has kind of gone back to historical norms. I know it's higher than it was in the 2010s, but that was low because of the great financial crisis. So this is not anywhere near inflation like we saw in the 70s. And it seems to have kind of petered out across the globe as well. So if inflation is not as high as people think, just because gold's going up, that doesn't mean that inflation is crazy out of control right now. We had the one-time bump, but now it's kind of settled back into the long-term inflation rate.

26:24Michael Batnick:I didn't say that inflation was driving it. I guess, how do you run that back a little bit? So last year, we did not have a spike in inflation, but you had the best performance of gold. I'm not saying that we need runaway inflation for these assets to perform. Not saying that at all. What we are saying is that during periods of financial excess, assets within -

26:45Ben Carlson:So you're talking more about government spending than inflation? Correct. Okay. Correct. That makes sense. You're right, because when inflation spiked, I don't think gold had a great year in 2021 or 2022 either, right? It didn't like go crazy. And it's not historically, it hasn't necessarily been just an inflation hedge. So there's a narrative I used to explain this to people with.

27:03Michael Batnick:So I'll say it now. I haven't said it in a while. So this is what, if you would have met me in 2020, this is what I would have said. And you could fact check everything that I'm saying. So in 2020, this was the narrative. Gold will do well in the beginning of an inflation boom. It will do well, but not great. Wait until we're about five years in. But commodities will respond immediately. So oil prices don't sit around waiting for asking, is inflation gonna be a problem? It responds immediately to supply demand imbalances. Gold solves a problem. Now, if you don't realize you have a problem, then you're not gonna seek it out as a store of value asset.

27:41Michael Batnick:So how do we end up in this regime where the hottest selling item at Costco was gold bullion? How did that happen? Over time, people denied that inflation was gonna happen in the beginning, right? And then once it happened, right, they were told, don't worry about it, it's gonna be mild. And then once it became extreme, they were told, well, don't worry about it. Uncle Sam's got your back. We're going to fix this problem for you. And now people are sitting around dealing with these consequences of this. And now people want to protect themselves. They want to protect their families. They want to protect their clients.

28:10Michael Batnick:You don't necessarily need runaway inflation, but you do look at the debt. You worry about where's and how are we going to facilitate and actually pay for these deficits going forward? And you want to protect yourself. And then globally, right? Globally, if you just think about what's happening overseas. countries want to protect themselves from the dollar. So if you saw, if you're China and you saw what we did to Russia, you're going to be hesitant to hold the US assets as reserve assets. If you're an ally, it was fine because you're like, all right, well, listen, if we're on the same side of the United States, that's cool because they're not going to do it to us.

28:44Michael Batnick:And then we got to this trade war and then maybe take Greenland, right? And then we go on and on and on, the U.S. became the source of volatility. We lost the ability to be trusted as a neutral reserve asset, as that neutral custodian. And with that, people have to protect themselves. You think about it, it's the old adage of, fool me once, shame on me, or fool me once, shame on you, fool me twice, shame on me. That's a situation. If you hold the U.S. dollar as a reserve asset, as a foreign country, you have to say to yourself, I need to protect myself. And that's what you're seeing. So you're seeing central banks globally continue to de-dollarize.

29:21David Schassler:And as former President Bush said, fool me twice, can't get fooled again. That was an all-timer. What a banger. All right, David, last question for me. Did you all consider crypto as a real asset or is that hard? That's not a real asset.

29:36Michael Batnick:We put it in originally. It was a revolt against us. We took it out.

29:41Ben Carlson:That's the right choice. Wait, so your investors revolted or what? What was the pushback? I'm curious.

29:47David Schassler:Not even price-wise. It is, in my opinion, there is a distinction between these real assets and crypto or Bitcoin or whatever.

29:55Michael Batnick:I'm an asset allocator. So if you give me an asset that's historically a top-performing asset with a differentiator of risk and return profile, I like that. That gets me excited. That's why I get excited about gold. That's why I get excited about real assets because I look for assets with unique return drivers that are highly differentiated. So that generally makes me excited. You can tell a story, and I think that the story makes sense, how Bitcoin, specifically Bitcoin, we're not talking about other digital assets, how Bitcoin is an alternative to gold because of the embedded scarcity. And it fits very cleanly into the world which we're going to, which is a digital world that favors transparency and favors efficiency.

30:32Michael Batnick:So I get that. The problem is that not a lot of people see the world the same way. And you don't want to force your views on other people. Right? So our thinking is really simple. If you buy racks, there's no digital assets there. If you want digital assets, pair it. But we're not going to force that view on anybody else. And I think that that's the right decision.

30:53David Schassler:I agree with you. All right, David, for people that want to learn more about racks and VanEck and all your offerings, where do we send them?

30:59Michael Batnick:VanEck.com.

31:00David Schassler:Okay, well done. Thank you for coming on.

31:02Michael Batnick:Thank you, sir. Pleasure.

31:06Ben Carlson:Okay, thank you to a VanEck member. Check out VanEck.com to learn more about the VanEck Real Assets ETF. and then email us, animalspirits at the compoundnews.com.