Is it Gold’s Time to Shine? With Tavi Costa

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0:38Is it gold's time to shine? Hi, everyone. Welcome to the Real Vision Daily Briefing. With me today is Tavi Costa, member and macro strategist at Crestcat Capital. Hi, Tavi. It's great to see you. Hi, Maggie. How are you? I'm doing well. We were just discussing before we came on air, Tavi is a new father. So massive congratulations to you. Welcome to the tribe and to the madness. We've got a lot of veterans out there. So feel free to weigh in with any parenting advice. You might want to give Tavi and we'll be sure to pass it along. But we're going to focus on the markets today. And we had another down day for the NASDAQ.

1:16This makes it four in a row, although slightly off the lowest levels of the day. Apple and the reaction to China, obviously an issue there. S &P also lower. Dow managed to buck the trend up a little bit. But what's your view of this pullback we seem to be experiencing in tech stocks? Well, I've been of the view, and this is not something recent for some time now, that technology companies will start underperforming other parts of the market. We've had such a long period of outperformance from that sector specifically. And you can see that from so many fronts, even from CapEx trends of technology itself relative to resource companies and other parts or segments of the market.

2:02And it's very clear that we've seen, I think, part of this crowdedness towards 60-40 portfolios is in response also has helped a lot of technology businesses that are part of this growth story and so forth. And we've seen sort of a mirror, you know, market behavior of the 2022 times when technology was actually leading to the downside. And now we've had such a strong performance, essentially the entire performance, as everybody likes to say, of the S &P 500 coming from those mega cap stocks. And in my view, those are just ultra long duration assets. And as you tend to see this upward movement in discount rates and interest rates and cost of capital itself, it is just hard to believe that we're not going to be discounting the present value of those companies much lower.

2:57And so I remain very concerned. I think there is no reason to be owning something that is trading at 60, 70 or over 100 times free cash flow. And when you look at the actual growth aspect of those companies, as they are called growth stocks, there is not much growth going on. It's been actually quite this small in terms of even Apple and Meta and others. You've seen throughout the history of those businesses, their top line and bottom line has actually been not growing as anywhere close to where it used to be back in the days to justify those really half to multiple. So we remain very concerned about that.

3:41And I think there's much better other opportunities in the markets right now. Yeah, we're going to talk about that in a little bit. So one of the things you mentioned is that, you know, the higher interest rate environment. Fed speakers seem to be indicating that they're in wait and see mode now, you know, data dependent. They've kind of been messaging that and we've seen some mixed information in the economic data. What are you expecting in terms of policy and rates? Are we maybe in for one more, or is it just going to be that we hang at these levels? How do you see that playing out? I think we see a little bit more, but not much more in terms of rate hikes, and then we're probably going to stay where we are for a while, and that is given what's happening with inflation.

4:31I mean, inflation has decelerated since the beginning of the year, but then now we're starting to see signs of reemergence of inflation. And that is, if you study back in history, the 40s or the 70s, both inflationary periods that actually played out very similar but different in some aspects. Different in terms of interest rates, very similar in terms of how inflation developed through waves. You have the first and second and third wave in the 40s, the first and second wave. I think we have a graphic of this that we pulled from your research. Go ahead. Perfect. Yeah. And I think we're in the process of seeing something along those lines.

5:10That is just the base effects playing a key role into that. But there's also real supply constraints that I've been of the view of for a while, too, regarding commodities. And I think that's going to be a big driver of inflation over time. de-globalization to me is still underway. I mean, it's progressing. It's still happening across different parts with a lot of geopolitical issues rising. But then there's other things going on as well. I mean, think about the housing market, which I think a lot of people have really understood that there's a process of reshoring happening in most developed economies, but there's something else also happening, which is causing this sort of construction demand.

5:57It's not just infrastructure and it's not just non-residential. It's actually going to be also residential because everything is unaffordable, right? I mean, if you look at the housing market, prices are extremely unaffordable. At some point, we're going to have to see, and we're starting to see, construction boom in housing market in order to adjust for those issues. And so all that comes full circle into commodities. and the demand for materials. And so, you know, I've been of the view that this is an inflationary era. We should be treating that in that manner. And that will have implications of how, you know, the compression of multiples depending on equity markets, I think is highly likely.

6:41And how, my biggest point is how 60-40 portfolios ultimately will look a lot more balanced in the future. And that means that we're probably going to be favoring more hard assets and things of that nature. Yeah. So you mentioned we're in this sort of inflationary period. What about the growth side of that? So is it inflationary with high growth? Because there are some who say, you know what? Whether you call it a soft landing and no landing with the economy looks pretty resilient. We've got a lot of fiscal spending. This is going to buoy growth. The price you pay will be inflation, but you are going to see a period of higher growth is sort of setting the U.S.

7:22apart. And then there are others who just think it's a lag issue and they are concerned that not only are we going to see a recession, but it could be something quite severe. What are your thoughts about the growth side of the equation? Well, let's start with 2022. I think we saw the more of a severe contraction in terms of economic growth, along with inflation was still on the upside. And then that kind of peaked in the middle part of the year, we've had a deceleration since then on the inflation front. And I would say that growth hasn't, I mean, it's not that it's been reemerging from the 2022 times, it's just it's been very resilient, as you mentioned.

8:02I think that there's very high risk for a major deceleration of growth into this next couple quarters here. And if that's the case, while a lot of people think that that's going to have an immediate effect on inflation, I actually think inflation could be the actual thing that could be driving lower growth over time. In other words, I'm pretty, I'm very much in the camp of a stagflationary environment. And we're going to go in and out of that sort of, you know, scenario. But I think right now, specifically, we're probably getting into one of those again, where growth is, you know, a lot of people have been, went from, you know, being overly pessimistic to now becoming more optimistic, talking about soft lending or no lending at all.

8:51And the probability in terms of how we approach markets in order to see the probability of recession and contraction in the economy has basically gone away. There's, you know, it's very rare to find real bears in the markets out there right now. And you can see that on credit spreads. You can see that on valuation of companies and other things. And so those are parts of the market, I think, are very fragile still. And at the same time, you know, it looks to me like you've got oil moving higher, you've got agricultural commodities starting to move higher as well. And that's because the underlying issue behind those, the supply of those commodities have not being resolved.

9:33And so, you know, we'll likely continue to see those becoming upper pressure on, in general, for inflation. And let's not forget one more thing. I mean, fiscal stimulus, it's actually kind of shocking to see that the economy is not growing even more, given the fact that we're seeing fiscal spending excluding interest payments, keep that in mind, close to 25 % of GDP today. And obviously, that's excluding also tax collection, which we're just looking at how much the government's spending in the economy, how in the world are we not seeing an even stronger economy, right? That's more than we've seen even coming out of the global financial crisis in terms of government stimulus.

10:15So it is very significant. And throughout history, we've only seen this during the COVID recession or during the World War II, so I think, or World War I as well. So it is, you know, it's kind of shocking that we're not seeing more growth, personally. I do think that that's kind of the case. Hey, everyone, we're going to take a quick break right now to hear a word from our partners. We'll be right back with more of the day's top analysis on the Real Vision Daily Briefing. Have you ever wanted to trade Bitcoin but haven't dared try? With Plus 500 Futures, you can trade crypto without the hassle of opening a wallet.

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11:44Yeah, I mean, isn't it because in this case that we've had so much, so many Fed rate hikes so rapidly? I think I heard someone say at one point, because we forget what the expectations were, We thought there would be two or three, and that was something Jay just were relentless about. And we have seen a lot of that kind of countering the fiscal, right? Yeah. Well, it's almost like what I call a fiscal monetary dissonance where there's a total divergence in policies where monetary policy has been very restrictive when it comes to what we're seeing of QT itself. It's something we haven't seen to this magnitude that we're seeing today.

12:24uh interest rate hikes as you mentioned the steepest uh period of rate hikes that we've had uh probably in in many decades and uh and you know compare that with the stimulus that we're seeing from the government side it's you know they're just uh uh not in line um you know something's got to give and so which one is is you know feels like they're going it's very impractical kind of policies in my opinion but i'm not the one running the show um here to sort of look at the markets, I think there's going to be a lot of impacts on this tightening of monetary conditions. It's just, when you think about what's happening in terms of that specifically, in terms of the tightening of financial conditions, along with yield curve inversions and other things that are also tend to precede recessions, it's just, I think there's the signs on the wall.

13:20And it's sort of interesting that a lot of people have gone away from really thinking that there's a high probability of a recession ahead. I think that the probability of recession has only increased and not decreased. The fact that it hasn't happened yet doesn't make it that the probability should be lower. I think it's all the way around. Yeah. It sounds like you think the market is mispriced. Is it bonds and stocks all around? You think that there's too much complacency? I think equities are more mispriced than bonds, but bonds are also mispriced. When you think about what's happening in terms of the issuances of treasuries, something I've been covering very closely, this is insane.

14:06What we've had even from the debt ceiling problem, I think this is a debacle that I'm not sure how we're going to resolve this, knowing that there's not enough buyers of treasuries out there. And instead, we're seeing the Fed actually being a large, you know, depleting its assets in a very significant way. So, you know, to me, this is, you know, it comes again full circle on to why I believe gold is going to play a big role into being a defensive asset here. But on top of it all, you have a something called the twin deficit issue, which to me, it's a structural problem in the US. I mean, If you look at the chart of twin deficits.

14:46Yeah, we have that. We're going to try to pull that up if we can. Perfect. And if you look at the chart specifically, which is just looking at the fiscal deficit and adding along with the current account, which is essentially the trade balances most of that number. And you put that together. We're, you know, at double digits right now relative to GDP. And clearly, it is gradually getting worse every time we have a recession, which makes you or suggests that potentially we could see even lower twin deficits. What does that mean? It just means that we're going to be compounding the debt problem even faster.

15:22And so how do we do that in terms of if the government is not collecting really a lot of revenues? Well, that means somebody is going to have to be buying those treasuries. Banks are not doing that. The Fed is not doing that. And foreign institutions are not doing that. So yeah, I think the bonds in general are also mispriced. But equities are even worse because their price is not only for perfection, but we're going to see another disinflationary period with high growth and, as I said, falling inflation. So I think it's going to be quite the opposite in the next five to 10 years. Yeah. So do you think a lot of people, and we could do a whole show on this, so I don't want to go too far down the rabbit hole, but we talk about one of the things I think that factors into the equity call or the people who want to stick with it is there are still rate cuts being priced in for next year.

16:20And if that's the case, you either believe there's going to be a recession or you think the Fed's going to be forced to have to cut rates because they simply won't be able to make, The government won't be able to make the interest payments on this huge amount of debt that's out there. Is that a case for equities or is that faulty thinking? It's like, you know, all comes first, the egg of the chicken. But, you know, to me, it's sort of, you know, first you need to see the pain. And first, we need to see a severe recession to see the Fed really doing what the euro dollar curve and other interest rate instruments are really reflecting in terms of the expectation for rate cuts.

17:01We do need to see that pain being reflected in markets. I highly doubt we're going to see the Fed really cutting interest rates when inflation hasn't really gone even below their target. We're still above it, well above it in core inflation indices. And so, you know, in my opinion, that is a bigger part of the issue. And, you know, specifically if rates just stay where they are, remember, it's not, you know, how do we price something? It's not necessarily using risk-free rates. You have to be applying that to the cost of capital of that business. And junk bonds is a great gauge of that. Junk bonds being at about 8 % today, which is actually quite low relative to where risk-free rates are.

17:48In other words, credit spreads are very tight because risk-free rates have been rising and junk bond rates have not been rising even further because we haven't really seen that kind of contraction in the economic numbers that really cause credit spreads to blow out. But even at 8 % junk bond yields, I mean, this is quite significant. How do we justify a lot of those companies? There are companies now that are going to be rolling their debt in three years from now, which is likely to be completely squeezing their margins moving forward. Another thing I'll just suggest, I mean, just look at the manufacturing indices, you know, just those surveys that come out where you have executives sharing some of their opinions about their businesses.

18:34It is brutal what we've had recently with the Kansas City and the Dallas one in terms of the commentaries, in terms of interest rates killing their businesses. And I'm actually paraphrasing that. This is, you know, sort of most of the phrases is regarding how financial conditions are starting to hurt those companies and the wage price spiral with, you know, with that pressure from the cost of living causing folks to demand higher remuneration is also having an impact on their margins. And so, you know, I don't think that's really still, you know, reflected in equity markets. And I think it's still to be the case here in the following quarter or so.

19:16Yeah, great points. And something that was brought up as well yesterday with Paul Hodges talking about the chemical sector and the terrible capacity rates they have and the pressure on margins there. And it's always worth digging deep into those reports, as you just mentioned, to hear what people who are actually running businesses in the real economy are saying. It's so important. So, Tavi, we've already got some questions coming. So, hard assets. So, in this environment, you think that's the place to be. What do you like here? Oh, I like, you know, I think you want to diversify across those assets.

19:51I think there are plenty that you can look into. I happen to be a big believer of commodities because of that. And I think there's many ways to express that opinion in the markets. Number one, I think when you think about defensive assets within this sort of hard assets part of the market, I would say gold comes first and foremost as the key alternative. I think gold will outperform treasuries in total return basis as well, just like we saw in the 70s when gold was rising, despite the fact that interest rates were rising. And that is going to be driven by, first and foremost, the accumulation of that metal through central banks, which is already happening.

20:33And I think it's only going to increase over time as we see more FX volatility. I like metals and mining in general. I like silver a lot. I think, you know, if you're a believer. Let's put a chart. We'll go back to gold because there's some questions. Let's put a chart of silver up as you talk about this. Yeah. Well, silver has a lot of reasons to believe that silver will play an important role here if gold is at the beginning of a cycle. I think, you know, to believe in that, you really got to dive into why precious metals in general should be entering a secular movement to the upside. And by the way, when you see one of those, it is we've never seen in history a gold cycle that wasn't accompanied by a commodity cycle.

21:15And so, you know, that is why I think everything is interconnected. But nonetheless, gold, you know, just looking at production for gold has been declining across most of the major companies. The interest from capital allocators has been as bad as it could be. you know we were seeing central banks accumulating the asset over time 6040 portfolios have never been more expensive I'm going to be coming out with a report here soon really diving into the valuation of 6040s because I think that's key in fact if you look at gold itself downside volatility right now relative to the downside volatility of treasuries it's a lot more attractive to own gold in your portfolio for the first time in many decades.

22:00So are actually in the history of the data, to be quite honest. And so I think there's many reasons to believe that the market is getting very favorable for precious metals in general. And silver should lead the way to the upside. Because if we just look at the ratio for gold to silver right now at 80, it seems quite attractive to me as well. We're going to take another quick break to hear a word from our partners. We'll be right back with more of the day's top analysis on the Real Vision Daily Briefing.

22:33Yeah, I think I like to blame everything on the heat. We're freezing a little bit, but we're going to keep going because the audio is working. And so we'll bounce back. So bear with us. If you're frozen, so am I. I actually think my computer just froze. There you go. I'm back. Yeah, I think we're all freezing. Well, we're all melting. So we're freezing. where if you're sitting anywhere on the East Coast, much of the U.S., which, of course, we have a global audience, but I don't know where it is where you're sitting. But it's very, very hot here. And we always start to get the gremlins to come out when that's the case.

23:02But I think what you're saying is really important. And we just had the gold chart up as well. So let me get a question in here. TrillionX asking, Tavi, what do you make of the oil to gold ratio still being above its 40-year average? Well, I think that it is an interesting measurement. I used to look at those especially for sort of gauging economic activity in general. So when you see gold to oil ratio rising, it tends to be showing weakness in the overall economy. The other way around would be the opposite of that. But I'm not sure that's really the play. I actually think both could be rising here.

23:43So I'm not really looking to be hedging that position by being short oil or by being long oil and short gold. I think, in my view, you want to own a basket of those things. And you also want to own a basket of businesses that have those underlying commodities as part of what they produce. And there are many ways of doing that. I like energy companies quite a lot. I think they're very cheap, historically undervalued. But not only that, geopolitically, energy commodities are playing more and more of a bigger role here. And you can see that. Strategic petroleum reserves declining in a significant way.

24:23If you look at oil rigs in the U.S., they've been contracting for the first time since the COVID recession. If you look at CapEx in aggregate for most energy companies, they're still historically low. And so all those things are fundamental reasons why you want to own energy here. I don't want to bet against that. So I like to own oil. I think oil companies are a big part of my portfolio. I think that that's an important aspect of this inflationary regime that tends to really benefit oil businesses in general. And so actually, I'm quite bullish in oil and gold as well. Great question from Doug.

25:03Of the three asset classes, which do you rate as the best value? I'm just going to preface by saying we're asking Tavi. He can't say what's best for you. We don't give financial advice, only you can know your own risk, what the rest of your portfolio looks like. You know the drill. But Tavi, in your mind, for you, which of the three asset classes do you rate as the best value, PGMs, gold, or silver?

25:31Well, I think it depends. Overall, if you're looking for an explosive move with high volatility, silver is by far the best option here. Now, if you're running, let's just say, a large pool of capital with a lot of liabilities and things of the manner, which a lot of ways people think about yield as a source of income for those portfolios, I actually think gold is going to play a big role into those because of the sell off and fixed income markets. And so, you know, it really depends in terms of that. But I think it's very attractive is the fact that when you look at, you know, the what is, you know, how much worse can gold prices really get from here?

26:17You know, how much is the downside that I can see from gold prices from the current levels? And if the downside is small, I want to take risk to the upside. So that's why I think there's a lot of asymmetry to finding other businesses that have lower liquidity, lower volume that potentially could provide that level of upside. If we're right about gold prices really entering a gold cycle where it could take five to 10 years for those to materialize. And so to me, that's where I get more excited. It's not really buying gold or buying silver is looking for very unique ways to to deliver performance by, you know, finding companies that you can either turn them around in terms of mining businesses, you know, even in the private market.

27:02I mean, the private market for mining is incredibly attractive right now. So, you know, I think there's a lot of ways to create value in those industries. And the fact that there's so many inefficiencies and lack of people in capital really focusing in that part of the market is, to me, quite attractive. So that's where I spend most of my time personally and through the Cresket as well. Yeah, I love that explanation because you explain some of the fundamental story that you're looking at. but also your timeframe and what kind of move you're looking for, right? So if you want to have and you're willing to have a stomach for volatility, all those things are so important for all of you who know, who walk through the academy.