Tavi Costa: Golden Strategy in a Frothy Market
Tavi Costa, partner and portfolio manager at Crescat Capital, joins the Gold Exchange to dive into the current state of the markets, discussing the potential risks and opportunities ahead. From overpriced equities to concerns in commercial real estate and private equity, this episode explores the underlying factors that could impact investment strategies. A lighting round at the end of the episode gives Tavi and Keith a chance to share their views on a host of commodities, currencies, and more!
Follow Tavi Costa on Twitter @TaviCosta
Connect with Keith Weiner and Monetary Metals on Twitter: @RealKeithWeiner @Monetary_Metals
Additional Resources
The Case for Gold Yield in Investment Portfolios
Podcast Chapters
00:00:00]: Introduction
[00:01:05]: Why are things seemingly so calm?
[00:03:42]: Concerns about mortgage rates and private equity
[00:10:14]: The danger of inflated valuations
[00:13:43]: Gold as a safe haven asset
[00:17:50]: Gold’s potential breakout and investment opportunities
[00:19:08]: Investing in South American emerging markets
[00:23:43]: Gold’s popularity in Turkey and potential opportunities
[00:25:53]: Crypto market analysis and challenges
[00:30:13]: Crypto’s potential in countries like Turkey
[00:34:10]: AI’s impact on financial markets and gold’s volatility
[00:42:40]: Silver vs. Crypto
[00:43:29]: Emerging Markets vs. Real Estate
[00:44:52]: Oil vs. Artificial Intelligence
[00:46:37]: Brazil vs. Argentina
[00:48:17]: BRICS Currencies Comparison
[00:49:58]: Important Question for Future Guests
[00:53:09]: Where to Find More of Tavi’s Work
[00:53:32]: Monetary Metals
Transcript:
BVN:
Welcome back to the Gold Exchange podcast. My name is Benjamin Vern Nadelstein. I’m joined, as always, by founder and CEO of Monetary Metals, Keith Wiener. Our guest today is Tavi Costa, partner and portfolio manager at Crescat Capital. Tavi, how are you doing?
Tavi Costa:
Good. How’s it going, guys?
BVN:
Good. I am on the East Coast, Keith is in London and Tavi is in Colorado. So we’ve got pretty much everyone everywhere. We’ve got eyes on the market. Tavi, I want to start with you. We’ve seen not a huge blow up in the markets yet, as many analysts have predicted. I just want your big macro overview. Why are things seemingly so calm at the moment?
Tavi Costa:
I’m guessing you’re talking about the overall equity market. Well, look, it’s surprising me as well. I’m not going to lie. I think we’ve got all the signals to be concerned and not be aggressively buying this market. I think we’ve had in the past bear market rallies. I believe some people are confusing this as the beginning of a bull market. It could be. Would I take the risk? Not my analysis. I think markets are excessively expensive in many multiples. The history shows that when the only two decades you want to be concerned about allocating capital in the stock market really are during inflationary times or during times when you do have excessive valuations and you have both this time. For the first time in history, every time we’ve had an inflationary environment, the market was cheap. Every time we had an expensive market, we actually had more of a deflationary environment. And so interestingly, now we have both today. Inflation is decelerating and so forth. However, it still structurally appears to me at least, that we’re entering a different regime. And so there’s a compression of multiples that happens when you have those periods. I think we’re yet to see that.
And one main reason is the cost of capital. You can see Nasdaq completely diverging from 10 year yields, completely diverging from even corporate bond yields, which is literally what you pay for issuing debt. We’ve got a problem with the treasury market, in my opinion, which has been right now recently not… Now we’ve had a big move in 10 year yields and now they are moving the other way recently, but I don’t think this problem is going away. The deficits are insanely high between deficits, not only fiscal, but the current account overall as well. And so I just can’t imagine if the Fed comes in and says, yes, we’re going to be buying those treasuries and making new liquidity in the market. And yeah, then I think that’s a potential where equity markets could perform well. It’s not my type of investment. I’m not interested in that. I am interested in really cheap things that have been unloved for a long time that I believe strongly could be at the very early stages of a bull market. And so to me, that’s a much more attractive way to deploy capital.
BVN:
Keith, I want to let you jump in here. So water doesn’t seem too choppy. Are you interested in dipping a toe in? And what should people be looking out for?
Keith Weiner:
Let’s say we’re going to do that. What I wanted to add to what Tavi said, which is, I’m going to speak of lags, the same leads in lags, but usually it’s lags. You have monetary policy, high interest rates dramatically. And then there’s a delay before reality sets in, like Wyoming Coyote runs off the edge of the cliff. And until he looks down, it’s fine. And then the moment he looks down, then it begins to fall. So this mind over matter thing. I think why that happens, you look at employment, which there’s been layoffs, but not this huge massive wave of layoffs that a lot of people have expected. And I think it’s because the Fed has burned every company in the past little blips that we’ve had over the last 15 years service. Every time any company laid off, the Fed forced them to regret it. And then they were trying to free hire people back at big raises compared to where they’re letting off that. And so businesses are extremely reluctant to do that or cover any other cost where there’s a cost then to try to reverse your reversal. Same thing with investors.
Why is every show, including ours, asking the question, is it time to dip their toes in the water? The Fed has trained everybody well, have lost dogs. And this one is different because the cost of interest, the cost of money has gone up so dramatically. And the Fed is continuing to signal, hey, maybe we’re going to pause here for a bit, but there’s talk of backing it down. And meanwhile, real damage is being done as companies find they can’t afford their cost of capital, there’s real rollover problems. I think one earlier indication is going to be commercial real estate. They’re starting to I remember the term jingle mail back in 2008, where people would mail their keys back to the banks for residential real estate. That’s happening now with big commercial developers. So we’ll see. But no, I wouldn’t be a buyer of equities here. And I think to Tavis’ point about you want to buy something that’s been unloved so deeply and so long, surely that has to describe mining equities. It could describe anything.
BVN:
My God. All right, so let’s talk about commercial real estate. You briefly brought it up, Keith. So a lot of people are looking at commercial real estate nightmare. So is that an imminent issue, or do you think maybe rates will be lowered before that bomb drops, or do you think that there’s actually something entirely different going on and everyone’s actually missing the big picture when it comes to commercial real estate? Tavi, I’ll start with you.
Tavi Costa:
With me? Well, I’m not a huge expert of the commercial real estate market. I think I can speak for Denver, surprisingly, the market here is really hot still in terms of commercial real estate. I think there are other parts of the US, certainly, that you can see that they’re concerned I’m concerned more about mortgage rates, to be quite honest, on the residential side. I’ve seen that line just spiking up. It’s just hard to believe it’s not going to impact consumers in general in terms of their purchasing power and not eating into their wages and salaries and so forth, I’m quite concerned about that. I think it’s a big question. In terms of commercial real estate, I think could potentially be a problem. I think one part of the market that perhaps I’ve done more analysis that it could be even more concerning, in my opinion, is the private equity side of it. I very clearly look at private equity companies, the way they’re valuing their businesses, it is sketchy. And valuation is being very fruffy, especially relative to software companies that haven’t really come back since 2021 and that peak of the market. The types of ARC investments types of companies, meaning companies that don’t make a lot of money or make no money, really.
All those types of businesses are still valued at very frothy prices inside of those balance sheets of those private equity funds and firms in general. And so I am very concerned about that because I think people are starting to catch on to that, number one. If the market really does show more issues than what we’ve seen in the last, call it, five months or so, I think that could potentially become a bigger question and so we’ve got shorts and private equity firms. They do hold some commercial real estate as well. A lot of those need to be priced a lot lower as well. And so I thought about what happened with the banks in the US and the US banks and so forth. And to me, this was really a collateral issue where collateral price or treasury markets really struggled in 2022 and with the collateral price falling, it certainly created other implications in their businesses. And that’s really, to me, what caused most of the problem. And so if the same happens with private equity and others, I think there’s a potential for that. And the whole venture capital model across technology companies has been revamped in the last three, four months.
I wouldn’t be getting into that business at all if it was myself. But I think structurally higher rates and you’ve got even the risk of valuation in an entire sector that I think it’s extremely expensive. It’s just hard to justify really buying into a market where the earnings and the fundamental growth is not probably going to be justifying those very high multiples. So I actually think private equity in general, it looks very risky in my opinion.
BVN:
So, Keith, maybe let’s talk about the way that SVB went down and used private equity and that commercial real estate nightmare as maybe their sword hanging overhead.
Keith Weiner:
I was just thinking as I was listening to what Tavi was saying, there was a term, I think it was John Kenneth Galbraith, of all people, who I wouldn’t necessarily be siding for other things, coined the term the Bezel, which the root of embezel meant to basically refer to the difference between in the economy, the valuation of things versus what they’re really worth. And I think what Volbreth would say in response to what Tavi said is that right now, big difference in certain sectors, particularly between the valuation, let’s say, being held on PE firms balance sheets versus what maybe the story reality is. And the bigger the Bezel becomes, the more dangerous it is. Of course, the higher interest rates go, but if you just use the discounted cash flow type model for net present value, the higher the interest rate goes, the higher the discount factor needs to be. And therefore, the less future earnings are worth in the present. And therefore, the more valuation is to come down. And since it hasn’t, the wider the Bezel has become, I think ultimately the Fed is going to be forced to reverse just for that reason.
Evaluation’s got so high, all those high valuations were levered with debt and now, if valuation comes down, the debt can’t be supported anymore, that is going to be a true calam when it finally hits. I think the Fed is not going to want to just stand there and let that happen on their watch. Of course, they’re the ones who created it in the first place. And then in my view, then they’re going to fix that by lowering interest rates to get the valuations back to where that is supportable, which of course, then further the Austrian term of the mal investment. It is further the mal investment. And whether you look at PE, whether you look at CRE, Monetary Metals, we have our office in a space by Regis, which is a more hip competitor. Regus is pretty dodgy. That was their answer to Wee Work. That’s in a giant corporate building in Scottsdale. And you look around and parking lots empty, most of the offices are dark. Most of the offices are still being rented by big firms. They haven’t figured out what they’re going to do yet with their footprints. But the workers aren’t coming to the office at some point.
And this is where lags come in. At some point, they start to say, you know what? We’re going to reduce their footprint. And it wouldn’t surprise me if every corporate employer in the US kept their footprint by 50 % as a starting point. That wouldn’t surprise me the slightest. What does that do to all the commercial real estate developers? The ones that have data are all stuffed, as I would say here in the UK. And how many of them don’t have it yet because of valuations were so high because of the Bezel at all feeds on itself.
BVN:
So, Tavi, now looking it may be safe haven assets. People say, I’m not looking at private equity, I’m not looking at commercial real estate. Maybe I don’t want to be dipping into the stock market at the moment. So people look to, quote, safe haven assets. Obviously, gold being one of those top safe haven assets. You’ve said recently, today, gold, the metal, is likely to serve as an escape valve for those seeking the ultimate form of protection during times of debt and monetary crisis. So first, do you still believe that sentiment? Or are we going to see the end of gold’s status as a safe haven asset? Or maybe as Tyler Cowen recently wrote, the gold is no longer a good hedge against bad times. And he also, of course, implied it has no yield. Tyler Cowen has an open invite to the Gold Exchange podcast to discuss. But, Tavi, let’s start with you. Do you think that gold’s safe haven status is here to stay, or there actually might be some other asset that people should be looking for in these current times?
Tavi Costa:
Well, not only here to stay, but really about to reemerge as a popular haven asset. I think some people acknowledge it, but the skepticism towards the metal in a day like today with so many macro drivers supporting the thesis behind precious in general, it is surprising. I mean, in the 90s, we did see something similar back in the late 90s, but gold was down 70 % in the last 20 years. And so if you look back from the 80s at the peak all the way to late 1999, gold was down 70 %. Internet was the new thing, and a lot of technology companies were surging at that time. Can you imagine the similarities with the level of skepticism and this euphoria towards technology companies? It’s very similar. I can hear from today the voices at that time speaking about the issues with the metal itself and the fact that it had underperformed for the last 20 years or so, many other asset classes. Today, it hasn’t really underperformed a lot. And it’s actually outperformed a lot of things. In fact, it’s one of the few things today across the globe that is about to make new highs.
And so, no, if you ask me, I think this is, to me, this is a real interesting market to be deploying capital because it’s the first time I’ve seen gold about to break through its prior highs. And when it breaks through a triple top formation, it is not a small move. Usually, you see a surging price is adding whatever that is. It could be a 15, 20 % type of movement to the upside above the prior high. And if that’s the case, it could surprise a lot of people. And with that level of potential, technically speaking, and macro speaking, and then you look at fundamentally across most of the mining companies, and they’re still trading at historically low multiples. So one of those is wrong. And I don’t think gold is wrong. I think gold is right. And I think the whole industry and entire space is waiting to see the end of this development in the gold price. And if we do see a breakout, I think we’re going to see an influx of capital into the overall industry, I think for a lot of reasons. And so that excites me a lot more than buying a technology company trading for even NVIDA, which is the clear benefiter of this AI euphoria, trading a 45 times free cash flow estimate of two years from now, 45.
It’s just ridiculous. When you have Brazilian stocks today trading at the banks trading at three, four times earnings, most profitable businesses in terms of banks in the world, historically cheap. They have never been cheaper. It’s a no brainer to me in terms of a relative value. And it’s all linked to this idea of commodity and gold cycle, because once you get a gold cycle going, look at the price of copper and gold. Yes, there’s a secret reality towards copper and other things, but gold, essentially, you can say one drive the other, but essentially they’re interconnected. So if you are calling for a gold cycle, most likely you’re going to get a copper cycle, too. You’re probably going to get an agricultural commodity cycle as well. Look at the price of agricultural or soft commodities versus gold. It’s the same chart, essentially, over the last 20 years or so or 30 years. It’s a doom and gloom in terms of a lot of the equity markets and the people that are focusing this thing that has just done… I don’t see the value of it, but the level of opportunities today is really one of the best I’ve seen in history.
I mean, it’s as asymmetric as it can be with an incredible tailwind and support of a lot of macro important drivers that will likely unleash all these trends in the next 5 to 10 years.
BVN:
So, Tavi, I want to talk about emerging markets for a second. Maybe Brazil, Argentina, Peru, for starters. A lot of people say, Look, I’m never investing in Latin America. The region as a whole is completely uninvestable. First of all, what do you say to those people? And what are maybe some of the difference between some of the countries, let’s say Brazil, Argentina, and Peru?
Tavi Costa:
Well, I would start with the fact that everything has a price. Saying not investing on something is… I think there’s very few things I would actually say that. But outside of that, I’m not sure. I think historically, I think you want to understand first what’s the usual patterns of those markets that tend to really support those economies. And South America is incredibly unexplored resource wise. A place like Brazil is potentially more developed than other South American economies, but also very unexplored. Brazil interests me overall. I think you can make a case for the banks. You can make a case for a lot of different industries in the overall economy that will potentially do very well. Commodity businesses across many different types of commodities, from oil, steel producers, mining companies, and so forth. Now, we have recently acquired an asset in Bolivia, which is one of the largest zinc and silver mines in the world. And it’s just an attractive valuation. I mean, it’s basically trading for essentially one time free cash flow. Free cash flow. And so I don’t think we can find a lot of those things. I mean, yeah, you could be wrong if they can take over your business at some point and government become more authoritarian like we’ve seen in other times, even in Bolivia or other times in Peru and so forth.
But those things, they tend to happen during times when you’re seeing a desperate environment in the commodity space. What happened in Venezuela was really magnified by the fact that oil prices are collapsing in 2014, 2015, and 2016. And that period was very difficult. It allowed the situation in Venezuela to worsen significantly. I don’t think this is going to be the case here. I think this is very similar to the early 2000s, but South America strategically will play a much bigger role than even played back then because I think that’s going to be a place where a lot of developed economies will form partnerships with South American companies to really have source of their resources that they need to go through a manufacturing infrastructure period similar to what China did in the early 2000s. But this time it’s going to happen across most G7 economies. And so we’re going to need stuff. We’re going to need commodities. And I think South America is going to play a big role there. So like I said, everything has a price. If things get expensive in South America, the political risk is there. So you have to be mindful of that.
But today, things are extremely cheap, and some of them are essentially being given away. And so I think I wouldn’t bet the farm and put everything in it, but it’s something should be a part of the part of someone’s portfolio, in my opinion. And that’s certainly a part of my personal and client’s portfolio as well.
BVN:
Keith, I want to send it your way. I like that idea a lot. Listen, nothing is uninvestable. It’s just at what price? Maybe you can talk about some of the pros and cons about emerging markets, what you see, maybe even regarding currencies and these countries that are currently on the margin, maybe attempting to de dollarize, how that’s been going. Specifically, Argentina, we discussed that, of course.
Keith Weiner:
Yeah, I’m not sure what I can add to the de dollarization debate. I was going to say, so I’ve been traveling around the world and visited Turkey recently and had a chance to go to the Great Bizarre in Istanbul. And one thing I could say is there are gold stores, little shops everywhere in that bizarre. I mean, there’s countless gold places. I’ve been told by people who live there, those have increased at the expense of spice shops and textile shops and other things which have decreased. So gold has become a huge, huge, huge, huge thing in Turkey. Americans can’t even really imagine what’s going with gold in Turkey right now. And then of all the places I walked around, I can’t say I saw everything in the bizarre, but I walked through a lot of different walls and corridors, one Bitcoin place to probably 100 or more gold shops along the way. So huge opportunity there. My spin on it would be, you have to know what you’re doing and you have to know the people that you’re getting involved with really well. There are extra hazards in these places, extra challenges, funny laws that you wouldn’t necessarily expect.
So do your diligence. But yeah, if you’re worried about overvaluation in US markets, there are certainly places where there’s undervaluation outside US markets. Absolutely.
BVN:
I want to touch really quickly on the crypto verse. Do you think that the winter is set in? It seems like crypto has died down a lot. Prices has obviously collapsed. There’s been some scandals regarding exchanges and so forth. So do you think that the crypto hype is over, that the phase is all done, that it was a low interest rate phenomenon now it’s gone? Or do you think that there might be some more crypto frothing on the horizon, Tavi?
Tavi Costa:
My sense is froth as well. I think not a lot of businesses have substance to what they do. Understanding their business models is, to me, even as a younger generation investor, very challenging. It appears to me missing a lot of more critical thinking on how things will work. And that’s not all the businesses. I’m just speaking more broadly. There are some that are more attractive than others. I think it’s an extinction of the technology industry. I believe AI is indeed a huge evolutionary period for the global economy. It will unleash a lot of things as well. It’s going to be a true breakthrough of technological advancements. Now, crypto and blockchain and all that, I don’t know. I’m not as excited. I’m not seeing this as huge as of a technological moment as a lot of people do. But I’ll take that with a grain of salt because it’s not my expertise either. And not that I’m an expert in anything, but just not something I’m really involved in. And I was involved in the early stages of it. We own Bitcoin actually back in 2018 or 2019 actually. Luckily, we made money on it. Clearly, we didn’t sell it at $60,000, but at least I didn’t get my head chopped by the other folks that crash it because of my views on Bitcoin at the time.
Luckily, we made money on it. But I think it’s potentially an alternative. I mean, crypto and Bitcoin may be all different. I’m much more attracted to gold, personally. I think that’s what central banks buy. I’m talking about large central banks in El Salvador. It’s pretty clear. History is giving us the homework. Why do we need to create something different? It worked over the years and over centuries. Why do I need to take a risk, all this additional risk, on something that I’m not even sure it works. And so to me, it’s just as when I think about risk and reward and so forth and knowing that when I go to a restaurant or a bar and I talk to people, that is what most younger folks are excited about is about crypto, not gold. As a contrarian investor, I get excited. I can’t wait to see the day when I go to a bar and people… Not that I go to bars all the time, but that I go to a bar or a public space and people were talking about the potential for buying a property that has a resource of a certain degree.
And it’s just not the case today at all. People don’t talk about that at all. And so to me, it’s telling. It’s another sign of why I want to be where I am in terms of focus. But I just don’t… Yeah, I’m not excited about crypto at all. I do think it’s a phenomenon caused by interest rates being so low over the years, which is ironically how this all got created because the Fed has been so aggressive in terms of their monetary policy. They created their own monster when you think about it. That’s how much I can share about it. It’s not something I’m spending really any time on today.
BVN:
Keith, I want to send it quickly your way. Cryptoverse, we know some of your thoughts, but do you think the winter is really here to stay, that the frostbite is in and that the ice is settled, or do you think there might be a summer on the way?
Keith Weiner:
The thing with this crypto phenomenon is that there could always be another wave. Getting the timing right is basically impossible. Terry is an interesting place. I’m just going to go back to there for a minute. I just visited there last week. The currency is in the process of a pretty rapid, if not collapse, certainly massive devaluation. I don’t think their problems are over. I don’t think their people think their problems are over. Of all the places where the crypto value proposition should be strong, there’s a lot of it to keep the people there. Everybody has a smartphone there. It’s not like people living in dirt huts, or grass huts with dirt floors and don’t read or write or don’t have access to the Internet. You have a population. There’s a lot of educated people there and certainly access to everything is literate and other things like that. And I’ve been told that everybody in Jersey would have at least 10 grams of gold. And I was talking with somebody about my thesis that Americans, as a culture, understand gold the least of anybody in the world. I get to say that as an American, so I’m picking on my own.
So that’s fair. And I think I’ve done enough international travel to have the perspective to see that. And this, you know, Turkish and others there were basically confirming everybody in Turkey has gold, like everybody. If they have any pennies to their name, they would have some gold. And that’s just how it is. And try to sell those folks. And while their currency is collapsing, the demand for gold is rising, try to sell them Bitcoin. As I said, there was one place in the bizarre that I saw that said Bitcoin on it. And every day, I just took pictures of these shop windows. It’s almost like something out of an epic fantasy movie where the gold is all stacked and all kinds of different things. It wasn’t just coins and bars. It looks like jewelry, but not the sorts that I’ve ever seen anybody wearing and not even in Turkey. People are buying this stuff just to have the gold medal. So they understand gold. Not that I had a lot of conversations about Bitcoin there. So I don’t know. I mean, on the other hand, there’s going to be a Bitcoin ETF now. Could that drive a big rally in this price?
It could, absolutely. But in the end, every penny that anybody ever makes the Bitcoin comes from the next speculator’s capital. One person forks over his capital, that becomes the gain or the profit of the previous speculator he’s exiting. And to him, it comes as a profit, and he spends part of that. And so that is fundamentally unsustainable. One can use the word pyramid, one can use the word Pansy. So eventually, in the end, it turns to ruin. But is this the moment? Well, as Yokel Becker said, predictions about the future. No, predictions are hard, especially about the future. So I wouldn’t necessarily say this is it. Obviously, the price is on a rise at the moment. $30,000. Could it be $130,000? Yeah, it could. But could it be 30 cents? Yeah, it could. And the question is, when and in what order? I don’t know. I don’t think anybody knows. It’s certainly not the people that are prognosticators about where Bitcoin is going to go next. Anybody says, oh, yeah, Bitcoin has to go up from here. Ask them, what were you saying when Bitcoin was $69,000? Because they were saying the same thing even then, right before it went to 16.
So if gold could go down 70 % in two decades, per what Tavi said, Bitcoin could go down 70 % in six months. And it did. Could it do it again from here? Absolutely it could. Will it? I don’t know. Maybe.
BVN:
So I want to jump on something that Tavi mentioned, which was AI. So we’ve seen a lot of these tools come out. There’s a lot of traction with companies, chip makers who might be one step below the AI revolution. Silver is also talked about as well, because silver will be needed for chips and so on and so on. So, Tavi, do you see this AI revolution actually happening? Will this largely alter financial markets? Will some companies go under with Schumpeter’s creative destruction because of AI? Or do you maybe just see this as an interesting tool, another fad, something that will slowly get incorporated to markets, won’t make that big of a deal the same way that 3D printing did. For a little while, everything was going to be 3D printed. Your shirt was going to be 3D printed. Your headphones were going to be 3D printed, and now it’s like, Maybe they’ll 3D print a stake in 10 years. Do you see AI going the way of 3D printing, or is this the next big thing?
Tavi Costa:
I think it’s the next big thing. I just don’t agree with buying the companies today at those valuations because they’re very expensive. But I do think it’s the next big thing. It’s bigger than the internet, in my opinion, and it will really revolutionize a lot of things. Just thinking about the biotechnology industry in general, which, by the way, is really cheap today. It’s one side of the growth market that looks really cheap that could tremendously benefit from AI. One thing I think a lot about as well is the gap, which is, by the way, a very interesting opportunity in the market right now. You think about what AI does to you, as of today, it will create other features and ways to use that to enhance your business. But I feel like back in the days, what internet did, let’s start with the internet first, really was a way where you can start a business without really having a physical location. Back in the 70s or so, you had to rent a place and come up with the goods or services business model that you would have people working for you and so forth. And so to scale a business require a lot of capital at those times.
In the internet phase, it really allowed someone to start a business from their garage, essentially, in a way that was a lot more efficient than running a traditional business. And that created a lot of value and a lot of things were created on the back of that. But you still needed to hire people and so forth. Ai, in my opinion, and this is my experience using it a lot as far as in my own day to day business and so forth, I think it’s almost like that perfect assistant. I mean, it helps you in all angles when you have a question or you want to do something better, you use that as your assistant. It’s almost like having whatever, 100 people, 20 people, those assistants working for you, rather than having to hire someone. It’s free. It’s essentially, and depending on the business, it’s talking to software company, for instance, rather than hiring 100 people to do a job. Now you only need two to supervise an AI related tool that can perhaps help you to generate what you need in terms of a code or whatever that is. And this goes to a lot of other things.
And so I started thinking about that, I’m like, well, now you have an internet and you have this assistant. So now you’re essentially making it much easier to launch a business way easier than it used to be in the past. And then I go further on this. Well, then if you’re a small company, then that should help you as well. The gap between a larger company that is able to scale through hiring a lot of people and now you have a small business that is capable of acquiring that knowledge and ability or skill from one tool rather than hiring all those people could potentially be a real change for the potential success of a lot of companies. And so when I see the valuation of megacap companies versus that, yes, they are the ones having access to the tools today, and they’re paying thousands and thousands of dollars for actually a lot more than that. But I’m talking about depending on the service that they have, I think they’re charging 30 grand a month for the NVIDia Cloud service, for instance. So you can scale that over time. Obviously, it’s hundreds of millions of whatever that is, or billions that they’re spending on just that alone.
And that access is not available for a lot of the smaller companies as of now, but at some point it will be. And so this gap between larger companies and smaller companies, I’m not sure it’s really sustainable. And then I think even further on, what is the issue with an emerging market and why we have today such a large disparity between valuations in a business here in the US versus in Brazil, for instance. And clearly, one of the things that is very important, yes, it’s the political environment. And I’m not saying the US is free of a lot of issues that it does have here, but the corruption in Brazil certainly is. Potentially, you can certainly make an argument that it’s way worse than in the US. That doesn’t mean the US doesn’t have issues either. Maybe that is one way you can justify the difference between the valuations between those companies. But I don’t think that’s the real reason. I think potentially where you can close the gap between those is also through AI, is also through a resource space doing very well in terms of commodity led economy being really benefited from a commodity boom market.
Tavi Costa:
But just AI alone with the help from small businesses and larger businesses, that could potentially happen with a lot of emerging markets. One thing emerging markets don’t have is the same quality of labor market that the US does. And that’s a problem. If you’re running a startup in Brazil, you will have that issue. The knowledge and the level of quality of those employees or those workers is certainly not in the same degree or magnitude that you have in the US. And so potentially with things like AI, you can close those gaps a little further. And so when I see the markets pricing things completely out of whack in terms of companies in the US relative to other places, now I get a little excited. I think this is adding to my thesis as well. So that’s the way I see it. I think it’s a very important trend. I’ve been, believe it or not, accumulating a bunch of books about Industrial Revolution. I want to understand many angles of that period because I think it could potentially be as big as that. I don’t know. I’m definitely very interested in the topic.
BVN:
All right, Tavi, I love it. I want to take our last couple of minutes here to run through two different asset classes or commodities. And I want you guys to tell me, we’ll start with Tavi and then go to Keith, which you think will perform better in 2023. So let’s start. A rapid fire round starts with gold versus treasures. What do you think will perform better in 2023? Tavi, we’ll start with you.
Tavi Costa:
Gold.
BVN:
Keith, I want to send it your way. Gold or Treasuries, 2023?
Keith Weiner:
Gold.
BVN:
Okay, we have consensus. Gold from the experts. Okay, next one. Tavi, the crypto market in general versus silver as a commodity, what are you thinking?
Tavi Costa:
I’m going with silver in this one.
BVN:
Yeah. Keith, your way.
Keith Weiner:
I have to say I don’t really know because silver could double or triple. I do not expect to see $50 silver certainly not 2023. On the other hand, if crypto just… If the shine is off, no pun intended, then it would be silver. Interestingly, I’ve been falling for silver to be higher. Our fundamental model is several dollars above market for quite a while. And then I’m feeling a little vindicated to see plus what 4.7 % yesterday. I certainly don’t think silver does badly in this environment. But crypto is a giant wild card. I mean, if Bitcoin goes to hundreds of dollars, then that would outperform silver.
BVN:
Okay, interesting answer from Keith. All right, next one. Emerging markets as a whole or real estate as a whole. Tavi, I want to start with you.
Tavi Costa:
For how long? 2022 and 3?
BVN:
- Where do you see it?
Tavi Costa:
I’ll go Emerging. Well, I’ve got to break down emerging markets. I’m not a big fan of China. I’m not a huge fan of India for reasons because it’s not a commodity led economy and so forth. I’m not a buyer of Russian assets either. So Brazil specifically, I think that would be… It had a big move recently, but I think by the end of the year, it will probably end up higher than real estate as well.
BVN:
Keith, your way, emerging markets or real estate for 2023?
Keith Weiner:
I think for the markets that are really emerging, and I would put Singapore and Dubai on that list, then absolutely ahead of certainly commercial real estate state in the US. If we’re talking about as Ayn Rand coined term in the 1960s, not developing, never to redevelop places, some of the benighted places of the world, let alone the North Korea DRCs. But me and Mar are in places like that, then I’d say real estate.
BVN:
Okay, next one. We’ve got oil, the market, versus artificial intelligence. Tavi, I think I know which one you’re going to say, but maybe you’ll surprise us. Oil versus AI in 2023?
Tavi Costa:
Oil? Yeah, I’m going to go stay with oil. To me, that’s an easy meaning, conviction wise, not that I know what’s going to happen, but that’s just my strong opinion.
BVN:
Keith, your way. Oil versus AI, who do you think takes 2023?
Keith Weiner:
I think AI. I would just add to that that investing in AI today is like investing in the Internet in 1996. At that time, if you wanted to place your bets, would it be Likos, Alta Vista, Yahoo? What were the internet companies at that time? Cars in 1902? Stanley Steemer seemed pretty promising at that time. Would you have picked… It wasn’t even General Motors at that time. I mean, Ford was there. Would you have picked them? Maybe. I think a lot of good things could happen out of AI as a technology without necessarily the companies that are the leading names today commanding for us to evaluate things, necessarily proving to be worth the investment or even survive it. But I’m not bullish on oil, so I’d have to pick AI.
BVN:
Okay, Tavi, back to you. We’ve got Brazil versus Argentina. I think we know where you’re going with it, but let’s hear it anyways. Brazil versus Argentina for 2023. Who do you have, Tavi?
Tavi Costa:
Tough one, that one, because I think Argentina is just a high risk version of Brazil. Brazil does really well Argentina could outperform. I do think that the risk might not be… Risk reward, I prefer Brazil. That’s a tough one, though. I think if I’m right about Brazil in a large way, I could see other smaller markets, and I don’t mean that in a disrespectful way. I just mean Brazil is a bigger market today and I could see it underperforming Argentina. But if you ask me where I would invest my money today, I would put my money on Brazil just because I feel much safer politically speaking personally. But that’s just my view.
BVN:
Keith, I want to send it to you. Brazil or Argentina in 2023, who do you see?
Keith Weiner:
I’m certainly no expert in South American economies, although I do have some relatives in Argentina. And the only thing I could say is Argentina has such an incredible basket case. They have capital controls right now. I mean, it’s such a mess. And I’m not sure I see that really improving. So for that reason, I’d have to say Brazil.
BVN:
Okay, we’re going to start with the Bricks countries. You’re going to take them all against each other. You’ve got Brazil, Russia, India, China, and South Africa. Tovey, who do you think currency performs best in 2023, barring any gold backed Rix currency in August 22nd? Who do you think of the bricks does the best in 2023?
Tavi Costa:
Brazil. And I think that for FX trade, I actually think Brazil, relative to the Chinese one, looks really attractive as a trade. I think it’s a 3 to 5 year development I think could work very well, meaning I think the Brazilian currency can strongly outperform the Chinese currency over time.
BVN:
Keith, your way, which of the bricks currencies do you think performs best in 2023? I know it’s a relative game, but we want to hear who do you got?
Keith Weiner:
If we look at all of those and including South Africa as the ass and bricks, which I guess is the current a la mode, South Africa looks like it’s on the precipice of collapse. So that’s really bad. Russia, I can’t imagine anybody bullish right now. No matter how the war goes, that’s a mess. I’ve been saying for a long time, anybody with any degree of wealth in China is desperately seeking to dump their US and buy dollars and risking their lives to do so. It’s illegal and they do it anyway. So India is another perpetual basket case that always has so much potential. There’s a lot of really smart people there. But the systems institutions, the law, the government is such a mess that I would, by default, say Brazil has the greatest potential.
BVN:
Okay, that ends our lightning round. Tavi, I want to ask you two quick questions. First, what is the question I should be asking all future guests of the Gold Exchange podcast?
Tavi Costa:
That’s a tough question. That’s a very good question, by the way, from you. I think it would see my mind a lot that I would press people on that because I feel like narratives change and just because short term data will manipulate your views a lot of times. It was easy to be in inflation camp a year ago, and I think right now, very few people will stick with their views and say, Yeah, I still think this is an inflationary regime. And I think that’s a very important question because if we are or not in a structural inflationary environment because it changes the correlations across assets and it will create different opportunities. And so depending on how someone answers that question, I think, and and the level of depth on answering that particular question. I think you would be able to get a lot of insights on what could potentially be ahead. Now, my answer would be yes, we’re in an inflationary environment. I’m sticking with it. I’ve even tweeted before and said, look, very likely we’re going to go through waves. Now, the guy who put the waves chart, the first and second and third wave of the 70s and looked in the 40s as well.
Tavi Costa:
And my opinion, this is very entrenched in the global economy. So I would think this is not going to go away. The underlying issues have not been resolved, whatever, if it’s inequality or the chronic on the investments in natural resource companies, the reckless amount of physical spending, and also the de globalization trends, to me, that’s really what’s going to continue to drive inflation higher over time, or at least historically higher. And that will affect cost of capital, will affect other things like the treasury market differently, and the correlation between a lot of assets and create opportunities, maybe in emerging markets or commodities and other things. And so to me, that is the most important question out there. Some people answer it with AI saying now I’ve changed my opinion. Ai has drastically changed the outcome of inflation and so forth. I think it could be, but I still think that the other underlying issues are perhaps a lot more relevant than this very early stage technology that is still to prove itself over time. And I think it will. But yeah, that would be my question.
BVN:
Tavi, where can people find more of your work? If they want to see more about Crescat Capital, where can they find you and the company?
Tavi Costa:
They can find me on Twitter @Tavi Costa, and they can find the website of the company at crescat.net is our website. We have a lot of letters and research there where you can find anything about our investment strategies and so forth.
BVN:
Tavi, thank you so much for joining us on the Gold Exchange podcast.
Tavi Costa:
Thanks for having me.
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