The Breakdown - ‘As Toppy as It Gets’: Metals, Bitcoin and Fiat’s Race to the Bottom, Feat. Tavi Costa

Episode Date: September 12, 2020

Tavi Costa is a portfolio manager at Crescat Capital. In this conversation with NLW, he discusses: The credit exhaustion moment in the engines of global growth The race to the bottom for fiat currencies The explosive moment for precious metals  Where bitcoin might fit in this larger framework  Find our guest online: Twitter: @TaviCosta Instagram: @TaviCostaMacro Website: https://www.crescat.net

I think that the Federal Reserve right now is painted into a corner in which it has to continue to buy assets to prop up equity markets. It almost has two new mandates to keep valuations of equity markets afloat. And at the same time, suppress interest rates to continue to allow companies to borrow at cheap prices and the government to also borrow at cheap prices. It's a dynamic that we're seeing in which is an explosive mix for precious metals in general. It's a supercharged environment for precious matters in my view, any alternative for the monetary system, which Bitcoin would be part of that too. Welcome back to The Breakdown with me, NLW.

It's a daily podcast on macro, Bitcoin, and the big picture power shifts remaking our world. The breakdown is sponsored by Crypto.com, BitStamp, and Nexo.io, and produced and distributed by CoinDes. What's going on, guys? It is Friday, September 11th, and today I'm really... excited to share a conversation with Tavi Costa. You may know Tavi from his Twitter where he's absolutely prolific, or even from his Instagram, where he is valiantly trying to make Instagram macro a thing. He is a super sharp, high-level market observer. He's a portfolio manager at Crescat Capital,

and in this conversation, we discuss the credit exhaustion moment in the engines of global growth, the race to the bottom for fiat currencies, the explosive moment for precious metals, and of course, I ask him his thoughts about Bitcoin. There's no brief today, just this great interview, so I hope you enjoy it. All right, we are back with Tavi Costa. Tavi, thanks so much for joining today. Thanks for having me. Look forward to this conversation. Awesome. So let's start, I guess, just for people who aren't familiar with you, quick personal background and where you find yourself in the macro world today? Sure thing.

So I am actually in Denver, Colorado. I was born and raised in Brazil. I moved to the U.S. maybe 10 years or so ago to play tennis in college, finish up colleges start working at Kreske Capital. It's a global macro hedge fund. I started actually as an intern back then and kind of build up my way into a portfolio manager position.

I started from more covering emerging markets and then global macro and then graduated to more, the portfolio side of things, along with Kevin Smith, a co-portfolio manager with me, and then became a partner as well. We here at Crescott have five strategies, a global macro, long short, a large cap, and then we have two other projects or strategies focused only on precious metals. One is a hedge fund, another one of the separate manager account, and that kind of gives you an idea of our views. that's super helpful right it's a that's a good a good setup for uh checking out what people are doing

and actually spending their money on rather than just what they're saying but uh we're going to get a lot into to what you guys think today i think for sure um so let's what i want to do is you guys have a great uh recently published piece uh titled a new bull mac market for precious metals and i want to come to that but i want to kind of back into it almost by by zooming back to 2019. You know, for folks who are in the crypto or Bitcoin space, you were on POMS podcast then. You did a number of different shows. So, you know, people might be familiar with your take then. But it wasn't like you guys were really confident around the larger macro backdrop going into 2020. So maybe let's go back to 2019. And, you know, even before COVID-19, what was giving you pause in the larger

global economic environment? Sure. I think one of the biggest things, that gave us a high conviction of this whole idea, especially of buying gold and selling stocks, which we became a big proponents of that idea. It was the yield curving version issue. We've did a lot of comprehensive research on that. What we found out is that when you look at instead of one or two or three spreads in the yield curve, we decided to do more of, and look at all of them, all the possible calculations, which are 45 spreads. And the percentage of those that are actually inverted. And back then, what we figured out was that somewhere close to 60% of those spreads are actually inverted. And back then, if you look at doing empirical analysis of what

types of assets that tend to perform well during those periods, number one is that, well, first of all, it's a huge warning signal for recession. It was proven again correct. But the second thing was that gold starts to perform better than stocks during those periods that we have those inversions, especially at times when you have this commodities to equity ratio so out of balance, which in this case, today we have, you know, this ratio somewhere close to a 50-year low. Every time we had a low in the past was also marked by a significant run-up in gold prices and other commodities too, but usually led by the precious metal space. More fundamentally speaking, I think we saw a lot of earnings and corporations here in the U.S.

He's starting to contract already. We had Japan's GDP was already contracting in the fourth quarter. We have the labor market starting to show some issues too, and job openings are beginning to drop on a year-over-year basis. We have some unemployment rates beginning to rise. I love looking at the delta, in other words, the change in unemployment rates, because I think it's a very good, actually, coincidental. then indicator that you can use. And what you find there is that a lot of the, if you're divided

by states, there was a lot of states that were already rising in those metrics. And so if we had, you know, earnings beginning to fall in which would at some point start having an impact on labor markets, labor markets are perhaps close to a peak level at the time and beginning to fall apart. And those are all, you know, very important macro signals. Now, the other thing that was very important, was consumer confidence was at all-time highs back then. And those are all very important contrary indicators of what was happening back then. At the same time as we have valuations getting, you know, larger and larger, nowadays, even larger, given the monetary policy response we had since the COVID.

And so that's kind of how we began to really dive into this precious metals part of the trade, which was, you know, this whole idea of the yield curving version led us to look at, the gold to S&P 500 ratio. And a lot of people, when they think about gold, they think it's only gold. And it's not. I mean, we're looking at the most asymmetric bats you can get into gold. And most asymmetric bets you can get into shorting stocks and most overvalue stocks you can find rather than just buying gold and shorting the S&P.

So I think that that's kind of how we develop our thoughts about the markets and where we are today. Super interesting. So I want to go back to a couple things. It was funny, actually. When I was thinking about questions to ask you, part of the challenge right now is it's like that question that I asked, right? What was giving you pause? It's almost easier to ask what wasn't giving you pause.

What isn't a cause for concern right now in so many ways? But I want to hone in on that, the contrarian indicator of consumer confidence. Just for people who might not be familiar with why that might be a negative signal, what is the, what is sort of the history of that as an indicator for you? I think there's so many things. Number one, it's the same idea with peak earnings as well. We had a, you know, margins are at their highest levels. And usually you hear a lot of bowls or optimistic views in the markets of, you know, margins are great right now. But when, when, and that's the point. I mean, you can't have another positive surprise to really continue to lead to higher

higher prices for assets in general. And it's the same idea with consumer confidence. If you chart consumer confidence with S&P 500, you can see very clearly that when consumer confidence is at a peak, usually you're at the peak of the market too. Nowadays, actually, consumer confidence is absurdly low. And again, those are all, you know, that's what I think it's important to look at an aggregate

of a lot of macro indicators to have an opinion. I've never seen, for instance, a bull market at its very early stages for equity markets with record valuations. I think today is the first time we have such a depressed fundamental story for equities at the same time as equity prices are all-time highs. And I understand a lot of people talk about, you know, the equity markets is discounting mechanism of future cash flows and so forth. But even if you look at throughout history, we never seen such a divergence in disconnect. between fundamentals and prices. So I think it's pretty unique where we're going through, and it's certainly product of free money

and the policies we've seen in the fiscal and the monetary side. But I think that that would be the answer, is that consumer confidence, when everything is great, it's just like labor markets as well. Labor markets, consumer confidence and margins are great contrarian indicators that you can see throughout history that actually are great ways to find turning points in the economy. It's, you know, things can't get much better than what they are.

And that's why it's about time for us to see a downturn in the cycle. And that's pretty usual, actually, throughout history. So one of the things that you just mentioned is this gulf between fundamentals and prices. But there's another gulf almost between almost narrative expectation around markets, but willingness to play the game. And I wonder how much you think what part of what we're seeing, right, now are folks who maybe share a kind of similar medium and long-term outlook as you do or, you know, as skeptics do, but who also feel like they have to participate in the bubble for as long as it

lasts, right? There are a lot of folks who feel like they heightened their career risk in April and May by being too bearish as people piled back in, even though it seemed insane. Do you think that that's a factor right now? Yes, I mean, you know, we were also very bearish still at the March Lowe's, by the way. And even though we cover a lot of our shorts and we were short the entire year, we've been short the entire year. And our precious metals side of things worked out very well. But this by the dip mentality is still, you know, very strong in a narrative that had work incredibly well throughout the years. And I feel like, you know, what we didn't have so far was the retail investors,

becoming more or participating more in this market. We didn't have much of that five years ago, and certainly we're seeing that today. Again, I think that's all linked to the policies we've seen so far. You know, the amount of people that are unemployed, but making more money than they used to when they were employed is astonishing and certainly having an impact in equity markets. Sure, retail investors don't move the market the same way the institutions,

but certainly there is an euphoric narrative being in the markets in general. I think what a lot of people are missing in my view is more of the structural problems in the economy related to the debt problems that we have in corporations and the government as well. I think there's no way out of this aside from inflation. And the real question is when are we going to see that kind of response or consequences from the policies we've seen so far. I think that the Federal Reserve right now is, is, is, is, is, is, is, is, is, is, into a corner in which it has to be continue to buy assets to prop up equity markets. It almost has two new mandates is to keep, you know, valuations of equity markets afloat.

And at the same time, suppress interest rates to continue to, you know, to allow companies to borrow at cheap prices and the government to also borrow at cheap prices. And so I think this is all happening at the same, which I call this a, it's a, it's a, dynamic that we're seeing in which is an explosive mix for precious metals in general. It's a supercharged environment for precious metals in my view. And any monetary alternative for the monetary system, which Bitcoin would be part of that too. I hope I answer your question. But I think this is a little bit of how the macro scenario is playing out today in my view.

Yeah, so it's interesting. So I want to maybe let's go into this new bull market for, precious metals thesis, give you a chance to actually articulate it in full. But I want to highlight that. You had a great line in that, which you just echoed, which was financial markets simply cannot withstand higher interest rates. We believe the Fed has been forced into a new mandate to suppress yields at all cost. And I think that idea of forced into a new mandate is really resonant. But maybe you could just kind of share the overarching thesis of this piece. Absolutely. It's funny to look back in history of central banks and how their mandate was always to, you know, inflation was always a huge part of their mandate.

And what is interesting is that, you know, interest rates in general were actually set according to how scarce in general was the amount of gold. And if that was the case today, we would see gold, you know, interest rates at much higher, much higher level. levels. I think that what is what is happening with this new bull market for precious metals is certainly the supercharge environment is what leads to everything. It's, it's this expansion of the monetary base from the Federal Reserve in order to buy assets in general, especially government bonds in which, you know, we would expect that to suppress long-term rates at the same time as you expend monetary base. And that creates an explosive environment for precious metals in general, at the same time as you have precious metals as an asset class, you know, being out of

favor for so long, you know, in decades in the 70s and 80s, you know, precious metals was a huge part of portfolio construction and nowadays is all about risk parity. And I think that that's about a change. There's, you know, there are other situations in which how do you look and how do you value precious metals in general to really come up with the thesis that were early in the early stages of the bull market. Well, I think that the best ways to look at the alternative. alternatives of assets, and one of them would be equities. And when you look at equity earnings and the real terms, in other words, subtracting by inflation rates today, there's many ways to look at inflation rates by 10-year break-even, which is

inflation expectation. You can look at CPI. You can look at median CPI. There's plenty of ways you can see that we're at decade lows in terms of real earnings yield for equities today. And every time we reach those levels in the past of, you know, extreme lows, gold actually outperform equity. So that's number one. Corporate bonds are also, you know, if you look in real terms as well,

I just put out a chart on Twitter on that. It's very interesting. It's an unprecedented lows today in terms of real terms. It's at a negative level. And it's insane. Conceptually, people are giving money to corporations at record low yields or less in inflation rate for companies that are absurdly leveraged today in historical levels. So that part makes no sense. And the only reason, the reason why we're seeing this is because of manipulation of governments in general. Well, the government on its own, it's absurdly leveraged and at the same time is being able to borrow money at record low cost of capital. So I think this is all coming along at the same time as you have this lows in commodities

to equity ratio, which was a huge reason why we haven't seen inflation in my opinion. It's a major reason. The last decade or so, we had oil, iron ore, copper. Everything was down essentially throughout the whole decade. And that certainly has an impact on product and service costs in general. I think I highly doubt that the next decade, the next 10 years will look the same way. I don't know when it's going to happen, but I think hard assets are going to start outperforming. And that's going to create an inflationary environment and give it on the reason for people to look for any investment that serves

as an alternative of the monetary system. But the other part that I think is huge is on the whole supply and demand function of precious metals. When you look at gold today, there is a lack of investments on exploration. And also, we haven't seen almost no discoveries in the last decade or so of gold and silver. And this sets up a very bullish scenario. You look at the capital spending of the whole mining industry. it's the first time in history that capax and aggregate has been diverging from metal prices.

If you look through all history, when metal prices rise, miners tend to get very optimistic, so they spend more money. And that's not the case today because we went through a 10-year bear market for precious metals, stocks in general. And what's happening is that a lot of them actually had to become a lot more conservative. So we've seen clean balance sheets across a lot of the miners. We're seeing no equity dilution, as we've seen. seen in the past. And those, you know, that the whole industry has a very bad reputation of being

capital destroyers. I think that that's, you know, unfortunately, a lot of people were seeing that and not, not seeing an opportunity in the following months or in years for this whole industry. And I think that this is changing. I think actually that industry looks a lot cleaner in terms of balance sheet and a lot stronger than a lot of other industries and sectors in this, in the whole economy. I think there's a big chance this might be the new, growth stock environment is going to be in the mining space in general because there's no fundamental growth in any other sector of the economy. But that, you know, this would be probably the premise of a lot of reviews aside from what's happening in the government with a part of

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grow their digital assets. Others seek to maximize the yield on their cash. Nexo allows you to achieve exactly these two goals. The company offers instant crypto credit lines against all major cryptocurrencies, with interest rates starting from only 5.9% APR. Nexo also lets you earn up to 10% annually on your fiat and digital assets. What's more, interest is paid out daily and you can add or withdraw funds at any time. Get started at nexo.io. I want to kind of highlight a point that you made because I think it's really important. Most people who are just kind of passive observers of this tend to lump precious metals in simply the safe haven bucket, right? And part of your argument that I think is really important is that there is a narrative shift happening where people aren't just looking

to that sector as a safe haven, but as a new sort of source of growth and value. And part of that has to do with the comparative underinvestment in kind of the industries that surround it, right? Yes, absolutely. I think a lot of investors that have been looking at the traditional tech stocks as a growth environment, which certainly, you know, there's a lot of software companies that have been growing at very attractive levels and rates that we haven't seen in other industries. The problem is those multiples that they've been.

put on in pricing the markets are absurd. Some of those trading at 50 times what they are projected to make in sales in 2021, 2022. And, you know, and makes no sense. Why are you paying, you know, for a minor today, a junior producer? You're probably paying five, you know, five times free cash flow for that same business. And I think that that's, you know, that's probably the value proposition of minors. A lot of people unfortunately see gold and precious metals as more of a defensive part of your bucket of your portfolio.

I can see gold being that, but certainly silver and precious metal stocks are not so much your defensive stock at all. I think that those are where you're going to be looking for growth in the next five years or so. I think exploration businesses are interesting. I think junior producers are interesting. Senior producers look interesting. All of those are growing. It's the only interest that I know of that it's the only interest that I know of that it's, is showing free cash flow growth of over 100 plus percent this last quarter.

We didn't see that even on NASDAQ. NASDAQ actually earnings are declining. And so I think the opportunity here for investors in general, one thing I was talking to, Kevin, my partner, that I think is a huge deal is this narrative shift that we're probably about to see, which has to do a lot with the cost of capital. In the last 10 years, I think there's a lot of factors that, worked that were not related to profitability. And that's because of how low interest rates were and how free money in general allowed a lot of companies that haven't made any money to survive in this

environment for so many years, reporting negative free cash flow quarterly. You know, Netflix would be a huge one, Uber and Lyft and so forth. Now, I think the next 10 years, if we do have cost of capital rising at some point, I think profitability is going to start to matter. And I think that's where a lot of those mining companies will start to shine here in terms of, literally, to shine in terms of, not just fundamentally, but with their margins improving significantly, with metal prices increasing, and a lot of those companies actually have operations outside of the US with the depreciation of currencies overall across the globe with this, you know, a race to the bottom of fewer currencies that should help their costs to be reduced as well at the same time. It's almost like two forces

improving their size. The costs are being reduced and the products that they're selling are also improving in prices. So their margins are likely to expand going forward. And I think we're at the beginning of a bubble for precious metal socks. And I see no problems investing at the early stages of a bubble. But I think this is going to go crazy for the next few years. And, you know, silver and gold, especially silver is probably the cheapest metal on earth today. And I think that's still the case right now, especially relative to money supply. So there you have it. I couldn't be more bullish in the space. So is this the actual significance of Buffett's bet? Because when that first happened, people were like, oh, he's finally into gold. But then the counterpoint or just maybe the one layer

deeper point was like, look, this is about cash flow. Buffett likes looking for cash flow. And that's the thing that you're missing here. Do you think that's the real significance there? Sure. I think I certainly do. I think, you know, for a lot of them, minors, especially the senior producers that already have consistently proven production for so many years, those don't even need gold prices to rise much further. Right now, those guys are extremely profitable, and especially because they went through a period when, you know, they had to be reducing costs. And so their margins are at this levels are supposed to be expanding significantly. And believe it or not, this last quarter, even though metal prices have increased

significantly too, we didn't see much equity dilution. And we actually saw companies paying down their debt. So we're seeing improvements in almost all fronts of miners. And that's kind of what you see at the early stages of a bull market for this industry. It's certainly symbolic what Buffett did in a very interesting way. And I think there's a lot, you know, certainly leads to a lot of other value investors that, you know, the whole approach of value investing has been so much out of favor, especially for the issue of profitability not mattering in the last decade or so. But there's, you know, some other investors that I think are starting to come along in the last few years. You know, Ray Dalio talking a lot about gold, especially and some other, you know, Dr. Miller or Paul

Tudor Jones and so forth. I think a lot of investors that see this macro picture know that there's really no way around this besides inflation. And inflation doesn't necessarily mean rising consumer prices, but a lot of times it means, you know, debasing your currency. So I don't know another way around this, but I think the Federal Reserve has to continue to print money to fund fiscal stimulus. I don't see the situation improving anytime soon. And the big risk for all this, there's always a risk, is if we are in the early stages of a bull market for equity markets in general and also So for the beginning of an economic cycle here, which I don't think we're going to see organic economic growth in the next few months, given the levels of debt that we have reached, especially after the pandemic. And so, you know, it's very difficult to say.

I think we've reached a credit exhaustion moment here, globally speaking, especially at the agents of the world in terms of global growth. China, U.S., Europe, Japan, Australia, Canada, all those are highly indebted. And the emerging markets obviously don't have, you know, can't really handle anything in terms of growth globally. So I think that those economies have reached levels, absurd levels of that. And it's going to be very difficult to see organic economic growth to really disrupt this bull market for gold, silver, precious metals in general. So let's talk a little bit about silver because like I said, I think even folks who kind of passively fall. gold might not have a sense of where silver fits into this whole picture. You called it the most undervalued precious metal in the world. Could you expand on that just a little? Yes, I think silver

has so many attributes to why it's cheap today. You can look at first relative to money supply, and that's one way to sort of price silver. And you can see silver relative to end to money supply today is a near record lows. When you look at that versus, let's say, say, equities, S&P 500 versus M2 money supply, you see quite the opposite. You see a peak that is actually retesting the tech bubble levels. Now, you can also see another way. If you look at silver relative to Russell 3000 is also at a double bottom today in which it also reached the same level back in the tech bubble situation.

There's a lot of similarities in terms of valuations of the tech sector relative to the tech bubble. Another situation that is important point out is the gold to silver ratio. During 2011, at the peak of the 2011, we got close to 31 at that ratio. We are so far from that right now. And I think there's significant growth for silver relative to gold as well, which I think could be huge. And, you know, when you look at this parabolic move that we have started to see recently on

silver. When you look back in the late 2008, when we had the Federal Reserve printing somewhere close to one or close to $1.2 trillion in four months, silver went parabolic for the next two years or so. And, you know, I think I think there's a huge probability that that could happen again. The difference is that, you know, we're today in terms of gold to silver ratio and much, much lower levels or higher levels, I should say. And so the opportunity I had for silver, it's much more depressed and used to be in OA, number one. And number two, we have so much more money in the system relative to what we had back in OA as well. So, and again, it goes back to the valuations of equities in which, you know, the lack of opportunity of assets that can provide growth in an

environment where we have, you know, negative interest rates across the globe, over $15 trillion of government, a sovereign debt, trading a negative with negative interest rates, you know, that makes investors look for appreciation of prices, investing for appreciation of price versus interest rates in general. So I think that, you know, gold and silver will begin to really become part of especially large allocators, such a pension funds and so forth that have not really invested in places like that. And, you know, silver miners, you know, just silver miners have, you know, they're gone. A lot of those guys used to have their names, you know, silver, to be all over company names, and they all had to change their names to, you know, precious metals,

focus rather than silver. First of all, it's very difficult to find, you know, a very pure silver producer across the globe today. A lot of that is through byproduct, and a lot of those that actually came from copper mines that have closed down recently. And silver does have this more industrial aspect to it. And the whole reason why is more industrialized. It's because of the price. If the price of silver goes up to $50 and now, you can be sure that that's not going to be as cyclical as it had been in the past. It's going to become more, it's going to bring more of its monetary system aspect to it

versus its industrial side of things. And it will become more of a safe haven't as gold has become throughout the years. And it's important to remember, silver was a huge part of the monetary system centuries and centuries ago, especially during the early stages of global. globalization in the beginning of the history of economics in general. You know, silver coins were the whole reason why we saw the first moments of globalization in the world where the Western world used to sell goods and services to the eastern world in Europe especially.

And, you know, silver coins are the whole reason why we're capable of doing that. And so I think this could all come back. I'm not saying we're going to be using silver coins. to exchange goods and services, but certainly silver has a credibility, much higher credibility than other goods that nowadays have been used as part of the monetary system or alternatives for that. And, you know, I think that that's, you know, in my view, it is the cheapest medal in the world today, and I think it's a huge opportunity. It's interesting.

In 1896, there was a hugely famous presidential campaign in the U.S. between McKinley, who's the Republican who eventually won, and William Jennings-Bryan, who got famous for a speech that's called the Cross of Gold speech. And basically, back then, the populists were arguing that the gold standard, that kind of de facto gold standard because it wasn't an official gold standard that was in use in the United States, which was largely in use to trade with Britain and the UK, was negatively impacting people on the ground, right? the poorest people because they couldn't get enough of the currency.

And silver was part of the answer. It was this whole campaign. The entire central issue of the campaign was bimetallism, which is so fascinating to think about how much monetary policy impacts elections now or doesn't really impact elections now, but it's never far away from the surface. Anyways, I was just, I was rereading it the other day, and, you know, your comments on silver made me think of it. Yes, I mean, you know, this whole thing with credit in the economy, is something very recent of the last few decades or so, you know, looking back in history,

it's certainly a lot of value for assets in general, especially equity markets. I mean, there are so many reasons why we've had, you know, a long bull market for equities. And I don't think that's going to be the end of investing in equities in general. I just think there is a natural business cycle in which, given the amount of imbalances that we have in the system today, you know, precious metals are becoming more and more attractive relative to equities. And so it's the whole idea of buy gold and sell stocks, but it's a lot deeper than that. I just say that just because it's simple and it's easy to understand. But, you know, certainly there's so many ways you can expose yourself to that theme, that whole idea.

It's a very interesting investment thesis for us. And I think, honestly, I think it's probably one of the best investment ideas I've had in the last few years. and I think it'll probably play out in the next two to three years. That's the whole goal. Yeah, it's interesting. Do you think, I know this isn't kind of at the core of your investment thesis, but do you think that this narrative shift from looking at things as safe havens to also getting growth in a world where it's seeming harder to get growth elsewhere

has the potential to impact interest in Bitcoin? Oh, yes. I think Bitcoin is very similar to the mining space in a lot of ways, given the size of the whole industry and the size of Bitcoin itself, market cap, is just so small relative to other alternatives of the monetary system. If I believe gold could be value at much higher valuations, let's just say take it at 20 trillion or so, I mean, Bitcoin could be worth much more. It's fascinating to me that, for instance, when you look at Apple's market cap is about

three and a half times the size of the whole precious metals industry, that's no different than Bitcoin. And you know, you don't need a lot of inflows in terms of capital to move the needle here in terms of opportunity. The problem is a lot of people see this as as an opportunity, certainly, but end up putting their entire capital into this idea. And it certainly has a huge potential, but it's very volatile, just like miners. And so I think every investor has to size it appropriately. And we do as well. And miners, you know, can't go down significantly during the March lows there. I remember some of the miners are down 70% you know in in a month. Sure it was a very

unprecedented type of drop in equity markets and financial markets overall but and it could have happened again. But you know, I think I think that that is a very interesting opportunity for for investors in general. Why would you ever, you know, I'm not, and this is not a bash Apple by no means. I really think Apple is actually one of the best companies that we're seeing out there in terms of free cash flow yield and the multiples that we're seen, even though it hasn't really grown its bottom line as other companies have. But, you know,

the whole point here is, you know, I just believe that the potential, the asymmetry for those trades of Bitcoin and especially precious metals miners in general is very, very interesting. The one great thing about miners is the history that you can get data, you know, for decades and decades ago. And you kind of know how that actually works out in the past. I mean, during the periods of confiscation of gold back in the Great Depression or so, now, how did gold perform as silver? Well, a lot of people started to buy silver at those times

and also begin to buy miners. Miners actually disconnected from the equity markets back then, which is very interesting. It's a thesis that no one believes today. Everyone thinks that if the equity markets falls apart, miners will fall apart along with it. Sure, it's very possible. But there is a huge opportunity here that this disconnect could happen again.

And I'm not calling for a conversation of gold again. I'm just saying, you know, as investors begin to really realize the asymmetry to the trade and the opportunity of fundamental growth going forward, I think the mining industry, you know, could certainly, and Bitcoin could certainly disconnect from equity markets in a huge way. And I, you know, I don't know if it's going to be a lost decade for equities. want to be coined saying anything like that because who knows? You know, we could be, you know, who knows if we're going to have a hyperinflation environment? I don't know how the Federal Reserve is going to continue to react in the following years. It's been pretty extreme we've seen so far,

which with companies already outperforming hyperinflated Venezuela in stocks, which is crazy. Tasla just did that in the last year. And, you know, that could certainly happen. I don't know, but I just see a massive opportunity ahead of us in this whole space. And I think investors still are not giving a full look at this industry. And I think Bitcoin could certainly be impacted in a positive way as well here. So let's bring this up to today and maybe close on kind of what you're focused on now. On September 3rd, you wrote, as topy as it. gets. Financial conditions are flashing warning signals for stocks. And of course, we saw, you know,

a pretty significant move down the end of last week, the beginning of this week. And we've kind of leveled out now. But, you know, besides just the current state of the stock market, what are the signals are you watching? How much are you paying attention to things like the ECB presser today? I mean, what, you know, maybe what are some of the lesser observed signals that you think are really important to be paying attention to as we go forward? That's a really good question. I think the ECB, I was just listening to the whole, to the whole speech. And my biggest takeaway is that clearly countries in general cannot afford their currencies to be too strong. And that proves the point that we're in the race to the bottom for fee of currencies in general.

And it proves the point again. It's not about so much about, you know, the dollar declining. It's about every single currency in the world today looks fundamentally weaker. than gold. And it's important to look at gold because gold is the big giant that moves all their markets linked to gold. And Bitcoin could be certainly linked to that as well, along with, you know, silver and precious metal stocks in general. I think you asked me what I'm looking at. I think there's a unfortunate a lot of investors are looking at one side of things in seeing a huge amount of liquidity from the Federal Reserve by, you know, QE. First of all, the balance sheet increase that we've

seen so far as being astronomic. It's being something nobody has really foreseen in the speed and the size of the money printing that we've seen so far. I think it surprised everyone. I mean, I was expecting some sort of increase, but not the same level we saw in such a short period of time. And so, but what is important here is the amount of treasurer issuance that is sucking all this liquidity out of the market. And a lot of investors are not seeing that. I was just looking at about 70% of the last Treasury issuances that funded all this amount of debt that we increased since the pandemic in the last 12 months. Actually, 70% of that debt that they issued is going to mature in the next 12 months. There's about $5 trillion today of bills outstanding.

Bills for anybody who doesn't know are treasuries that actually will expire in the short term. And if you look at the other tenors across the Treasury market, about $8.5 trillion. will be maturing by the end of 2021. And so, you know, this debt, the government is not in a position where it can pay off its debt. So this debt is probably going to have to be rolled. And as it gets rolled, and I'm not saying there's not a strong demand for treasuries. There's certainly demand for that today. But more and more, the Federal Reserve is going to have to participate on those insuances,

as we've seen so far, and fund this fiscal stimulus. And so the monetary stimulus have been sucked into this. this funding dynamic with the with the with the governments. And I think this is happening worldwide, certainly more in the U.S. given its status as a reserve currency, allows them to do a little more. But, you know, I think I think this is this is going to be an issue in the following in the following years. And if the Federal Reserve is going to participate in a bigger way into this, I think, you know, the size of the balance sheet is going to be even a lot bigger in the following years. And that's just considering that, you know, the deficit situation doesn't get any worse than it is right now, which I'm not sure if I agree with that assumption. And I'm not sure if I don't agree that the debt situation also won't get a lot worse going forward.

In the last month, for instance, the debt amount that increased in the federal debt increased by about $200 billion in one single month. I mean, these are just huge numbers. And, you know, when you look at the amount of people taking unemployment claims today, the insurance claims, it's about 29 million. That number just went up again today, about, you know, 400,000 people or so. 29 million people out of a 200 million labor force. I mean, it's pretty significant. And, you know, those levels kind of tell you that maybe, even if it goes back to 20 million, as well above what it was back in 2008 after the global financial crisis.

So that tells you that deficits and extreme deficits are here to stay here for longer. Free money is probably here to stay for a little longer until we see the eyes of inflation. When we do, that's going to limit everything else. And I think equities are going to have a very hard time when we see that. Well, Avi, this is awesome stuff. I really appreciate you spending some time today to talk through this all. For people who want to follow along with your ideas and thoughts, where can they find you? So I'm pretty active on Twitter at Tavi Costa.

I'm actually having an account on Instagram now. It's at Tavi Costa Macro. And I also post stuff on LinkedIn as well. And I suggest everyone to look at our website at cressket.net. It's where we post most of our letters and more in-depth research. But thanks again for having me. I really enjoy this conversation. Yeah, thanks for joining.

And we will talk to you more soon. Reflecting on that conversation, there are two things that I keep coming back to. The first is this idea that there is a shift in the narrative for precious metals. Instead of being just pure play safe havens, people are now thinking about them as something closer to growth and value opportunities. I think this is a really interesting observation. In a no-yield world, people want things with cash flow, right? potentially these domains like precious metals that are historically safe, but opportunities within

them like miners which have cash flow and clean balance sheets could be really strong investments. I think this same narrative idea of looking for safe haven areas that have growth and upside potential could provide a tailwind for things like Bitcoin as well. Now the second thing I keep thinking about is Tavi's idea about the comparative exposure of different assets. The example that he used was Apple's market cap being 3.5 times all of precious metals. Meanwhile, it's almost exactly 10 times that of Bitcoin. It doesn't take much capital to flow from a big overcrowded trade like that into something like Bitcoin for it to make huge moves. Anyways, guys, I hope you enjoyed that conversation with Tavi. I will put his links in the

show notes, and as always, I appreciate you listening. Until tomorrow, be safe and take care of each other. Peace.