Ask The Expert - Tavi Costa - March 2021
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Tavi Costa is a partner and portfolio manager at Crescat Capital and has been with the firm since 2013. He built Crescat’s macro model that identifies the current stage of the U.S. economic cycle through a combination of sixteen factors. His research has been featured in financial publications such as Bloomberg, The Wall Street Journal, CCN, Financial Post, The Globe and Mail, Real Vision, and Reuters. Tavi is a native of São Paulo, Brazil and is fluent in Portuguese, Spanish, and English. Before joining Crescat, he worked with the underwriting of financial products and in international business at Braservice, a large logistics company in Brazil. Tavi graduated cum laude from Lindenwood University in St. Louis with a B.A. degree in Business Administration with an emphasis in finance and a minor in Spanish. Tavi played NCAA Division 1 tennis for Liberty University.
In this edition of Ask The Expert, Tavi answers seven of your listener-submitted questions, including:
- What’s pending: Inflation or deflation?
- When will institutional money flow into the mining sector again?
- Plus: How to forecast a bull market in commodities?
For the answers to these questions and more, listen here:
Man: You're listening to "Ask The Expert" on "Sprott Money News."
Craig: Welcome back to the "Sprott Money News, Ask The Expert" segment for March 2021. I'm your host, Craig Hemke, and joining us this month is a brand new guest for the "Ask The Expert" series. His name is Tavi Costa. You may follow Tavi on Twitter. You may have seen him in financial media, and it's great to welcome him. He's a partner and portfolio manager at Crescat Capital in Denver. He built Crescat's macro model that identifies the current stage of U.S. economic cycle through a combination of 16 factors. He's been featured in all sorts of financial publications, like "Bloomberg," "The Wall Street Journal," "Financial Post," "Reuters." He's been on "Real Vision." And it's been a pleasure for me to get to know him over the past few months because he knows his stuff. Tavi, thank you so much for joining me at Sprott, "Ask The Expert."
Tavi: Hi, Craig. Thanks for having me. Looking forward to this.
Craig: I am too. And if anybody that's not familiar with this format, we do this once a month. We bring in an expert, we collect questions from Sprott Money customers and anybody that emails them to us at the email address submissions at sprottmoney.com, and then I lay them on the guest. If you enjoy these segments, if you enjoy the weekly wrap-up segments, please be sure to like, share, even subscribe to the channel you're listening to. And one more thing, as Tavi and I record this here on St. Patrick's Day, there's just a couple of days left in the Sprott signature sale. We've got over 15 gold, silver, and platinum products at special prices through March 20th.
You can check out all of our products at sprottmoney.com. But if you want to pick up the phone and talk to a real person, that's just (888) 861-0775. All right, Tavi, it's time to get at it. Like I said, I got seven questions for you. If you're ready, I'll hit you with question number one.
Tavi: Let's do it. I'm ready.
Craig: On that Twitter account, and I might have you hit everybody with your Twitter email address as we get started. On your Twitter account, I noticed lots of great information. And one of the debates that is often found on Twitter is whether we have inflation coming over the horizon or deflation coming over the horizon. Where do you stand on that argument?
Tavi: I'm much more to the inflation side of things. And I do believe that we have today two divergent school of thoughts that I think that have never been so prevalent in the markets today. One is calling for this sort of historic reflationary setup. They like to say the Roaring '20s. And the other one really is that worries more about the greater liquidity crisis that we may face. And both narratives have valid points but flaws of their own. But we find ourselves sort of in-between more to the left, more thinking on an inflationary one.
So I think that the bullish one who fails to understand is that we are not at the bottom of the business cycle in our view at least. And, you know, the population is receiving the largest transfer of wealth from the government. And so it really what's going on is we're removing...the population in the U.S. is going through a deleveraging process. But it's not fixing the problem, it's only transferring the problem from the people, from households to the government, in general. And so, you know, I think the stage here is, you know, for what we saw, you know, long years of economic prosperity, you know, in the '20s or so, first we saw a financial reset. And I think that's what we're going through here.
You know, in the deflationary side of things, you know, you have those who remain really worried about the output gap becoming a bigger and bigger problem. The deflationary risk of a bust or anything of the sort, it really is if you believe that policymakers will undershoot their stimulus package, I think it's quite the opposite. I think they're going to overshoot. In fact, that's exactly what Janet Yellen has been saying and any other policymaker, such as Jay Powell, not worry about inflation, instead doing quite the opposite. So the difference between what we're seeing, that the combination of fiscal and monetary stimulus versus what we saw, in a way, and even 2000s during those downturns in the economy is very, very different.
And so this pent-up demand, I'm not really buying into that idea either from the Roaring '20s, as I said. I think there is a pent-up demand but there's not what's going to really fix the economy. It's just transferring the problem from households to them, what we're seeing right now in the government side. So deficits are here to stay. Monetary stimulus becoming more and more of a funding tool going forward. And so we believe the inflationary thesis is going to be heating up.
Craig: All right. I think that's a great segue to the second question. We're getting latest round of stimulus checks going out from the U.S. government. We'll see if that's the last one. Probably not, as you said, but as this hit, what do you expect the impact will be on the U.S. economy and the markets?
Tavi: Look, I think it's very inflationary back in '08 when we saw the fiscal stimulus rising significantly. That did not translate into an increase in net worth of especially the bottom 50%, which I think it's what really, really drives inflation at the end of the day. And the reason why we see this in emerging markets being a much bigger problem than in developed economies, unfortunately, given the fact that the bottom 50% is not as financially savvy. And so the bottom 50% in those places is much greater inequality. Issues are much greater than in developed economies. That is not to say we don't have the same issues here in the U.S., Europe, and other places. And so what's happening was that back in '08 we saw a transfer, you know, somewhat of a trial of the transfer of wealth from the government to the people but that didn't really succeed.
And so the net worth of the bottom 50% declined close to 84% back then. And so obviously we saw, you know, those deflationary forces at the time, you know, that the whole money printing situation didn't really lead to the sort of inflation that we expected. Again, comparing to emerging markets type of inflation. We saw prices going up, inflation in asset prices in general. So I think this time around, we're seeing the quite opposite. We saw the largest increase in that worth of the bottom 50%. We've seen in history in the middle of a recession, it looks a lot like depression. And so that adds to the reflationary or, as you say, inflationary part of it.
But the second part that really adds to the table here is the commodity supply constraints that we see, that is very similar to what we saw after the pandemic situation in 1919. And so when you add that to the table, it's hard to see an economy the way we're running things in terms of the politics. We have the politics in place to run helicopter money policies for much longer. And so it's hard to see any type of policy that goes against removing, or it goes forward in removing, trying to remove these stimulus checks that we're seeing. I think it's here to stay for the longer.
What is actually going to translate as we all know, the Federal Reserve cannot continue to be the only buyer of treasuries in the next few months and so. And so what we're going to see probably will be taxes going up significantly from here. And that's what we see usually when we have those large increases of that in the government side. And so now be prepared for that. The taxpayer is the one that's going to pay for this, like it or not. And so, you know, this is just part of the game but, yeah, I think stimulus checks are here to stay for longer. And it's a huge part of this inflationary thesis that we did not see back in '08, by the way.
Craig: All right. Question three is someone who obviously knows your background. And it's a question about the Brazilian economy. What are your current views on the Brazilian economy, the Brazilian real, I think, is the currency, right?
Craig: And the Brazilian mining sector.
Tavi: Those are good questions. Yes. What's going on with Brazil is also on the side of the monetary policy. So Brazil experienced a lot of inflation back in the '90s through a lot of money printing. And so they are trying to shift a little bit and work more towards fiscal stimulus being a much larger part of the stimulative package versus the monetary side of things, even though they're keeping interest rates today below inflation rate in a huge way. So today we have negative real rates in Brazil that are actually worse than what we see in places like Switzerland and in the U.S. and so forth. So I believe that the Brazil real is in big, big trouble.
And so when you asked the question about how do we protect if you are a Brazilian, well, tangible assets is one of the ways you could do. But mining is a great way to be protecting against those things, especially if you find businesses to have their costs and so forth related to the local currency. So we believe the Brazilian real is going to be devaluing significantly relative to the dollar going forward. I can certainly see a handle close to 7 on the dollar relative to Brazilian real, which is today about 5.6, 5.7, depending on the day here.
And so the situation in politics in Brazil has always been a problem. It's always been something a little bit more volatile than other places. It's the nature of any emerging market. I think the real is ripe for some major devaluation going forward. As we've had in the last 10 years, just to put into perspective, the lass 10 years, 8 of the 10, the Brazilian real devalue against the dollar for a full year. And so I believe strongly that, you know, by being long Brazilian real, you're really fighting against history.
And so Brazil is really indebted today in the government side of things. You know, running such extreme monetary policy, I see that as a major problem. From a geological side of things, we see a lot of very interesting trends, and something we have a very high conviction in terms of region and district that we would like to be, in districts that we would like to be exposed to on the mining side. So we have a few names that we own a significant stake in those companies in areas such as the Western parts of Brazil, Northern and Western part of Brazil. We're really bullish in those regions and we own a significant portion of that in our portfolio today.
Craig: And they can find out more of that, I'm sure, by visiting Crescat Capital, maybe becoming a client.
Tavi: Yes, absolutely. We can certainly share all those names. You know, Altamira would be one. Cabral would be another one. We have others that we really liked that we're closing deals recently in the following months here as well.
Craig: Tremendous. All right. Let's move on to question four. You mentioned how you're leaning on the side of inflation and that inflation-deflation argument. I've also seen on Twitter and we've discussed in the past that you think we're right at the beginning of a new bull market in commodities. The question that came in is, if that's the case, how does someone measure and forecast a bull market in commodities?
Tavi: There's never an easy way, but I think it all starts with the scenario that we have, where it's hard to find assets that yield more in inflation. And so when you look at especially corporate bond yields yielding less inflation expectation, if it's those stocks that yield also on the earnings or dividends side of things, less than inflation expectation to treasuries, you know, Southern bonds yielding almost nothing, if not negative on the nominal terms. And so, you know, it's forcing investors to be looking for tangible assets or it's forcing investors to look for any asset that will be appreciating price. And when you look at across all asset classes today, commodities is the one that is really cheap relative to where it was historically.
At the same time, we're seeing those constraints of under-investments in space for a long time. That's just adding to the table here. You know, CapEx have a lot of commodity-related companies have been falling for a significant amount. You know, we're seeing geological issues of finding commodities in general, especially in the precious metals and base metals space. And so, you know, with that in mind, I think we're due for, I guess, a super cycle in commodities. When you look at commodities priced adjusted for inflation, it's still at the bottom of where we were back in the worst part of the great recession in '08. So we're really cheap levels there.
We did see sort of commodities rising recently since elections. And that's certainly, I guess, reassuring part of that thesis or validating part of the thesis, but I think we're a long way from done here. Sure, we're going to have some hiccups on the way, but I think commodities are going to be running significantly higher. And that for any investor will change how you think about the macro landscape, how you think about cost of capital. Now, cost of capital may be going higher. Profitability may start mattering a lot more than it used to in the past, at least they'll pass decades or so.
And so, you know, that will change how we select and pick investments, in general, at the same time as you have this risk parity problem, where a lot of large funds in large capital allocators have been having issues with equities and bonds being record over value for the first time in tandem. Not even in 2000, we saw equity markets, very expensive. The corporate bonds are not as expensive as they are today. So having all that in mind, I think the flows opportunity of capital towards commodities is extremely high. And that's one of the reasons why we feel so confident in this long-term thesis.
Craig: All right. My friend, that's a good segue into question number five, Tavi. I think this is interesting as well because we always talk about the precious metals, gold and silver. But outside of those, given that commodity thesis, what's your favorite metal for investment? Uranium, platinum, palladium, copper? Which one do you like the best?
Tavi: I think outside of precious metals obviously silver would be my pick. But outside of that, I would probably pick nickel. I think there are a lot of opportunities that we're finding in the exploration side of things in that part of the commodity asset class. You know, certainly, there are things going on in copper too that we like. I think all, you know, base metals look very interesting, even though I think precious metals, given its monetary aspect, looks a lot more interesting. I like silver a lot. I think silver is poised to move significantly higher. It's my favorite commodity. But you asked me, you know, uranium looks also interesting.
There's some political, you know, parts of it that makes it a little bit more challenging, but I do think that it's kind of inevitable, that we're going towards that in terms of energy developments. And I used to be... No, really the beginning of the year, I'm not sure if I said that in your other podcast, Craig, but I really liked oil. I think oil is going above $100 a barrel, you know, in the following 1 to 2 years. And so I think that's going to also add to the inflationary thesis. But you asked me more asymmetric opportunities, I mean, platinum and nickel looks really interesting to me. We've been in its stuff to find nickel was a little easier to find, more peer plays in terms of exploration and development of companies in the space.
Platinum, a little bit more difficult. Usually, comes in as a secondary product of a lot of what we ended up finding in terms of minerals. You know, we're very bullish in those and we think that the screen agenda is real and we're certainly moving towards that. And in order for you to go from the old economy to the new economy, you need commodities in there. I always say that that has been a highway from the old to the new economy has been cheap. And I think that highway is about to get a lot more expensive with prices going higher, and will also have an impact on those and the evolvement of new innovations and so forth.
Craig: All right, Tavi, for our final two questions, we're going to kind of draw on your expertise in the money management business. The first one deals with, you know, this is something that's been driving me crazy and almost all mining share investors crazy for the last six or seven months. The miners, especially producers, are throwing off all this major cash flow. They're lean and mean. They're increasing dividend share buybacks, and nobody cares. We keep waiting for the big institutional money to flow into the sector. What's it going to take, Tavi? When might that start?
Tavi: Look, I actually hope it's a gradual move. Not all of a sudden. And I think, you know, initially, when we saw the silver squeeze, even though I love the idea, I love what they're asking for here, and fighting for, it's, unfortunately, you know, as you're building a business to the long term, you really expect that this would be sort of a gradual move. And a gradual move as we start seeing the fundamentals of those companies look a lot more like growth stocks rather than just, you know, perhaps a value trap, which a lot of people actually fall into that category of thinking, where I completely disagree.
Now, what we're seeing is that, you know, if you look at the free cash flow yield for the miners, they're now beginning to look more attractive in the value side of things versus tech stocks. And so, when you start seeing those value metrics beginning to appear in a lot of...you know, we're seeing even value screens showing up with miners now, those are all very interesting things. And look, I think if we're going to see, you know, silver back to, let's say, $50 dollars an ounce or, you know, gold to $3000 or so dollars an ounce as well, you know, how much is, you know, each of those companies in the whole space going to be worth?
I mean, today we have...you know, they're probably worth...precious metals industry's worth about $600 billion on the public side of things, which is most of the companies that we look at. $600 billion and, you know, when you look at Apple's market cap, I mean, it's about 4 times the size of the entire industry. So, you know, we think that there's a ton of asymmetry here to continue to belong that name, but do I know the answer of when that's going to happen? You know, I don't know. Usually, those are, you know, weird triggers. It could be the yield curve control, you know, sort of news that could shift towards inflows in this industry.
Certainly what we saw was skepticism. It's been something that has been really, really hurt in this whole mining space. And I completely disagree. I think people have been really not doing their homework in looking more in-depth on what's happening. Like you just mentioned, they're not issuing a lot of equities. They're actually buying back stocks for the first time we've seen in a real long time. They're paying down dividends. They're paying down debt. They just saw the largest repayment of that in history in a quarterly basis. Not what we saw in 2011, where they're leveraging up.
So not a lot of people are doing their homework. And that's usual. We've seen this before. I don't know the answer, but I'm going to guess that that's the whole reason why we're invested here for the next 3 to 5, to even 10 years, depending on what the length of this possible secular bull market in gold that we believe we're in.
Craig: All right. One last question, Tavi. And, again, this is for folks that are doing their homework on their own, trying to figure out, you know, they like the sector. They like where prices are headed, but you got to do your own homework. So in valuating juniors and explorers, what do you think are the most important factors to assess before you dive in?
Tavi: I think it has a lot to do... You know, the general things that a lot of people like to say are actually true. You're always looking for a safe jurisdiction in a place, but it really starts with, you know, being economically viable, really understanding if that deposit can actually turn into a mine that can be profitable one day. And I think a lot of investors tend to look at, you know, large deposits rather than seeing if they're economically viable. And understanding the district of that region in general. You know, can we really make something happen with the surroundings of that deposit, of that project that is happening in a certain area?
So at Crescat, what we do is we kind of look for those regions. You know, certainly, Golden Triangle has been a large focus of ours. Newfound Land has been another one, Nevada, you know, Brazil, those parts of Brazil referred to. Even parts of Bolivia. And when you find places like Bolivia, that are not as safe, you want to make sure that the deposit is really not being priced and the stocks of the valuation makes sense. Now, the success rate of drilling results is another thing. So, you know, having a strong team, which is hard to quantify is a very important part of it. So understanding the success rate of those drill results, if they're really being driven by, you can't really lie with numbers.
And so, you know, if you're seeing, you know, 10,000-meter drill program, you know, what type of drill results have we gotten so far? You know, the history of that management team in delivering value is, I think, a very important part of it. And so, you know, that's really how we try to focus, is kind of a mix of being... Starts with economically viable. Are they economically viable? Yes. Okay. Well, you know, what region is this? And is it priced accordingly with, you know, the jurisdiction level of safety? And so, you know, you move forward from there and then really understand the team. You know, it's not about buying a great asset. It's really about being able to unlock value with a great management team that can actually deliver the success.
I know those are not...it is not an easy answer, and unfortunately, we spend a lot of time, you know, looking at the...95% of the projects that we look at are really not worth our investment. I wouldn't say they're garbage, but they're just not worth our investment for some reason, either from the management side of things or from the economic side of things, you know, just does not look attractive to us. And so, you know, those are the bigger things that I... You know, management team is a huge part of being successful, I think, in this industry.
And being able to bring in experts, in our case, is trying to be an activist in allowing the company to actually be open-minded to allow us to help them to succeed. And the other part is telling the story. Those companies that are able to also tell the story. So it's crazy because there's so much speculation in this part of the industry exploration. Unfortunately, there's not, or fortunately, there's not smart money coming in in a big way. So it creates those very mispriced opportunities for anybody like a fund like ours, really going in and trying to...with the mindset of really building a whole business, I think there's a lot of opportunities. And so the goal really is to have 50, 60, 70 good names that you find, and really try to help them to succeed in going forward. But that would be my best way to answer that question, Craig.
Craig: Tavi, before we go, hit everybody with that Twitter handle here so they can follow you.
Tavi: Thanks. Yeah, @TaviCosta would be my handle on Twitter. And I try to post things almost daily with our macro views and anything that has been in my mind.
Craig: And as I said, you're a great follow on Twitter, and the charts you share from Crescat are always very informative as well. So please, everybody, check that out. Please also be sure to like, share, or subscribe to whichever channel you follow the Sprott content on. It really helps us to get the word out. And, of course, one last thing, if you're in the market for any kind of physical precious metal, or you need to store that metal, please go to sprottmoney.com and you'll learn a lot more there. You can also just pick up the phone, give us a call, (888) 861-0775. Again, I want to thank Tavi Costa of Crescat Capital for being our guests this month for "Ask The Expert." It's been a great call, full of great information. Tavi, thank you so much for joining us.
Tavi: Thank you, Craig, for having me. You know, I really looked forward to this conversation. It was great.
Craig: And from all of us at "Sprott Money News," sprottmoney.com, thank you for listening. We look forward to another "Ask The Expert" segment next month.
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