Fed To Cut ‘In A Big Way’: Will Market ‘Breakdown’ Follow? | Tavi Costa

The current market cycle is transitioning from a stealth phase to awareness, with institutions beginning to deploy capital, particularly into the complex mining industry. Companies are experiencing unprecedented cash flows, driven by favorable metal-to-energy cost ratios, suggesting this is an early stage of a multi-year bull market for the sector. In contrast, tech stocks, especially the "Mac 7," are in a frothy environment with expensive valuations and deteriorating balance sheets, creating a clear distinction between "spenders" (tech) and "earners" (energy, infrastructure, materials, mining).

The speaker predicts significant dollar devaluation, driven by the need to manage debt and potentially reaccelerate inflation, which will benefit emerging markets, particularly Latin America, due to their commodity-based economies and undervalued assets. Despite concerns about the US current account deficit and twin deficits, the underlying structural issues are not deterring capital flows away from the US. The mining industry, with suppressed capital spending and limited new projects, is poised for substantial growth, with the risk for investors being the ability to hold onto shares during this burgeoning bull market.

Further analysis suggests a potential prolonged period of lower interest rates, leading to higher inflation and continued liquidity, which will seek out neglected and cheap assets like mining and commodities. The mining sector is seen as just beginning its upward trajectory, with significant potential for outperformance of gold, and the speaker is highly optimistic about its future, anticipating considerable upside driven by current valuations and increasing demand.

• Prediction of significant rate cuts, leading to a substantial increase in silver prices, potentially beyond $40 an ounce.
• The biggest risk for investors is holding shares during a bull market in the mining sector, which is at its early stages.
• Tech stocks, particularly the "Mac 7," are in a frothy, overvalued state with deteriorating balance sheets, contrasting with "earner" sectors like energy and mining.
• Expectation of a significant dollar devaluation, benefiting emerging markets, especially Latin America, due to commodity-driven economies and undervalued assets.
• The mining industry is poised for a major bull run due to suppressed capital spending, lack of new projects, and increasing demand, with current valuations being exceptionally attractive.

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Market Stages and Mining Industry Dynamics [1:40]

• The market is transitioning from the stealth phase to the awareness phase, with institutions starting to deploy capital.
• The complexity of the mining industry makes it difficult for institutions to deploy capital quickly.
• Smart money has been accumulating assets for 3-4 years, and now visible movements are starting.
• Leverage relative to metals is still far from peak levels, indicating the very beginning of a cycle.
• Mining companies are currently making money and experiencing record cash flows due to favorable gold-to-energy cost ratios.
• The speaker predicts another 2-3 years of strong performance for the mining industry.
• Valuations are recovering from depressed levels, leading to excitement about potential profits.
• The current excitement is not indicative of a bubble but rather a recovery from a long period of underperformance.

This is a very different cycle. Does it look like a bubble to you right now? No, no, not a bubble at all. I I would argue very much against that.

Tech Stocks vs. Mining Industry Valuations [3:31]

• Mac 7 tech stocks show increasing enterprise value to free cash flow and decreasing net cash balances, indicating a frothy and expensive environment.
• This contrasts sharply with the mining industry, which is seen as undervalued.
• AI is driving significant capital into the tech sector.
• The potential deterioration of tech company balance sheets and how the market will react is a key question.
• The market is bifurcating into "spenders" (tech companies like Mac 7) and "earners" (energy, infrastructure, materials, mining).
• Spenders are likely to consume capital, while earners will compound earnings.
• The ability of tech companies to finance the massive infrastructure development for AI is a concern, especially if their balance sheets become more leveraged.

"The spenders are likely to be the max 7 econ uh companies and the other technology companies. The earners are going to fall into three categories in my opinion. Uh probably energy uh number two infrastructure and three materials uh mining being one of them."

The AI Revolution and Infrastructure Spending [5:41]

• AI is a revolutionary force, but the infrastructure development required is unprecedented compared to the internet revolution.
• An "arms race" for AI dominance is catalyzing massive spending on construction, potentially doubling current construction-to-GDP ratios.
• This construction spending, estimated at trillions of dollars, will flow into various industries.
• Tech companies' free cash flow (around 85% to shareholders via buybacks and dividends) could contribute half a trillion dollars annually to infrastructure spending.
• Industrialization driven by AI will significantly benefit the mining industry.
• Government infusion of capital into certain companies (e.g., MP Materials) indicates a growing impact on the industry.

"This need for somebody, a country or a company to get there first. And that race is what will catalyze the spending on construction."

Recent Market Rallies and Economic Drivers [7:34]

• Over the past week and a half, stocks and gold have rallied significantly, with gold hitting all-time highs and silver reaching $40 an ounce. Bitcoin has also surged.
• A key interpretation for these rallies is the increased expectation of the Fed cutting rates soon.
• However, inflation is reaccelerating, especially in hard assets, suggesting that gold may be leading inflation data by about a year.
• The economic environment suggests inflation needs to run hotter than expected, with a policy of suppressing rates to manage debt.
• This policy will likely lead to the devaluation of the dollar against other fiat currencies.
• The DXY index has experienced one of its biggest declines since the 1970s, raising questions about whether this is the start of a long-term downward trend.

"We're in a funny world. you know, inflation is reacelerating. Everything you said is very inflationary, especially if you look at the hard asset space."

Dollar Devaluation and Emerging Markets Opportunity [8:39]

• The unavoidable policy of lowering rates to manage debt implies dollar devaluation.
• This devaluation is expected to catalyze investment in emerging markets, which are seen as one of the most asymmetric opportunities currently.
• Energy, which has been lagging, is also seen as a strong opportunity, trading at historically cheap levels and benefiting from onshoring and AI trends.
• The historical parallel between inflation cycles in 2015-present and 1967-1983 suggests a potential reacceleration of inflation.
• Unlike the 1970s, the current global economy faces significant current account deficits, fiscal deficits, and debt problems, leading to fiscal dominance.
• Emerging markets, especially Latin America, are poised to benefit from capital flows shifting away from the US as the dollar weakens and yields potentially stabilize or decline.
• A weaker dollar reduces the debt servicing costs for emerging markets, which often have debt denominated in dollars.

"The two largest risks of investing in emerging markets are higher yields and higher dollar, we may see the opposite of that in this next 5 to 10 years."

Mining Sector Performance and Valuation [12:45]

• The derivatives of gold, such as silver and copper miners, are starting to move, reflecting an acceptance of risk.
• Emerging markets are the next logical step after gold and its derivatives.
• Latin America is favored due to its commodity-based economies (energy, mining, agriculture).
• Brazilian banks are trading at historically low multiples and are expected to benefit indirectly.
• The valuation disparity between Latin American economies and the US is significant, presenting a compelling opportunity.
• Government involvement in the private sector, once a concern in emerging markets, is now also a factor in the US, narrowing the gap.
• Junior mining companies are still cheap, and institutional capital is beginning to flow into them as they accept more risk.
• Current mine valuations are based on lower gold price projections ($2200-$2500), while gold prices are currently around $3600, creating substantial upside potential.
• All-in sustaining costs for most mining companies are below $1300, leading to massive margins at current gold prices.
• The sector is at the beginning of a bull market, with potential for further discoveries and significant long-term upside.

"The valuation disparity between uh Brazil or any other Latin American economy versus our business relative to the US is is is is one of the worst we've seen in history."

Long-Term Outlook for Gold Miners and Discoveries [28:34]

• A long-term challenge for the mining industry is the increasing difficulty and cost of making new discoveries and drilling, coupled with the depletion of existing mines.
• There are too many companies in the mining industry, with a high percentage expected to be worthless, while a select few possess high-quality assets.
• Identifying these high-quality companies is crucial for investors.
• The speaker's firm has been deploying capital into what they believe are the top 5% of high-quality mining assets for the past three years.
• The 1970s, a period with few discoveries, saw gold prices rise and mining companies perform well, leading to a subsequent age of discovery in the 1980s and 1990s due to significant capital inflows.
• Another discovery phase is anticipated in the next 5-10 years.

"Your job as an investor in this industry, if you're in this part of the Lone curve, the left side of the Lone curve, is to figure out which ones are those 5%."

Monetary vs. Fiscal Policy and Future Market Dynamics [30:51]

• Monetary policy has effectively become fiscal policy, as lower rates are necessary for governments to manage their debt.
• This dynamic suggests rates will remain suppressed, allowing inflation to run hotter and liquidity to continue flowing into neglected and cheap assets.
• The Fed might not lower rates in the next meeting due to higher-than-expected inflation data, but a significant rate cut in the longer term (by 2026) is expected.
• This environment of lower rates and higher inflation could be positive for markets if inflation is managed, but a stagflationary scenario is also a possibility.
• The speaker is bullish on commodities like copper and energy, seeing them as cheap and part of a typical commodity cycle rotation.

"Um, I I think monetary policy has become fiscal policy."