Episode #511: Louis-Vincent Gave & Harris “Kuppy” Kupperman: De-Dollarization, De-Sinafication & The Commodity Bull Market – Meb Faber Research
Episode #511: Louis-Vincent Gave & Harris “Kuppy” Kupperman: De-Dollarization, De-Sinafication & The Commodity Bull Market
Guest: Louis-Vincent Gave co-founded Gavekal in 1999 with his father Charles and Anatole Kaletsky. Gavekal started as an independent research firm and evolved in 2005 to include fund management and in 2008 to include data analysis services.
Harris Kupperman is the President of Praetorian Capital, a macro themed small cap focused hedge fund.
Date Recorded: 11/28/2023 | Run-Time: 1:16:02 
Summary: In today’s episode, we start by covering the macro landscape and then dive in on some key themes Louis and Kuppy are focused on. We talk about emerging markets, the energy transition’s impact on commodities like oil and uranium, and stealth bull markets in places like Japan and India. We also touch on the Mag7, Argentina, Turkey, and even aviation sub-assembly.
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Links from the Episode:
- 0:37 – Welcome Louis and Kuppy back to the show
- 4:09 – The macro landscape
- 9:09 – The future of the US dollar
- 11:43 – Addressing purchasing power parity issues
- 15:24 – The bull case for the Japanese market
- 19:21 – The Argentina economy
- 21:49 – Gold
- 29:19 – Uranium
- 40:21 – Other underexploited investment areas
- 43:49 – The state of Asia’s stock markets
- 53:05 – Identifying overlooked or underused strategies by industry peers
- Learn more about Louis and Kuppy: Gavekal; Pracap; Twitter
Transcript:
Welcome Message:
Welcome to the Meb Faber Show, where the focus is on helping you grow and preserve your wealth. Join us as we discuss the craft of investing and uncover new and profitable ideas all to help you grow wealthier and wiser. Better investing starts here.
Disclaimer:
Meb Faber is the Co-founder and chief investment officer at Cambria Investment Management. Due to industry regulations, he will not discuss any of Cambria’s funds on this podcast. All opinions expressed by podcast participants are solely their own opinions and do not reflect the opinion of Cambria Investment Management or its affiliates. For more information, visit cambriainvestments.com.
Meb:
Welcome My friends. We got an extra special episode today. Our returning and much requested guests are Louis and Kuppy. Today’s episode we start by covering the macro landscape and then dive into some key themes Louis and Kuppy are focused on. We talk about emerging markets, the energy transition impact on commodities like oil and uranium and stealth bull markets in places like Japan and India. We also touch on the MAG7, Argentina, Turkey, and even aviation sub-assembly stocks. I think that’s a first for the podcast. Please enjoy this episode with Louis and Kuppy. Today we got two good friends back on the show. Louis and Kuppy, welcome back.
Louis:
Hey, Thanks for having us. Great to catch up with both of you.
Meb:
We were just chatting on the intro. The three of us can all turn our cameras around to see different Cs. Tell the listeners where we find each of you guys today starting with Louis.
Louis:
I’m on Vancouver Islands and I’m looking at the Georgia Straits right now.
Kuppy:
And I’m in Rincón Puerto Rico, and I guess I’m looking at the Caribbean.
Meb:
If you guys don’t follow Kuppy on Twitter, you should and not for the Jay Powell memes, which by the way, your most popular tweet from last year was something along the line of, hey, a-holes, I’m going to keep raising rates until you guys stopped trading monkey jpeg JPEGs or something like that, which was great.
Kuppy:
Did you see that Bloomberg reappropriated it and used it as one of their own pieces of content?
Meb:
Well, they’re soulless at this point, not just traditional media just is willing to cut and paste at this point, but that’s great. At the very least you can take pride in being copied, but what I’m saying is you don’t follow Kuppy for his great memes. You follow him for his landscaping tips and all the work that you’ve been doing on your property. Tell the listeners you live in Puerto Rico on a little surf break called Rincón but you’ve had quite the property development over the past couple of years. I’ve been there. It’s beautiful on top of a hill, but tell us a little bit about it.
Kuppy:
I live in a little town of about 15,000 people called Rincón. I love Puerto Rico. I go surfing. I went surfing this morning. It’s super pretty out here and I recently bought some land and I startled a little farm. It’s called Finca Kuppy. Right now we have three cows. They’re keeping the weeds down. I’ve planted some fruit trees that all look dead. I’m running some irrigation lines out there and hopefully we can save them and then I mostly go and clear the brush all day, but it’s tropical so if you don’t go every week, the brush is about as tall as me by the end of the week. But it’s been an adventure. I’m learning.
Meb:
I’m looking forward to Kuppy Farms starting out to be able to buy some stuff on your marketplace. We might as well start talking about investing at some point. I figured we’d start with Louis because he’s got a special way with words in a slightly different way. You wrote a recent piece that hopefully will be out by the time this publishes, but you had a great line where you’re talking about the Ottoman Empire where they were on a branch and sawing off their own branch. And I thought that was such a good description I feel like as a lead in. Can you tell us what you mean by that? What is that? What are you talking about?
Louis:
Yeah, so the Constantinople fell to the Ottoman Empire in 1454 and that was a disaster for Western Europe because all of a sudden basically Western Europe was cut off from the spice route, the Silk Road, and if they wanted to buy anything fancy, they had to go through the Ottomans who jacked up all the prices like crazy. But what that ended up doing of course, is it created the incentive for Europeans to get on ship and try to find a new route. So Vasco da Gama went south and around Africa, Christopher Columbus went west, eventually hit the Americas and the Ottoman Empire by basically trying to squeeze Europe, ended up making Europe the center of the universe for 400 years, 500 years. It ended up of course leading to the capture of all the America’s gold to the slave trade and eventually to industrialization in Europe. And the Ottoman Empire by imposing these trade restrictions in essence wrote itself out of history.
Now, the parallel I was drawing is fairly obvious today where we’re trying to block China’s trade and not only China’s but also Russia’s and so doing, we’ve basically thrown them into each other’s arms. We’ve officiated at Russia and China’s wedding, which is I think a geopolitical mistake of epic proportions because Russia produces everything China needs and China produces everything Russia needs. And the genius of Kissinger and Nixon was to have split those two guys apart and we’ve spent the past five years basically getting them back together and that makes for a very different world.
Now I think we believe that we can do this because we’ve got tech supremacy. I think one open question, and that’s another piece I sent you Meb, is whether we are going to maintain this tech supremacy when every year China produces more new engineers than there are engineers in the US, when China is now graduating 12 million graduates a year and almost half our STEM. For us to believe that we’re going to keep this tech supremacy given this widening educational gap, perhaps not over the next five years, but over the next 20 to 30 it seems shortsighted.
Meb:
Kuppy, you talk a lot about geopolitical macro. Do you have any general thoughts on what Louis is talking about or are there other areas, the globe that are on your brain today?
Kuppy:
Well, I’m not a China expert. I defer to Louis on that, but I agree completely that we’ve totally screwed up our geopolitical space. We put China and Russia together. It’s one of the most hair-brained things we’ve ever done, and China keeps running laps around us in everything we try to do, and honestly we don’t try to do much these days. We’ve surrendered to the kids’ table. I don’t know what to even say or think about it, but the Western world’s just a joke in very many ways and resting on past glory and past wealth as we consume that wealth and I think the future is in the eastern world and we’re on the wrong side of the iron wall suddenly. It’s scary.
Meb:
Well, I mean part of this discussion is a topic that I think investors struggle with, which is currencies and the dollar. It looked like the past year or so we were at a major inflection point for the dollar, and then it’s jiggled a little bit. Do you guys have any general thoughts or opinions on the prospects for the dollar? Trying to plan my travel for 2024, which is the only way that people really think about currencies. I think as Americans, rest of the world is very currency forward, front minded, but US, I think it only comes up when you’re looking at exchange rates for travel. Which else’s perspective is this a long running stomping US bull going to continue, or are we finally in a different regime?
Louis:
For me, there’s two things that are capturing my attention. The first is if you go back to the horrible events of October 7th, Biden made a big speech affirming US primacy. And in essence said, “Look, of course we can fight a war in Ukraine and of course we can fight a war in the Middle East. We can do those at the same time, hell with the United States.” And the initial reaction of the bond market was to sell off and the dollar was to sell off. It was almost as if the market was saying, “Yeah, sure you can fight two wars, but we’ll tell you at what price.” And since then, of course, bond yields have come back down and the dollar has rolled over. Now, so I’ll park that aside, but I just want to highlight this. The second thing I want to highlight is that when you look at the FX markets today, we all look at it through the prism of the dollar of course, because to your point, everybody around the world measures their currency against the dollar.
You can walk into a cab in Jakarta and ask what the exchange rate to the dollar is and they’ll give it to you within a decimal. Everybody knows their exchange rate against the dollar. The real though, if you look around the world and you think of what’s the one price that’s completely out of whack in the world, that’s completely wrong. That two years ago, bond yields were completely out of whack. It was completely stupid how low bond yields were everywhere. Today when you look around the world and you say, “What price makes 0 cents?” It’s not as much the dollar as it is the yen. The yen at 150, you were saying, “Where do I go spend my holiday?” Go to Japan, go to Tokyo. It used to be that when you went for dinner in Tokyo, you needed a second mortgage just to pay for the dinner bill.
Now you go to Tokyo, not only did you get the best food in the world, it’s half the price of New York City, which in my life has never happened. You get food that’s three times as good for half the price. All of a sudden it’s to the point where you can’t spend money in Japan if you tried. Now before you used to say that of Indonesia or Poland or wherever, Japan is, depending how you measure it, the second or third biggest industrial country in the world. To have a country, the importance of Japan have such a cheap currency creates economic and financial market imbalances. And so for me, as I look at 2024, that to me that’s the single biggest question is does the yen stay where it’s?
Meb:
Let me just interrupt real quick because I needed to stay this way at least through February for my annual ski trip. We go to Japan and we’ve been doing this for many years and I need to stop talking about it because every powder magazine I open now, or even in the Wall Street Journal this past weekend, they’re talking about skiing in Japan. I need to be a little quieter, but we were looking at a lot of the prices and like you mentioned was actually having a debate with my wife because skiing and I grew up in Colorado and loved to ski, but it is so insanely expensive in the United States for lessons, for just gear for the passes, everything. And we were having a conversation where I was like, “Would it be cheaper for the entire family to fly to Japan to ski than it is to go to Colorado?” And the answer was yes, and not even close. So we’re debating it.
Louis:
And it’d be more of an experience too.
Meb:
Yeah. Why is this persisting and how does it resolve? Because I was looking up my Ned Davis Purchasing Power Parity in Japan of every country in the world currently had the biggest Purchasing Power Parity. I mean Turkey I think was number two and Egypt. You usually don’t see Japan in that conversation. How does this resolve and why is it persisting?
Louis:
That’s the single most important question, macro question as we look at the current year is does it continue or not? So the reason it’s there, of course, is the interest rate differential, is the higher yields in the US especially at the short end. So do you think that that gap at the short end continues or not? But there’s another impact. It’s going to be harder and harder I think for the yen to stay 150 because Japan’s trade surplus is now starting to improve meaningfully, so they’re now starting to get proper inflows. There’s always a two-year gap between a currency devaluing and the impact on trade because most businesses hedge their currency risk for a year, two years, maybe three years. But also if you’re, I don’t know, using a Korean made part, but the Japanese made parts is now cheaper in your car, it takes a while to retool, right?
You’re not like, “Oh, this month this is cheaper, so I’m going to use Japan rather than Korea.” No, supply chains take years to evolve, but once they evolve, then they stay there for a few years as well. So all it is to say economically, I don’t think we’ve yet felt the impact of the 150 yen. To your point, you’re just starting to see now people saying, “Oh, maybe I should go ski in Japan.” Nobody was doing it last year. This year you’re going to have a lot of people on your ski runs and it won’t be just Americans, it’ll be Chinese, it’ll be Europeans. All these things take a little while, but the coming year is where the impact starts to be felt on the Japanese economy, on the global economy. Now a yen at 150 is profoundly deflationary for the rest of the world.
If that changes then moves back to being inflationary. We’ve had the deflationary hit, so imagine what inflation would’ve been like if the yen hadn’t been at 150. Imagine now what it’s going to be if we go from 150 back to 120 or 110 where it should be. Now to the extent that the US is in a bull market, that MAG7 goes up every week, et cetera, you can say, well, the Japanese savers are going to take their money and plow it back into Microsoft. So as long as that goes on, then you’re fine. If that stops, then all of a sudden you’re like, “well, why am I holding these stocks that are going down when I can own, I don’t know, Hitachi or Komatsu at home and those stocks are doing great?”
Meb:
Yeah, it’s just like the challenge of an entire generation that’s grown up with no Japanese equity returns as that does potentially shift. Could be we certainly see a lot of Japanese stocks show up on our screens as being cash flowing and starting to change the governance as far as dividends and buybacks. I was laughing as you were talking about skiing last year because the night before we went skiing in Japan, our guide broke his femur and we went over unguided in which means you have to drive these tiny Japanese vans in 10 feet of snow in Hokkaido on the left side of the road through a roundabout, which was a good exercise and trying to get around, not speaking Japanese. But my favorite part of that story, and he’s fine now listeners, but we’re going skiing with him again this year, was that he was like six two and they didn’t have rods long enough in his size because everyone in Japan is shorter, so they had to fly in some rods from Tokyo to stitch him up.
Anyway, listeners, if you want to do a meetup in Japan, let me know. It’s been a while since we’ve done one. Kuppy I don’t think anyone’s ever said this about you, but you’ve been so quiet. We’ve got to let you get in some words. I know you think about international investing a lot. We sat on a rooftop in Puerto Rico and chatted about international and emerging investing last time we were hanging out. What looks interesting to you? I’ve read all your letters. I don’t see you talking about Japan. I see you talking about some other far fun places. Anything front of mind for you today?
Kuppy:
As you said in the pre-show, I was just going to nod and agree with Louis most of the shows. I’ve been mostly doing that. No, I mean look, I probably should be paying attention to Japan. I actually thought it was funny. All sorts of little PICO cap companies are always emailing me, “Hey, Kuppy, look at this. Hey, I want to have a call with you.” But it’s always like cannabis companies or junior mining or some pharma thing. I just never respond and for the first time ever in my life, a Japanese company reached out this morning. So that’s interesting because I always assume Japanese companies hate IR to the point of just not even responding to emails. The fact that they’re doing outbound just totally changed the whole narrative for 25 years in my head of Japanese companies. So maybe I should be looking more at Japan.
Louis:
I’ll make a quick point on this. I think you said one generation of no return. It’s really been two, right? Because it’s been 30 miserable years and from that, I think indeed comes the impression that look, Japanese companies are terrible shareholder value creators and they have so many things they care about i.e. employment and their community and this and that rather than shareholder returns. All of which is by the way true, but I think all of that was also amplified by the fact that you were working in a deflationary environment and now you’re not anymore.
So managing a business when it’s minus 2% deflation and managing a business when it’s plus 3% inflation is night and day. It’s really not the same thing. So today everybody’s running around Japan and thinking, oh, these guys, they’re doing a better job at creating value, they’re doing a better job at… Maybe these guys finally get it now, et cetera. I’m personally skeptical on that. I just think we’ve moved from -2 to +3 and it’s a whole lot easier to manage a +3 than at -2.
Kuppy:
But they actually, the Japanese, and I hate to generalize, but I have friends that follows a lot more closely than me, and it used to be the joke that the guy who was doing nine basis points, ROIC was the best performer in Japan. And he was just putting his money in a money market account and he traded as a net net and the core business was an okay business and all the cash you kept piling up and they never did dividends, never did buybacks. They just put it all out there at nine bips and now it seems they’re starting to do dividends and buybacks and actually starting to allocate capital intelligently again. I know this is really a lot of generalizations, but I think that’s what drives equity markets. You need people to think the stocks have a chance to go up and then people start buying them and once they double or triple, then people start stampeding.
Meb:
And as you know, nothing helps more than that grandpa in Omaha putting his stamp of approval on something. And so the fact that he at least is looking to the empire.
Kuppy:
Wasn’t that a great trade? I mean, I see guys go out there and they go, “I run a billion dollars now and I can’t find anything that’s cheap to do in value, blah, blah, blah. I run a billion.” They’re crying. That guy runs what? A quarter trillion dollars and he put a few billion each into these Japanese companies that aren’t particularly small. They’re all triples and they’re like three year triples. It’s incredible. He’s what, 96 and he’s probably wearing diapers and he’s still running laps around most of the guys my age when it comes to allocating capital. It’s incredible. It’s just incredible. Props to him. He found the trade everyone was missing.
Meb:
As we move on from Japan, we could talk about it for a while. My favorite was the very first time we went to Hokkaido, we met a Japanese waitress who spoke flawless English, but she did so with an Australian accent, which was a little cognitively weird to handle. But Kuppy, you’ve been talking about a totally different emerging market. It’s hard to even call them emerging because sometimes they float into the frontier depending on what crisis they’re going through once a decade. But the equity market in Argentina, is that something they just had a pretty dramatic election outcome and with their head of the country, talk to us a little about Argentina. Is that so interesting to you?
Kuppy:
Yeah, it’s interesting. I wish I hadn’t sold, I mean, Argentina has three rounds of elections and I bought some quite a lot actually before the first round, and my guy Milei did very well in the first round, which is the primaries, and then he didn’t do so well in the second round. And I’m an inflection investor and that means when the strength of the trend turns down, so second derivative down, you exit and I exited. It’s a breakeven trade. Adds up a little bit of money over a couple month holding period. I do this a lot. I go in, I go out and then Milei did quite well and the third rounds and all the Argentine equities are up 50% to 75% and everyone’s super excited about him. I mean, I’m excited about him. It remains to be seen if he can actually accomplish anything because he doesn’t control the senate or Congress.
But he seems like a very forceful guy and it comes down to if the Peronist want to just stonewall him for four years and light the country on fire so they have another chance to come back into power, which is usually what socialists do, or they actually want to see the country go forward, in which case they work together and things go forward. I think it’s going to be a bit of both. And I worry that he doesn’t have enough of a mandate really. He won by 10 points, but that’s not always enough to really govern, especially you don’t have the houses. But look, Argentina has hit absolute rock bottom to having an economic crisis. I think almost anything is incrementally positive and no, I think it could be really quite interesting there. I mean, I wish I had exposure. It’s up a lot. I got the thesis right and didn’t make any money.
Meb:
Yeah, well, that’s better than the opposite, getting the thesis right and losing money. You mentioned the word inflection point, and we haven’t mentioned this word yet today despite it being a topic that seems to be pretty quiet in my circles. Y’all run in a little slightly different circles, so maybe it’s a little more front of mind and I know my Aussie and Canadian listeners will perk up here, but gold is something that seems to be creeping on all-time highs in the US dollar as we record this the end of November. So by the time this publishes, it’ll probably be back down at a thousand. What do you guys think? Is this an environment that seems conducive? It seems like we’re waiting on Godot here.
Kuppy:
I feel like the Thanksgiving Turkey, I’m so stuffed full of gold.
Meb:
Oh, okay, well talk to us about it. Is that a thesis you like?
Kuppy:
Yeah, of course. I mean, I’m a gold bug at heart and gold’s one of these products. It trends for a couple of years and it does nothing for a bunch of years. It trends again, and look, 2000 is a magic number in US dollar. I don’t know why it seems to pause at 2000. You can go on the internet and find a billion conspiracy theories and maybe they’re right because all the other conspiracy theories came true this year, but maybe 2000 is just where the ceiling is, I don’t know. But we’re back through 2000. I’m not much a chart guy, but I know you don’t have quadruple tops. It’s not really a thing.
And I think we’re going to start trending again. We’re a country that’s addicted to fiscal deficits and money printing. I think we’re going to have some sort of a multilayered crisis, and I’d like to talk about this because Louis and I see things very similarly on the fiscal side, but it’s going to be a monetary crisis and a fiscal crisis and a bunch of other crisis of confidence in all the various systems. And when you have a crisis of confidence, you buy some gold.
Meb:
You’re expressing this through the miners, through the actual metal.
Kuppy:
Oh, I’m playing a wild man. I own the GDXJ.
Meb:
For listeners, that’s the small cap miners.
Kuppy:
Yeah, and I own GDX and I got some calls on them. I don’t know. By the time this airs, I probably already lost all my money, but look, miners destroy capital for nine years in a row and then they all go up two, three times and they go back to destroying capital again. But when gold is moving and gold has one of those runs where gold goes a couple hundred dollars in a straight line, these things have huge beta to it. It’s just a trade. I wouldn’t wish miners on anyone as an equity portfolio position, but they do trend. I mean I haven’t seen it happen in a decade now, but they do trend and I think it’s good trade. I think what’s super interesting is that I’m pretty active on Twitter. I’m active in social media. I have a ton of friends in this industry I talk to all the time and my friends tend to lean gold buggy, I guess for lack of a better word.
And we’re 30 bucks from an all-time high and I haven’t gotten an email yet all month. Hey Kuppy, what are you doing in gold? Or you’re looking at gold. Go on Twitter. I just put two tweets out there just to test the water. No one even engaged with me. If I tweet about uranium, I get a thousand likes in three minutes. I tweet something on gold and it’s just a ghost town. And with $30 from an all-time high, that usually tells me that it’s probably going to go. I mean look at GLD, which I think is indicative of portfolio managers in the US. I mean the units outstanding are down dramatically over the last two years. It’s a straight line as they have redemptions.
So what’s driving gold? Well, it’s China, Russia, India, every other country buying the gold off American investors. And when Americans come back into this market, I think it’s going to stampede gold. It’s interesting actually. It is something cultural. I have Chinese friends, I have Indian friends, and when gold pulls back, they buy on the pullback. My American friends buy breakouts. I’d rather buy it cheap. That’s just my mentality and that’s how my Indian friends think about it. But the Americans, when it gets to 2100, they’re going to be chasing.
Louis:
I was going to make that point in that if you look at where physical demand for gold is basically two thirds of global physical demand is the broader Indians from continent and China. And yes, they buy one in dips. They also buy when they’re doing well. If you’ve got spare money, you put it in gold either because you don’t trust your banking system, you don’t trust your political system, whatever the reason. Americans don’t buy physical gold by and large. How many people do you know actually own physical gold coins. But in China, in India, if you’re rich, you own physical gold and the richer you get, the more you’re going to buy. Now, to the extent that the Indian economy this year is powering along, it really is. We’ve talked about the Japanese bull markets. If you look around the world, there’s been only a few bull markets with assets keep on making new highs.
We talked Latin America, which is another bull market. Japan’s a bull market, obviously MAG7’s a bull market. Everybody talks about that. Kuppy mentioned uranium. That’s another bull market. These have been the 2023 bull markets, but India has been one of them. As India gets rich, they buy gold. So that’s the first thing. As China gets richer. Now most of the Chinese economic data bottomed in the second quarter and it looks like China’s picking up again. So at the margin that’s marginally supported for gold. So you’ve got already your big markets for gold is doing better. Now two thirds is there, another 20% is the Middle East for physical gold, and this is where I think something’s very big has happened and nobody’s even mentioned in the US is that about 10 days ago, the Saudi Central bank signed a swap agreement with the PBOC, with the Chinese central bank.
Now imagine you’re a Saudi prince or you live in a world that’s fully dollarized, you produce oil, you sell it for US dollars, your currency is pegged to the dollar, et cetera. And then you see your central bank sign a swap deal with China. You think, why the hell are we doing this? What’s the bigger play here? Is the bigger play that we’re going to de-peg? Is the bigger play that we’re going to move some of the pricing of oil in Renminbi? Is the bigger play that we’re going to move more into the Chinese camp away from the US dollar, far away from the US camp? Unless you’re MBS and MBS knows what the play is. But if you’re prince number 1,500, you’re still very wealthy. You’re just prince number 1,500 with no real insight as to what the hell is going on. But you just saw this and you know it’s big and you don’t know what it means.
The default mode is, I don’t know what it means, but I’m going to buy gold because gold is making new highs in every single currency in the world except the US dollar. And now it looks like the US dollar is rolling over, so it’s probably not going to be very long until gold makes new highs in US dollars as well. So now you’ve got your three big markets. Your marginal prince in Saudi Arabia is probably buying gold. Your Indian guy is making tons of money right now because it’s a roaring bull market so he’s buying gold and then your Chinese guy is basically stopping losing money, so at least he’s probably stopping selling gold to buy something else. So like Kuppy, I think the environment has changed.
Meb:
I agree with you guys. The sentiment has been very quiet in my world. Sentiment often follows price. I feel like where as we saw with all the buffoonery in 2021, people getting very excited about the meme stocks and et cetera. But I was trying to see if the Costco, the only sentiment that I saw was the Costco gold bar, which was selling out, which I had to finally buy a Costco membership. I’ve never had a membership at Costco in my life and I bought one just to try to buy a gold bar in Costco and they’re consistently sold out. So listeners, if you bought a gold bar in Costco, let me know. I’d love to hear your story.
Louis:
That’s a very interesting thing because how much gold did Costco really sell? I really don’t think they sold that much. I think it was a great marketing ploy by them. It was-
Meb:
Yeah, well, they got me in as a member damn it. I have no interest in being a Costco membership to buy 75 packs of soda or something.
Louis:
They got you in. They got I think a lot of people in, it was a great marketing ploy. It was all over the news for two weeks, so it was free advertising everywhere. Great ploy, very smart.
Meb:
All right. Well let’s get even weirder while we’re in this metal world. I think Kuppy you mentioned you get more responses from one topic more than anything and uranium, I don’t know anyone that loves uranium more than you. So let’s hear what’s going on in this very… What many would consider to be esoteric part of the investing world?
Kuppy:
Well, I only do esoteric. Mainstream is hard. I leave that to other people. I like these third tier markets that no one’s really paying attention to. And outside of a couple of assholes on Twitter, no one’s following the market really including a lot of the utilities that are asleep at the wheel and have no idea what’s happening in their own market. Uranium is just a supply and demand story to me. We talk about the big picture and the why, but the key fact is that next year the world is going to produce about 150 million pounds of this stuff. There’s going to be about 10 million pounds of secondary production, so call it 160 total and the demand’s going to be 210.
That’s 50 million pounds, that’s almost 25%. If we were drawing 25 million barrels a day of oil, that’s the only thing we’d be talking about globally. But uranium is 15% of world electricity production. It’s almost 20% of the United States electricity production and you’re drawing 25 million barrels a day equivalent. It’s 25%. And you can ask how has this been sustainable? I’d say it’s not been sustainable. Utilities have drawn down their inventory now. Since 2019 we’ve been in deficits. You have four years of inventory drawdowns and it’s gotten to the breaking point and the price is starting to move.
Meb:
What is the major driver of that? Is it utility demand, is it something else?
Kuppy:
Well, the utility demand is the story. There’s some investment demand on the side and it’s going to be very reflexive in a (inaudible 00:30:44) sense, whereas the price goes up, investors will invest into publicly traded trusts. There’s one called Sprott Physical Uranium Trust, and there’s another one called Yellow Cake. I own both of them. Well, my fund owns both of them. There’s a number of hedge funds set up to invest in this. If you spend about six months of your life, you can get a regulatory approval to buy it inside of your hedge fund. And I know some hedge funds that have done that now. So this going to be reflexive flow is the price goes up and I think that on the margin that’s going to be additive to the price. But in the end you have utilities and in most commodities you use a pound, you buy a pound, you use a pound.
It’s like your gas tank. You never let your gas tank hit zero and you usually refill it at about 50%, 30% full because you don’t want to ever go near zero. And with the utilities it’s not the same. The fuel cycle means you only buy fuel about once every three to five years. You buy a lot of fuel and then you have to go through all the steps that lead up to fabrication of a fuel rod. And these utilities just held off on buying fuel and they’ve ran down their inventories and now they’re at the critical level and all the utilities at the same time are panic buying. There’s no pounds, there’s nothing on the offer right now. The price has gone this year from 50 to 80.
There’s nothing on the offer. There’s like 10 utilities with RFPs out there to the market. Market being basically two mining companies and the two mining companies have already sold all their supply. And so I don’t know where the pounds come from. I literally have no idea where the pounds come from and I don’t think the utilities know either because no one’s responding to the RFPs. So I mean, how do you have a one-sided market? It’s a bid only market right now.
Meb:
How do you think about… I’m not going to ask you about position sizing, but how do you think about this trade exiting? Are you a price target guy? Are you someone who just fundamentally reassess as the story plays out? Give us, this is uranium ETF up 50% since the spring. How do you think about exiting or adding to this position as time goes on?
Kuppy:
Well, I don’t think I can add. I’m already a little clunky, but look, it’s already done well for me. It’s outperformed everything else in my book this year. It was started as a pretty damn big overweight. I don’t own the ETF, I just own the physical. Well, I own a little the ETF, but I mostly know the physical. I like that a lot better than the miners. I really think about it this way. We’re in deficit. We have a list of all the mines that are getting built right now. There’s a bunch getting built, there’s a bunch going through permitting, there’s a lot of steps, but from the day that you get your permit, you got to raise capital, you got to do 19 steps along the way. It takes two to four years. That’s even just an existing mind just turning it back on.
Some of these take 10 years to build. And so we’re tracking this and I don’t know how it’s going to work. You have between now and December of 29, depending on how you model it’s between 500 million and a billion pounds of deficit. I don’t know how this works. I mean without the lights going out, honestly, because what we’ve learned with these RFPs that keep coming out, the Koreans just issued an RFP for a second time this month and no one responded to the first RFP because there’s no pounds, there is none. And I don’t know how this is going to limp on for another other seven years like this with the deficits. And that deficit can go from a billion to 500 maybe to 300 depending on what mines come online when. But the mines aren’t coming online. They’re all having teething problems. The ones that are in startup and the ones that are supposed to come online, they’re not producing to name play, no one can get the pounds out of the ground as fast as they’re needed.
I think it’s going to be a problem. I think this game stocks, when you think of the price of uranium, it’s 1% or 2% of the price of running a nuclear power plant. It just doesn’t really matter. Things like conversion, enrichment, fabrication, just all the other HR, all the other aspects are far more important than the price of a U308. And I think if the price of U308 went up 20 times from here. It just wouldn’t matter. You’re talking about a couple pennies, a kilowatt that just gets passed onto the rate payers or maybe the utility just eats it or the government subsidizes it, but you’re going to have a chase for pounds because it’s not clear if every power plants could be able to keep going, which is just based on the current supply demand imbalance.
And I haven’t seen anything like this ever in my life. I mean the only thing I can even think of like this is GameStop because there were more shares short than existed. And so you had this odd calculus equation you can’t solve and here you have more demand than exists in the world. It’s the same thing except for no one needs GameStop. And I have sympathy for the guys who are short because it was idiotic what happened, but that was just a market structured thing. Here people really need a uranium if you want to produce electricity. And like I said, it’s 20% of the United States electricity, but it’s also what drives aircraft carriers and submarines around here. And I think you can have a lot of imperative to go find this uranium and I think the price is going to go up a lot to incentivize it.
Meb:
All right, so you’re slightly bullish. Louie, is the uranium discussion coming up much in your conversations with institutions around the world or does this tend to be a little more on the sideline topic?
Louis:
No, I think at first, as Kuppy mentioned, it’s esoteric. It’s not that big a market. There aren’t that many instruments. Either you indeed have to buy the uranium ETF or you have to buy the miners. The miners are an imperfect play and haven’t been the best stewards of capital over long periods of time. And the reason it’s not in the conversation is it’s not really a big part of anybody’s benchmark. If Microsoft outperforms the market by 20%, that’s a really big deal for everybody because you’re either long or not. But if uranium goes up 10 times, nobody cares because it’s not part of a benchmark. I am talking the big institutions, if you look around the world today and things that are making new highs, things that are in a clear bull market tenancy, I think there’s five or six of them, that’s one of them. But again, it’s tiny, so people ignore it.
There’s India that’s tiny, so people can ignore it. There’s Mexico or broader Latin America, that’s tiny, people can ignore it. There’s Japan. Now Japan people have been able to ignore it because even though it’s making new highs, the Yen’s been weak. So all in all, it’s like people have, I think by and large ignored it, but I think that one, they won’t be able to ignore for very much longer because it is a part of the world MSCI, it is significant. And then that’s of course the MAG7 or the Cult 7 and everybody looks at that because that’s like whatever it is now, 28% of the S&P or… And so that one you can’t afford to ignore. So everybody just focuses on this one at the detriment of all these other bull markets, bull markets that are less crowded, not overvalued, have terrific fundamentals, et cetera. Everybody focuses on the one that’s where everybody is, expensive, which leaves lots of opportunities elsewhere.
Kuppy:
Return to what Louis says about expensive. I mean look, uranium’s $80 a pound, I think if you want to run your mine, that’s the breakeven cost. If you want to produce 210 million pounds and the 225 million they need next year, that’s about the breakeven price. You’re not earning a profit doing it. So how do you even call the fiscal price expensive for here? You have to have a profit incentive, and I just think it’s still in the low risk part of the cycle, even though we’re two years into the bull market and the price has almost tripled.
Louis:
I don’t want to add water to Kuppy’s meal, but if you look at where there is uranium, one place of course is Kazakhstan who wants to do capital spending there? One place is the Sahel in Africa where there’s a coup every third week.
Kuppy:
9 million pounds are offline in Niger. They just had a coup. And by the way, that’s in my 160. So if they don’t turn back on by January, we’re drawing already from by 160. And then Namibia is having water issues. So they haven’t hit their targets for two months in a row. Kazakhstan, they mixed the window before the ground freezes to do their sulfuric acid injections this year because the supply chain issues. So they’re definitely going to miss their targets next year. So you start looking at this and it’s just like infrastructure, supply chain, politics, it’s all these problems.
Louis:
The only place conceptually where people would feel comfortable adding mines and getting it out of the ground would be Canada. But here the problem is good luck finding workers because Canada, like the US, you want to find workers to type on a computer in Vancouver that you can find. You want to find guys who go up to northern Alberta, Northern Ontario in the winter. Good luck. You’re not going to find them.
Meb:
As we talk about all these ideas that no one’s paying attention to or paying attention to. I mean, I think one of the most discussed topics in my world, particularly on the end investor side, has just been this elation with T-bills having a yield again, and a lot of people the phrase, the air being T-bills and chill and just chilling out in 5% yields. But is there any other areas that we haven’t talked about thus far that you guys think either are really interesting investing, investors are ignoring. Kuppy hasn’t even mentioned oil, which like on my bingo card we should have had. At what point will we all say one of these words and Kuppy not saying oil, 45 minutes in I think is… I’m just so excited about uranium. And we can talk about oil. I mean I don’t want to lead it with oil, but just what in general is on y’all’s mind or what are people asking about?
Kuppy:
I do bull markets. Industries that have been started with capital for long periods of time that have destroyed everyone’s hopes and dreams, and everyone just stopped looking because it’s been so miserable and sad and depressing. But I tend to look at decently good quality businesses. Look, aerospace has been terrible. You had the issue with the max plane where the planes were falling out of the sky because they programmed it wrong. Then COVID came and no one wanted aircraft. I mean, it’s been an eight year bear market in aviation, and I think it’s a crazy statistic, but Southwest Airlines, which is like a second tier airline in the United States between what they own and what they control, they have more aircraft than entire India with over a billion people. Just think about that. Southwest Airlines, a smallish airline in America. They control more aircraft than all of India.
And then you look at Boeing, at Airbus and you see what their backlog looks like, and it’s all India, China, Indonesia, Philippines, Africa. This is where it’s all coming from Middle East. They just keep reordering and reordering. Turkey. And just look at the backlog. You have a 10 year bull market and Boeing and Airbus, they have bottlenecks. They can’t figure out how to produce what they plan to produce. They each say, we’re going to produce X many planes. We’re producing 40% of that right now, and every month they want to get one more plane done and eventually ramp up to 70 a month, 70 of this model, 50 of that model, whatever. And they’re slowly ramping up. And as they ramp up, everything in the supply chain is seeing huge growth in demand for all the components. Boeing and Airbus, they just final assembly. And these factories have really had no business for years and years.
And suddenly the business, the backlog, I mean these companies have three and four times the backlog they would’ve had in 2019. It’s incredible. It’s happening. And yeah, they’re earning no margin right now because it’s really hard to ramp up an industrial business in America. But I think they’ll figure this out and volume usually drives margin. And if not, they’ll get some concessions from Boeing and get more margin. I mean, we own a bunch of these things. They’re great. And I just think there’s a huge bull market as Boeing ramps up to whatever the target number is. And like I said, I love bull markets that are reasonably good businesses. And for a lot of these aircraft, there’s really only one sole supplier.
Meb:
Aviation sub-assembly has definitely been the first time that’s been uttered on this podcast, probably not certainly just this year, probably ever.
Kuppy:
Meb I think that the thing that makes this far more interesting is that we just gave all our spare toys to Zelensky, and suddenly the US military is outbidding, Boeing and Airbus for new equipment and suddenly it’s a price war. Whereas before Boeing and Airbus collegially work together, the US military is just outbidding everyone. And suddenly I think these guys are going to get huge margin next year. And you see it in the backlog and they have to basically eat through the backlog because you book backlog for 2025 now. So you have to eat through 23 and 24 and then margin. And I don’t know, I love this trade. I love bull markets that no one’s paying attention to because you could buy into them at 1, 2, 3 times cashflow, 25 cashflow 20, 25.
Meb:
1, 2, 3 times cashflow is always a nice multiple. You don’t see that when you’re talking about the magnificent seven. Louis, what else is on your brain as we wind down 2023, what are you thinking about? What are you worried about? These two big conflicts, it seems like the discussion around Taiwan has receded a bit, maybe not in your world. What are you marinating on as we get to year end?
Louis:
I don’t like being worried. I like being hopeful. I’d like to make a couple points that I think there’s misconceptions that perhaps predate COVID. I think when people look at Asia from the United States, they bring two conceptions with them that are wrong. The first conception is that China exports cheap stuff. And the other misconception is that India can’t build infrastructure. Now, I just thought of this because I was listening to Kuppy just now about airports, et cetera. In the past five years, India has opened 17 new airports and they’re going to open another 17 in the next five that are in construction right now. You go to India. I went to India this summer, spent a couple of weeks there. I hadn’t been there since pre COVID. You now have motorways. You have world-class airports, much better than airports that you have in North America at this stage.
Meb:
Yeah, can we get them to take over LAX and Los Angeles? My God, what a dump.
Louis:
And so I highlight this as Kuppy’s talking about the lack of planes, et cetera. If you’ve just built 17 new airports and you’re building another 17, you’re going to need planes to fly to between these airports. Now that brings me to the next point is in the past, all these airports would’ve been built using caterpillars, using Western either US or European machinery tools, et cetera. And the planes for now are still going to be Airbus and Boeings. But in 10 years’ time, it’s not given that it will be Airbus and Boeing. And in the meantime, you are moving from Caterpillar to long haul machinery. China’s trade surplus has gone from 30 billion a month five years ago to 80 billion a month. And it’s not because all three of us have decided to buy three times as many pairs of underwear and three times as many pairs of socks.
The reason it’s gone from 30 billion to 80 billion is China’s now exporting cars, earth moving equipment, telecom switches, trains, turbines. China right now is negotiating with Saudi Arabia to sell nuclear plants to Saudi Arabia. Now, as a Frenchman, I’m like, how are we losing this business? This is French business. This is the kind of stuff we do, but China’s going to get this business because of course it’s doing it cheaper than the French. Now, I highlight all this because this is super hopeful for the whole world. China, today, if you’re Indonesia, if you’re Vietnam, if you’re Saudi Arabia, China’s allowing you to industrialize on the cheap. It’s allowing you to industrialize on credit. It’s allowing you to industrialize in a currency other than the US dollar.
It might be in your local currency, it might be in Renminbi, and putting at the back end the pipes to make this necessary. So China says to Saudi Arabia, “Look, let’s do a deal on these nuclear power plants. Let’s do it in Renminbi, and I’ll give you a swap line to make sure that you can always have Renminbi to pay me.” This makes for a world that is much more stable, where trade doesn’t depend on all of a sudden JP Morgan waking up one morning and saying, “I’m not going to fund Indonesia. I’m not going to fund Saudi Arabia for whatever reason.”
Meb:
On China. Are you generally positive on the equity markets? And the reason I ask that is there’s probably been, as far as valuation, no bigger basket case in the markets than China over the past 20 years has been-
Louis:
Oh, Japan, Japan as well.
Meb:
But the full spectrum of boom bust, boom bust. And arguably, if you look at the long-term, PE ratios, China’s at or below the lowest valuation we’ve seen, if not ever in a very long time. Are you generally constructive on Chinese equities or how are you feeling?
Louis:
I think the biggest misconception of foreign investors when they look at China has been to look at it through the prism of equities. And here we’re all the fruits of our own experiences. But when I started in this business, my very first client gentleman called (inaudible 00:47:30) in Geneva, told me, “Louis, remember that when you don’t know what to do when it’s panic in the markets, when it’s mayhem, you have to buy equities in the US because the Fed will always manage policy for the equity markets, and you buy bonds in Germany.” So I’m showing my age, “But you buy bonds in Germany because the Bundesbank,” so the Bundesbank still existed, “Will always manage the economy for the bond holder because all the Americans own stock and all the Germans own bonds. So deep down, if you don’t know what to do, you just do that and you’ll be fine.”
And by the way, if I’d followed that advice, I would’ve probably done better. But most Americans look at China think, oh, China’s growing. I buy Chinese stocks. The reality to your point is Chinese stocks have massively underperformed US stocks. If you bought Chinese bonds, you’ve absolutely crushed US treasuries. Chinese bonds have been the new Bunds. The PBOC is the new Bundesbank. Why? Because the primary goal of Chinese policymakers has been to internationalize the Renminbi to make it a credible currency. And for that, you need a credible bond market that delivers steady, positive, absolute returns. So we are now in the phase of the cycle where the Fed has done everything it could to goose up the equity market and done it successfully. And if that meant that treasury holders got smoked, then so be it. The next thing that will happen is I think US dollar holders will get smoked because the equities will need to be saved.
And so the US dollar will end up being sacrificed. But in China, what matters more in the order, in the pegging order is first currency, then bonds, then equities. The equities are the variable of adjustment. So we are now at the stage where, yes, equities are cheap. Yes, all the economic data X real estate shows that the economy bottom in the second quarter and it’s picking up. Yes, the government wants the equity market to come up. So I think it’s a dangerous short, but long-term, again, if you want to buy something long-term in China, you buy the bonds.
Meb:
If I was to guess of all the people listening to the show, how many own Chinese bonds, I’m guessing the answer would be it would round to zero. There are two Chinese bond ETFs. One has 3 million, the other has 33 million in it. And foreign bonds largely one of the… If not the largest asset class in the world, it’s pretty darn close and astonishing.
Louis:
China’s the second biggest bond market in the world, second biggest bond market in the world. And nobody owns it. Nobody owns it.
Meb:
I bang my head against the wall almost every day on Twitter talking about international investing. I was going crazy today because I was getting into it with an institutional investors, says, international investing hasn’t worked over the past lifetime. And I go, let’s be clear, international investing has worked great. What you mean by what you’re saying is international investing for Americans, but international investing for the other 44 countries around the world that are investible has worked fantastic. So you have a sample size of one out of 45. That’s an odd statement, but-
Louis:
I would say… I remember so well in 2000 a piece, I think I’m pretty almost 99% sure it was published by Merrill Lynch. Basically it was a huge report saying Logan’s national diversification makes no sense. You need to be a hundred percent in the US. And this was in 2000. And then for the next 10 year, 2000, 2010, US basically underperformed everybody. I want to be clear today, I look at Chinese bonds, yields have come down a lot. They’ve delivered terrific returns. They’ve crushed US treasuries on a one year, three year, five year, 10 year view, et cetera.
I think if you put money in bonds today, you’re much better off owning Latin American debt than either US treasuries or Chinese bonds. You’re getting real rates. Today you can buy Brazilian tips offering you 6% real. What else do you need? You can buy Pemex debt and Kuppy and I have talked about this before, but you buy two year Pemex debt, you swap it back into peso, it gives you a 16% yield. Unless oil goes to 20 bucks and Mexico goes bankrupt. This seems like a fairly… And by the way, I don’t think oil’s going to 20 bucks just to be very clear.
Meb:
We’re going to have to title this episode is it Time to buy Brazilian tips? Which we did a fun poll on Twitter where we said, “At what real yield would you sell stocks and buy tips?” This is in the US and they’re at whatever, 2.3 now, et cetera. I said, 3% real 5% or tips yield. 3%, 5%, 7%, never. And the vast majority of people are like never or seven, so forget the fact that none of those yields have ever been hit. These are levels-
Louis:
Seven. Of course, you do it all day every day.
Meb:
Right. Five I think. At this point I feel like people are just trolling me and my Twitter polls and answering things that they know will set me off. Kuppy’s quiet again. So one of the goals in the beginning of this podcast, we said we have to challenge ourselves and find something that at least the two of you disagree with, maybe all three of us. So as you think about one of our favorite questions, which we’ve asked you guys before, but to think about maybe in current terms as you have conversations with your investors and just general media and other pros, let’s talk about the pros is what do you believe right now that the vast majority of your friends don’t? And it could be something that is either a specific investment or trade. It could be something that is more like philosophical speaking? Anything? This may take a minute to think about.
Kuppy:
I believe quite strongly that we can have a recession, though it doesn’t appear like we’re having a recession. The data might be a little softer, but doesn’t seem particularly bad. I believe we could have a recession and the equity markets keep going up. I believe that the S&P, even though MAG7 is such a big piece of it, and I don’t think MAG7 goes up much more. I think it can go up because there is no alternative. I mean, you’re not going to buy tenure, you’re not going to put it into money market. What are you going to do with your money? You don’t really have any option. And as Louis said, the government’s going to be there to bail out the S&P because that’s every voter’s retirement account. And if the S&P has a down 20, no one gets reelected.
That’s how the policy system is set up. And if you have a recession, it means they print a ton of money and the S&P goes up. If you don’t have a recession retained earnings, they buy back all the stock. The S&P goes up, and if MAG7 goes down 30%, it goes back to an index multiple. Well then oil stocks, rerate and industrials rerate and cyclicals. There’s all these sectors that are priced for a recession that never seems to come. And we’re two years into this process where every month they say, “Next month the recession’s going to be here, “and then the recession doesn’t come and the jobs data is fine, and maybe leading indicators are slightly worse. There’s always that one data set they drag out and they’re like, “Look, look, it’s happening. It’s happening,” but it doesn’t really happen. I believe that no matter what happens, the equity market’s just going higher and I don’t think most of my friends think that. I mean, most of my friends are… Look, I’m running 130 long right now and I’m bearish I guess.
Meb:
Wait, hey, hold on. Can you restate that statement and explain it for listeners? Because I feel like people are sipping their coffee to be like, “Hold on. Did he just say he is 130 long and bearish?”
Kuppy:
Yeah, I’m bearish. I mean the data’s starting to get a little tarnished on the edges, but I mean I’m long GDXJ, I’m long uranium, I’m long things that probably are countercyclical. I don’t have any consumer put it that way. I don’t have any of the leading edge stuff, but we have a lot of industrials and I mean they’re two and three times next year’s cashflow. Some of them are one times, like come hurt me, take 30% of my EBITDA, come hurt me. I’m not that worried. I mean if they hit the stock, there’ll just be more buybacks, but I genuinely believe that one, the economy is a lot stronger because everyone’s looking at real data and not nominal data, which is why every corporate beat earnings in Q3. On the revenue side is a little dicier, but on the earnings side, they were just fine because when you’re running seven, eight nominal, well, yeah, of course you should have 8% revenue growth.
That’s just treading water in a real world, and I just think equities going higher as a result of this. And like I said, if equities go down 20%, well then you print money and equities go higher. I just look at my friends. A lot of them are sitting with a bunch of cash. A lot of them are short. A lot of them are running like 120 80 or something where they’re like 40 that long. They’re just suffering. They’ve been suffering for two years now and their shorts are killing them. They’re probably short MAG7 and they’re longs at the same value stuff I own that never goes up. And no, I mean everyone’s suffering and I feel like people are totally mispositioned for the world we’re in, which is an inflationary fiscally stimulative world.
Louis:
Kuppy and I have very similar world views. Let me put it this way. My whole life has been the story of different economic zones integrating. So I grew up in France just when European Union was really getting going, trade bearers were coming down, and the exciting story was the European Union. Then I moved to the US for college in the early 90s and that was in NAFTA and that was an exciting story. Then I moved to Hong Kong just as China was about to join the WTO. And then for 15 years we talked about Chin America. Now everybody today talks about deglobalization, which to me is completely wrong. There is no deglobalization going. Global trade is still expanding. It’s just that we’re not part of it. For the first time since Columbus sailed for the Americas, the western world has nothing to do with the globalization.
We’re not doing the financing, we’re not doing the logistics, we’re not doing the capital tools, the machine tools, we’re not doing any of it. All the growth in the world and trade is now happening in emerging markets to emerging markets, and I think people are missing it because they’re looking in the emerging markets through the prism of China. Now, China has had a rough five years, but because it’s had a big real estate boom and a big real estate bust. Having said that in my career, every time you had a real estate bust, Southern Europe in 2011, US in 2008, Sweden in 1992, Japan in 1991, your economy imploded. Your banking system went belly up, your economy, unemployment went through the roof, et cetera. China’s just gone through a big real estate contraction and they’ve kept a show on the road. Banks haven’t gone bust.
Nobody’s gone unemployed. It’s stayed okay. Now still China’s been weak. We look at emerging markets through that prism. We need to look at it through another prism. And the prism is that you draw a line from Istanbul to Jakarta, it’s 3.6 billion people with incomes growing by 5% a year and population growth by 1% a year. It’s capital spending. It’s every day that goes by a new free trade deal, a new railway, a new canal, a new road gets announced. I mentioned the 17 Indian airports, but it’s the same story in Indonesia. It’s the same story in Saudi Arabia. It’s the same story in Turkey. Few people realize this, but since the bottom, for all the talk about how the US you mentioned international diversification doesn’t work. Since the COVID bottom Mexico and India have outperformed the US, Brazil, Indonesia, even Turkey. Everybody thinks Turkey is this big basket case.
Turkey’s done just as well in US dollar terms and Turkish stocks as US stocks. And in the past two years, Turkey has crushed the United States in US dollar terms. So the new big story is the story of the Eurasian economic integration is how from Turkey to Jakarta, you have one big economic access with more trade, more infrastructure spending. And the question becomes how do you play this? Do you play this through capital spending? Do you play this through the luxury goods? Do you play this through the commodities? Do you play this through the local banks, the local real estate? There’s many ways to skin a cat, but that is the big macro trend is the economic integration of the Eurasian continent. And I’m not sure if for all the talk about how you got to have all your money in the US, I’m not sure that the US is actually, and US companies are the best positioned to participate in this. Swedish companies, Japanese companies, Chinese companies are much better positioned than American companies to participate in that growth.
Meb:
Listeners, if you want to hear more on Turkish stocks, we did an episode with Mohnish Pabrai where he talked at length about investing in Turkey, which I don’t know if we’ve done elsewhere on this podcast before. So good to hear. Gentlemen, we’ve been at this for a little bit and we’ve covered almost everything I could possibly think about. We’ve done little very disagreement unfortunately. Is there anything else that is on your brain that we didn’t get to?
Kuppy:
Let me bring up iron ore. That’s the commodity that was supposed to roll over like a hundred times the last decade and they just can’t touch iron ore. It’s bulletproof. It’s like met coal, but it’s even stronger. I mean, look, China was supposed to have all the steel it ever needs at the end of time and iron ore doesn’t have down ticks. I mean I think that’s telling you what’s happening in the global economy. They keep building more iron ore mines to keep exporting more. It doesn’t matter the price just bulletproof. I mean copper, it’s hanging in there in the high threes. I think things are just really strong and I think that’s what Louis is talking about, 3 billion people that want stuff. I got a question for Louis. There’s a ton of these companies that trade at one to three times cashflow globally. These aren’t PECO caps, billion plus market cap.
A lot of them have double digit dividend yields. Big buybacks. Yeah, they’re clunky businesses. They’re steel or they’re iron ore or they’re cooking coal or industrial something. They make gigits and these things have been cheap for the better part of a decade. They got super cheap during COVID in 2022. They had a bit of a revaluation period and I was like, oh, it’s happening. And then they just deflated all 23. The money flowed out back into MAG7. What do you think it takes for these things to go up? I mean, economically they’re performing very well, but the share prices are just miserable. Is this just you need the dollar to roll over? Do you need interest rates to roll over? What is it that finally wakes these things up? For life for me, I don’t get it.
Louis:
Either the dollar wakes these things up, but you’re right. You’ve even seen I’d add one more thing. You’ve started to see some industry M and A. You’ve start to see it in oil with the pioneer deal, and so you’d think, oh, okay, finally this is going to bring it to life, but not even. So yeah, look, it’s been a place of immense, immense frustration.
Kuppy:
That’s the word, frustration.
Louis:
As my dad likes to put it, it’s funny, but not amusing.
Kuppy:
I wouldn’t be upset. Look, the businesses we’re doing poorly. I would say, yeah, that’s bad fundamental analysis.
Louis:
Yeah. I messed up. That’s right. I messed up.
Kuppy:
Every quarter they just keep plowing and the cash keeps coming in and no one cares.
Louis:
I mean, one easy culprit is ESG, and you say, look, most people can’t buy these things so they can be given away in the street. People aren’t going to pick them up even if they were free just because you can’t be seen owning those things. And here there might be a change in the zeitgeist, just like in uranium, we’ve seen a change in the zeitgeist. Five years ago we were getting Chernobyl on HBO telling us that if you get… My favorite part of Chernobyl, I don’t know if you watched the series, was the guy, the firemen, the heroic firemen who go in there, et cetera, are then kept in isolation because they’re going to be contagious for radiation exposure and their families are told you can’t see them because you get contaminated as if radiation poisoning was contagious. So the public was massively against uranium and that’s shifted.
It shifted with the Russian invasion of Ukraine. All of a sudden people are like, actually, it’s nice to have your own power supply and not be dependent on anybody. And I highlight this because on ESG, I wonder if we’re not going to start seeing that it’s slow moving, but initially the point of ESG was we told investors, “Look, you can’t buy this. You can’t buy any of it.” And now what you’re starting to see is I think a shift where people are like, “Okay, well we actually do need copper and we do need iron and ore and we do need all these things, but there are more or less green ways to produce it.
So maybe BHP is a green producer, they get all the right stamps of approval, and so therefore BHP you can own in an ESG portfolio, but you can’t own the Chinese one that pollutes the hell out of the sky or the Korean one. And so the shift starts to move from you can’t own any of them to actually, let’s try to be smarter about this and see how different things are produced. And I think there is starting to see that shift in ESG and perhaps that might help some of these guys, but maybe that’s just me clasping at straws.
Kuppy:
I think it makes sense. The ESG stamp approval, you’ll have a whole nother military industrial complex of stamps on stuff.
Louis:
For sure. Oh no, no. Governments will be very happy. It’s like, oh yeah, let’s do this, jobs for the boys. I’ll be head of the copper mining stamp and you can be the head of the iron and ore stamp and maybe Meb can be the head of the nickel stamp and we’ll all need to build armies underneath us to stamp and so governments are going to love this.
Meb:
I was getting into it, as I often do, I love to poke CalPERS, the $400 billion plus pension plan in my home state. And we wrote an article like a decade ago called Should CalPERS be Managed by a Robot? Then we did one on Harvard, largely both of those due to governance issues and then Bridgewater, but largely due to the challenges of just how hard it is on a global portfolio at scale. These guys and CalPERS particularly triggered me yesterday because they wrote a job description, which I’ve applied for three times. They’ve had something like five CIOs in the past decade, and it’s the most laughably, you got to make a documentary out of it at some point, but they’re paying a consulting firm, 300 grand to find the next CIO and part of the attributes they’re looking for cultural competence, ability to effectively listen, the ability to read the room, present in a way that doesn’t cause a furor or that’s insensitive to CalPERS culture.
And the board would also like the new CIO to agree to receive mentorship. And I was dying laughing. I’m like, Scott Malpas or the late great David Swenson. Can you imagine hiring one of these guys and then being one of the things you’re going to have to do, you’re going to have to be mentored. You’d be like, “By who? By whom?” Unless it’s Buffet or-
Louis:
I was going to say, unless it’s Warren Buffett’s or Howard Marks I’m not taking it.
Meb:
You need to separate the CIO role in a press secretary role, which is what… But my goodness, dysfunctional.
Kuppy:
It’s good that these mandates exist because it creates alpha for guys like us to pick up off the street.
Meb:
It creates alpha and also a lot of management fees for, I think our VC friends, they did something like 0.5% on their venture capital portfolio the last 20 years, and then to have decided to triple it. They’re like, “We’re so bad at this. We clearly can’t be worse.”
Kuppy:
It was the golden age of VC had they lose money.
Meb:
Right. Right. You could have just picked a dart. The favorite though was when they eliminated their entire tail risk portfolio the month before COVID started. It was like the absolute worst time in the history. Maybe the month before GFC rolled over. But anyway, they do it to themselves, so I don’t feel sorry for them. Anything left? I got some more ideas, but I figure we’ve been boxing and dancing for a while. You guys probably rack up more frequent flyer miles than anyone I know. Do you have a favorite place on your 2024 travel list you’re excited to check out?
Kuppy:
Louis travels way more than I do. I got to be 183 days Puerto Rican.
Meb:
I don’t know what you’re talking about, Kuppy, because you got to start a separate Instagram account for your food travels. I give you credit for dining well. All right, well, give me your hotspot next year.
Louis:
I’m off to Beijing actually in a couple days. I’m doing Beijing, Shanghai, and Hangzhou. So back in China, I actually, I’ve been obviously in Hong Kong a bunch. That’s where my office is, but I haven’t been back to the mainland since June. And when I was there in June, people were feeling very despondent and the mood was very, very somber. So it’ll be interesting to see if that has changed a little bit.
Meb:
And that was regarding what?
Louis:
Well, regarding just the economy, regarding government policy, regarding pretty much everything. Now, what was interesting to me when I was in Beijing, everybody was super despondent, et cetera. And a couple of the people I met, I asked, and especially with the real estate outlook, and I’d say, “Okay, so what would it take for you to buy real estate?” And a couple of times people were like, “Oh, I bought one last week.” And I said, “Oh, well, so you can’t be that bad.” He goes, “Oh yeah, but I got a special deal. It was like 20% off and then the mortgage rates are half the price,” et cetera.
I go, “Yeah, so okay, the market’s starting to clear.” And then they were like, “Yeah, but that’s okay.” In Beijing and Shanghai it’ll clear, but there’s empty buildings in the middle of nowhere that will never clear, which to me sounded a lot like I remember in 2009 where people were saying, oh, there’s all these empty condos in Florida, Nevada, Arizona that will never be sold and we might as well turn them into chicken coops. And then you came back three years later and they were all occupied because prices go down and mortgage rates go down. And today affordability in China is as good as it’s ever been in 20 years. Price have come down 30%, incomes have gone up 30% and mortgage rates have halved. So I’m very interested to see whether the despondency is still there or whether people are starting to pick up a little bit.
Meb:
Kuppy where are you going?
Kuppy:
I think I’m going to Venezuela. I think I’m going to check that out. A friend who has a property portfolio there, he’s been very early in buying Venezuela. I always thought it was a dangerous screwed up place, but he’s still alive and it’s been five years now, so I feel like it’s time to go see.
Meb:
Well, I mean, let’s be clear listeners. This is coming from somebody who’s lived in Mongolia and is now in Puerto Rico. I’ll give you this, of the nearing on 400 investments I’ve done on the startup world. My number one, very likely, it’s certainly in the top three currently was a Venezuela company. Just to go to show you can make money anywhere. But as a look around to the next few years, I’ve seen probably more interesting deals in emerging markets in the startup world than certainly in the US over probably the past three to five years. So let me know when you go. I’ve always wanted to go fish. What is it? Los Roques off the coast.
Kuppy:
I’ll let you know. You can come join. Look, they’re just opening up right now.
Louis:
So Kuppy I was just in Chile a few months ago, maybe two months ago, three months ago, and one of the guys I met there, big billionaire, I had just bought the biggest Venezuelan insurance company for 17 millions US dollars.
Kuppy:
Is that good or bad?
Louis:
Well, I think the way you looked at it was a call option. And if you’re worth billions and you can buy the biggest insurance company for 17 million bucks.
Kuppy:
Yeah, why not I guess.
Louis:
And if you think you can probably turn it around. In 10 years’ time, if Venezuela does any economic readjustment, that thing could be worth a couple billions pretty quickly.
Kuppy:
Yeah, I mean from what I understand that the current guy is Maduro. He’s trying capitalism because communism didn’t work and things are actually working there. I mean, from a super low base, but it hit absolute rock bottom about five years ago and it’s on the way back up. And they might even have elections and someone else shows up.
Louis:
The one issue they have is all your middle class, the guys who worked in petroleum engineers and et cetera, they all left for Brazil and for Columbia.
Kuppy:
They’ll go back. Most of them are in Miami now.
Louis:
Or Miami. The rich guys went to Miami, the poorer guys went to Columbia and the middle class went to Columbia and Brazil. They might come back, they might not. So you’ve hallowed out your talent pool. But-
Kuppy:
Yeah. I’m curious to check it out. Maybe not invest, I don’t know.
Louis:
No. No. It’ll be interesting. I’d love to hear what you think.
Meb:
I’m looking forward to Kuppy holding a conference meetup in Ring Con to where we can all come visit.
Kuppy:
Yeah. Let’s go do this. So you’ve already come once and enjoyed Ring on. I’m inviting Louis five times now.
Louis:
I’ll make it because my sister lives in Puerto Rico, so I got to make it down anyway.
Kuppy:
Make sure you come before it gets too hot. Before May.
Meb:
We’ll get Wes to get all the quant nerds.
Kuppy:
Good. Let’s do it
Meb:
Gentlemen. It’s been a wide-reaching conversation. It’s been a lot of fun. Where do people go to find out more info on you guys if they don’t already? Start with Louis.
Louis:
To our website, which is gavekal.com, G-A-V-E-K-A-L .com.
Kuppy:
And for me, go to precap.com. I got a blog there. It is free so you get what you pay for. And if you like memes, go to @hkuppy on Twitter.
Meb:
Perfect. Gentlemen, thank you so much for joining us today.
Louis:
Great to see you guys.
Kuppy:
Hey, thanks for having us.
Meb:
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