Investing For A High Price Future | James Davolos on Inflation, Pricing Power, and West Texas
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Very pleased to welcome to monetary matters. James develops portfolio amending of horizon connecting s. James, great to see you.

Have you been to show i'm very .

pleased. See you, James. Uh, you are portfolio manager of the uh, a horizon connecting inflation beneficiaries found etf. And so we first spoke when that fund launched uh, three years ago.

I want to ask you, you back then IT was the beginnings, the early innings of an inflationary wave. Obvious we had a huge inflationary boom in point twenty two, that we are our economy, our citizen, are still dealing with. What is your what was experience like of managing an inflation fund during an inflationary boom? And then also, how would you characterize the inflationary boom that we had?

What a lot of people say I was caused by the amount, large scc stimulus, basically money printing. A lot of people say, no, no, no. IT was all about supply chain issues and oil and war and the lake. I will say that is that makes to both what what do you think.

uh, what to impact there. But you know, maybe I was back up. And so the fund was launched in january of twenty twenty eight.

One CPI was still wilber one percent. You had half of the people in the world saying that the economy was never gonna recover from the pandemic. The other people saying, we are going to go through this boom a lot to be decided.

But we launch a predecessor to this strategy in twenty seventeen, where we thought that there was two overwhelming trends that we're going to result in a macro economic regime shift, the first of which was under a malinvestment, in a lot of the critical materials that run the world or the old economy. So under investment and energy in basic materials in agriculture, but also when things like infrastructure, the power grade water systems and set a, those are very relevant today. We can talk about those later.

That was colliding with what was, at the time, very elevated fiscal spending for a time period that was non recession. So if you go back to the spend, the fiscal deficits that we're run after the nine eleven attacks, you have this large deficit spend to stimulate out of a recession. But then after every subsequent crisis, a global financial crisis and then the pandemic, not only did you have, did you have progressively larger stimulus spending to combat those recessions, but then the Normalization or the recovery spending was materially hired, such that leading up to twenty twenty, we were still spending three to four percent of GDP and deficits.

And so you have this sustained, structural, higher level of government spending and now investment. And we said eventually this is going to create a higher level of inflation. So we weren't forecasting eight, nine, ten percent, but we were certainly think thinking two percent was well, too low.

And that was going to create a structural regime, regime shift relative to very low rates, very low inflation, which was ulto accommodative for a profit margins, multiple expansion at center a. And I think that we've kind of come full circle now where that's the new reality. And half of the market is in Price for that.

Half of the market is, but most people seem to just not really accept the fact that we're not going back to you represent ent interest rates. We're not going back to sub two percent inflation, and we're probably I don't see any way that we're going back to any semble Lance of a reasonable deficit going forward. And so the playbook is extremely different today than IT was pre twenty twenty. But again, a lot of capital assets are pressed for that.

And so you don't think inflation is going back to two percent. We're pretty close to two percent are about two point five person. Let's say inflation has fAllen, uh, a lot. Why do you think IT will continue? Why do you think that two .

percent is kind of the floor? But I think that one of the dirty secrets is that global central bags want inflation. So if you accept the premise that part of their Mandate is to fund the treasury or fund basically the nation that they represent, right now, you have the interest expense in the united states approaching a trillion dollars a year.

And that is part of why you have the structural deficit. One of the only logical scenarios, short of austerity or default or growing out of IT, which I think is a mathematical near in impossibility, is due debates kind of in the rustle, APP or camp. So the way to do that is to try to get rates as low as possible while having high ominous growth.

And part of that Normal growth and inflation. So part of the only reason why the debt burden isn't so extreme today, reality to the GDP, is that we had that period of extremely high inflation. And so A I think that governments are very happy to five, to have three, four and even five percent invention.

Eight, nine, ten is not tolerant. But forget to forget the fact that their implicit intent and it'll never be explicit. But again, you're looking at people have been calling for a recession as rates were starting to hike, and people are looking at all these leading indicators that we're seeing the economy was rolling over.

But again, circle back to the fact that we're spending two trillion dollars of deficit spending a year here in the united states that's keeping a good amount of economic activity moving. And so because of all those variables that are pro growth and pro l Price levels, add in some of these kind of supply side issues and then you know add in these exogenous things like we sure on shoring and know things like building out data centers and building out the power grid. And basically all of that adds up to a structurally higher base rate of inflation. No matter how you want to measure such .

gentle banks reserve quite open in the fact they don't want zero percent inflation. They want the target is is too. I don't know if they want four, five recent inflation, you perhaps they might prefer three percent inflation to to one percent inflation. But so your way, when you say you think inflation is going back, that you making a micro o call, but when you structure the your your kr, which is is I N F L is not so much about the microcode ge about buying high quality companies and and doing well. And I like to congratulate you.

How are and could I stalled that? The founder of just having A A fun that has performed well as we all this IT has been ten, the s and p five hundred without owning any of the big large cap tech stocks if you're sticker about sharply. So I believe that has had probably little bit more as well.

But that is congratulations, you give you flowers for that. But I believe is the case, James, just looking at IT, that, uh, your fund has done much Better this year, twenty twenty four, when inflation has fAllen more sharply than twenty two when inflation was on the rise and and and very high. So what does that tell you that your fun did a lot Better when the fish was going down? Then when was going up?

sure. You know, one little new on is that I don't think we're making a macro call. I think that we believe in a structurally different economy that is supportive of Price levels versus non supportive of Price levels.

That was really the norm in the call at twenty ten to twenty nine. So whether you want to depending on how you want to measure inflation or whether it's three percent, four percent, five percent, whatever IT may be, we think that it's just a very different maco regime. And part of that is very constructive for real assets.

The problem with traditional real assets, which if you are in a traditional allocators, that means natural resource companies, real est companies, infrastructure companies, is that they are both capable, intensive, cyclical, energy sensitive. So let's take the latter to infrastructure and realistic phenomenal assets. I think they are probably going to garner a lot of attention in a year in in in a world where people are going to need inflation index income.

But a lot of these assets are sensitive to long term rates in the form of the cape, which is implicit in evaluation, but also short term rates and the sense on how they fund themselves. So I think that your best case scenario with a lot of those assets is that your return is going to grow at best with the Operating income. It's almost impossible that you're going to experience that much of an improvement in your cap rate because again, let's say we cut another hundred bps to two hundred bps, I have no idea.

But what if the yield curve is positively sloping at which IT should be an an ormat zed environment? That's where your captain is anchored. When you look at resources, yes, you have the right sensitivity.

Yes, you have a sickness, but you're having a lot of cost pressure on the Operating side and the reinvestment side. So look at new mountain mining, one of the largest gold miners in the world that had very disappointing results a week or two ago. And a lot of IT was around.

They are all in sustaining cost creeping up much more than investors had inspected, had expected. And that's a function of labor. Now they're na have a little bit of Taylors in the form of energy going forward. But as these cycles mature, IT becomes more expensive to extract these resources. There are lower and lower quality or grades White, you're talking copper or gold or silver, generally lower quality resources and energy as well.

And so you're also reinvesting your cap cks into a lower quality, more scarce universe, and that's why you're seeing him in a so if you think about that, so with all the global energy companies there is buying each other. So while people can argue about what baLances are going to be in three and three months or six months or nine months, and can argue with the I E A and the E I A, the fact the matter is non OPEC global supply is not increasing because everybody just consolidating, and that's gna have consequences. So when you think about that level of cab cks and how that's very difficult for, you know, going back to my origin point is that these companies, particularly on the Operating side, are having rising expenses and then they're also having rising capital expenditure.

So those are directional bets. You're making a bet on the resource, on the cycle, on the valuation seta. When you look at what we own the capital light business models, we are trying to smooth out the cycle to where you can own these over five, ten, fifteen, twenty year periods and compound your capital by virtue of them being capital late.

And as you mention, we think that a big part of how we have out perform all of the relevant benchMarks for the fund, including the S M P. Five hundred over the past nearly four years. Is that we captured the upside when the market is accommodative.

So we've captured the upside in twenty one. We captured the upside in twenty four, but we also didn't participate in the downside in twenty two when equity markets were down twenty percent, certain growth markets were down forty, fifty, sixty percent. And so it's equally, if not more important to preserve capital during those periods when rates are being hiked.

They were really combating inflation. People were worried about IT, worried about a recession such that you can then compound all that at establish base. And so now, about four years into the fund, having compounded in the vines of fifteen or sixteen percent a year, we think this is actually a much more sustainable environment.

So rates inflation goes to ten percent of every says, great, let's go by this inflation fun. Well, first of all, it's not inflation fun at a real asset found that is orient around compounding businesses that happened to do Better in that in these environments. But I was telling people ten percent is not good at.

Maybe it's great for short term performance, but central banks are gonna have to go very aggressive with their policies as they did. You could argue whether interest strates actually had the effect that people think they did. I would argue no, but that's probably a much longer conversation.

But now slightly elevated inflation. And again, you could argue the nuance two and a half, two or three, three and have with slightly more accommodative monetary policy and the continuation of fiscal support, that's where you can really compound. So you're not swiming up stream anymore.

And that's why we think that weren't a really good position today. But again, these past four years has almost been a full cycle of rates, inflation and growth condense into a three and a half year period. And now we're at this whatever landing you want to call IT and you we're going to see kind of what the future looks like.

I guess the importance of a capital life business is really important. I guess you talk about like three levels of businesses, not of which in I don't think are in your I and hell one, but just like a credit card company like capital one. So they have to spend a lot of money on Operations you ready down, create people who don't pay your credit, ards back, marketing you, they're got to get a samual jacket on on on the ads.

Then a higher level business would be something like american express, probably less capable you have to put out because but then I think the ably the high quality is where the least capital be, something like VISA, where you you're just getting paid and you don't have to put out new capital. Why is that so important? And and you talk about how that principal animates a lot of the holdings of a bion fell.

Yeah I mean, I love that example. And so when you're a credit card lender, your sensitive to your funding rates versus what you can earn on that capital. So all of any baLance sheet base company is taking baLance sheet risk per prieta risk and earning a spread on that risk.

And that's why these businesses tend to trade a around book value because it's pretty hard to consistently earned a high net interest margin or spread on that capital. And when you do, it's a low return nl assets because you can take that much risk and you can then lever that up to earn a region of return on equity. You know bank today are level up about ten times.

Go back to lean in. These things are level up forty five times. And so you can see how IT was pretty easy for a small impairment, your equity to topple all of these bags.

But you can think about how that a signal business and a would moderately risky business, I could argue that they've been devised a lot today. But looking at a master Carter VISA zero proprietary capitalists, they're not lending any money. They're not funding and matching liabilities to their assets and their duration.

They are an intermediary where their revenue is a function of volume. And then it's basically a platform where the costs are largely fixed. So the more volume that goes through that network, the more revenue that they may largely is going to be a fixed margin.

That's all gonna rop down to free cash flow. So think about those two businesses and think about which one you would rather own. It's obviously want to own master card. And so that distinction is obvious in these larger industries where you can see the multiple is being paid for a mastercard VISA relative to the capital ones and the banks and the insurance companies of the world.

But you know, I would argue a company that we owe our companies, that we own the exchanges, very similar business model, a little bit less smooth of an earnings trajectory and the credit card companies, but it's the same thing. You don't have that baLance sheet risk volume, plant Prices, revenue, very high margin, very high occurring revenue. Those are the businesses that can compound over time. And I think that's why so many people are gravity and towards the capital payment processors that you that you refreshed. And so something like VISA.

uh, I don't think you officially easy royalty company in in the ways of commodity real companies, many which you find owns but IT he does have that similar uh, properties. So let's talk about gold, gold miners. For example, in twenty twenty, if you said in twenty one, you said I think inflation is is going to sore.

So gold are very gold as well during inflation. And gold miners are leverage to gold. I went to buy gold miners.

Your microcode would have been right. Inflation went from three percent to nine percent. However, the person goal actually went down for reasons that no one really know that there is more selling, the buying.

And IT actually gold miners, because inflation, the cost went up dramatically and the revenues in terms of the realized Price of gold went down. So they all in sustain costs. How much they had to spend to get the gold went up, the realized Price of gold went down. So they actually had very, very bad year in two and two. Compare that to some gold royalty y companies, many which you either the Price of gold went down, talk about the the capital that went in and why they on a fundamental basis did a lot Better than you're not about something, but fundamental basis did a lot Better than the gold .

mining company is exactly I think that that's a great example where again, if you are going to own any upstream commodity producer, you're taking fairly high directional exposure on that commodity. And in the case of gold companies, yes, you have a directional exposure to gold, and that's what everybody understands. But you also have to understand what are the inputs are going to their construction.

So on the Operating side, labor is the biggest problem for mining worldwide, and it's a large and growing problem that's not getting any Better anytime soon. And look no further than the amount of kind of engineers that are coming out of mining schools today. But also you can look further down at the manual labor s that, that are kind of doing some of them more high light, high labor work, but then you also have your energy costs.

So a lot of these minds, but a lot of diesel that was extremely prohibitive during the peaks of energy Prices. It's obviously helping them a little bit Better today. But so you had a double wai where you you make a macro o call on gold. And you think when you buy the miners, miners look cheap there below ten times earnings. I think I want the positive leverage to gold, but not only to gold network.

The cost is what the costs, what against you come for cycle, also the reinvestment cp pex is going up to because if you want to start developing new assets, well can to cost you more for labor, more for equipment, more for materials and set us. So who was kind of a perfect storm for miners, not torn? The royalty companies benefit for a lot of variables.

But number one, there are generally not exposed to those dynamics of apex and capex. So if you are on a royalty or a streaming agreement, which is a slightly different variation of a royalty, your revenue is driven by the production of that mind. So yes, the Price of gold coming down is going to hurt you dollar for dollar as long as the production is there though, which as you've have, you've had plenty of guys to mention this.

But it's so widely prohibitively expensive to shut down in mind that you're going to run minds in some cases for years at negative incremental profit margins because you're going to shut IT down. You're basically saying we're backgrounds. So as a royalty holder, because you have a grow generally, what's a growth revenue interest, you're continuing to generate profits.

And plenty of our energy royalties were cash flow positive during the first and second quarter of twenty twenty when you're seeing billions of dollars are right down to the producers. So you're sustaining your cash flow in value. And that's important for two reasons.

One, you don't have to sell assets issue equity issue that do things that actually create permanent damage to your business. But you can also invest counter securicor. And this is something the royalties do and they do very well.

So when there's blood in the streets, they're investing and they are investing aggressively because they don't have debt financing. They have plenty of equity capacity. They have plenty of cash.

Well, minors, every single cycle, they invest prosecutions, ally. So as Prices go up, they invest, invest, invest, invest in, rolls over. And obviously, they go over the hill with IT. So because of that dynamic of sustaining during the trough, then leveraging the eventual upside is why these investments have done so well through this cycle. But also, if you zoom out and look at ten, fifteen and twenty thirty years cycles, they really been the prem in an asset class across .

these commodities, right? And one company that you on quite A O C U persuing your fund, I felt, is is a gold royalty. But gold royalty, they do have to you, not constant, but all frequently reinvest and into new projects. And still often they will get a he passed to return over time.

Something is a very high return of our time, but compare that to another stock at you on T P L and a lot of and connect ones T P L, texas specific landrum that I don't know they do really do any or a really acquisition at all. They just have owned this plan for over a hundred years and IT just keeps on generative return. So they are not having to write a check you know every month to fund some new project in guma. They just own tons of land.

exactly. I just such a unique situation where they were basically bestowed with one of the best land and mineral packages on earth by virtue of the texas and pacific railway, which went bankrupt in nineteen eighty eight. So you can't come out no matter how much money you had, you couldn't come out today and recreate that portfolio.

And so that's such a different business model because there's not a lot that they need to do now as the company's mature, they've done some small button things with those surface accurate minerals. But yes, to you're point with Frank and of autum, they've been doing this about forty years since the early one thousand nine hundred eighties. And the great story with their original mine was the they they wrote a royalty on the gold strike mind in the ada, and they spent two or three million dollars to get a royalty on that mine.

Or when I was a small, I think there was about a five hundred thousand hours resource. And no, low and behold, american barra came in and and turned IT into a five million anounced resource. But through today, that two or three million dollars in check has given Frankland of auda shareholders about one point two billion dollars in cash flow.

And by our estimates, there's a couple hundred million month. Those things don't happen every day. They probably can happen in today's market where there's less information. A but because of the nature of franco, where some mines are coming off line and others are starting to be developed, they are constantly recycling some of their capital into developing those resources.

But one of the nuances, particularly on the precious metal side, is the largest precious metal royalties in the world that are not gold months is buy product from copper months. So the beauty of that is that a great gold mine today might haven't eat to ten. Your mindless, there's just the monster mind just don't exist anymore.

A great compromise could be a century. So having a royalty that is thirty, fifty, seventy years with upside. So the the other great thing about a compromise and and mining that's different from a lot of other assets is the best place in the world to find new copper is where you already know.

So you go deeper or you go laterally. And in many cases, these royalties and compass the entire mine plan. So because you have that longer duration, there's a lot more value for use a royalty holder because you don't have the sensitivity of expenses, you go deeper, you go laterally, you have higher attraction costs that's on the Operator. But so that's another reason why the precious metal royalties are so interesting is that there is that right hand tail that if you really believe in our thesis that we're in structurally higher Price environment, most royalty investors and resource investors, they are all to focus on years one, three, three, maybe one through five, and they basically ignore five through x while working as a lot of value in five through ex. And if you can intelligently underwrite that, that's where a lot of value is in the right business model, and that's what really lead you to realities.

right? I guess, IT is slightly dependent on the management. Are they making those good acquisitions? Are they doing at the time when Prices are destressing rather than when Prices are, of course, when Price are high? That's when I bullish, excited and want to do IT acquisition.

Ans, let's talk about about T P L. I from competition. And my own math, I calculated if there is one guy who knew, I think three thousand dollars, uh, in eighteen eight eight of the bank rup railroad that became pex specific ground trust.

If he never sold the shares, that would be what was converted IT would be worth over a billion dollars today. So IT is one of the greatest compounds in the history of of capitalism and resident metics and founder muri stall and and yourself have been involved that so so congratulations. How are you thinking about text specific trust now where i'm just on google, IT has a trAiling a Price ratio of fifty nine, which is obviously expensive.

And I think a lot of company is not in the royal sector, but in in all entire stock market. They the market, they have a very low capital needs, so they can have a very high return on capital. But the market is aware of that.

You know ten years ago, they they were undervaluing that, but now they're valued that. So you have very high quality companies that have a Price earning ratio fifty or eighty or a hundred. How are you thinking about that? And you know what why not just take look up table and sell when these these companies have to try valuations?

Yeah I I think you could you could have made an argument probably pretty consistently for the past thirty years to sell Frank and OTA, to sell we and precious metal, similarly to sell texas. And obviously, you would have left a lot of uh, upside on the table. But I think first of all, the P E.

Isn't all that relevant. And the best analogy I can give is think about an apartment building. And if you are only leasing out five out of fifty floors, clearly that cash flow was not indicative of the value of that building. Now let's also say not only you're only leasing out five out of those fifty floors, but what if that apartment building is in an up in coping area where there is a new google office complex coming in and a new university? So clearly, there's a lot of value that's going to it's going to be describe beyond even what the current cash will of those five forces.

Obviously, that's not a one for one example, but one of the things that so unique with tp l is that you have the minerals and you can argue until you're blue in the face, what is the proper assumption for oil? What is the proper assumption for gas? There's a little bit more structure around what is production going to look like.

But really, you want me have a line of site for a couple years and then you know, some people tell you that we're going to which we had pickle in twenty nineteen lips. Some people are now acknowledging that we're gonna to oil for a lot longer. The area where we saw see you, I should say murray saw the value that I think everybody was that people basically said, okay, you've got this millions acres of scrubland in west texas and you know, you fly over IT and IT literally looks like your own mars.

If you've ever been out there, it's just a dirt patch. I couldn't even call the desert because it's you think of desert, you think of kind of like the rolling sands, but it's like scrubland with brush dotted with the arx and small little oil clearings. But people say, look at its translate, ted, historically, but he was grazing land for cattle was worth almost nothing but incremental.

They were higher and Better uses. So all of a sudden somebody needs to put in a pipeline. Okay, there's a newman.

Somebody needs power lines. Another easier, you need an access road. Now you need a gas gathering facility.

Oh, now you need an area for a tAilings pond. The next situation was water. So oil and gas wells both require a very significant amount of source water to frack. They also generate massive amounts of water in the formation when you break that shale.

So in the in the western side of the basin, in the delivery and averages about five or six pairs of water cut that needs to be removed, remediated, transported and disposed of. So now you got this. So those are higher and Better uses.

But now looking forward, there are some some really interesting dynamics around wind and solar. So texas is very flat and very hot. IT also has an unregulated power grade where you can basically plug those in. You can to be behind the meter where you can be fully off the grid and support different facilities.

You've seen bitcoin lining, but I think one of the really exciting opportunities now as data centers and you think about what of the biggest constraints for data center development well, its land, its power and its water. And texas has a heck of a lot of land. IT has twenty and natural gas where you can do direct generation.

If you're a hyper scale, you can plug in some wind and solar and say that you've got some Green stuff. There's also twenty a potential for carbon capture. You have an unregulated power grid with a cot. So again, you can either be behind the meter or you can plug in and do demand response, kind of like the big coin miners.

And by the way, you have this massive water business as well, where not only as power generation require a lot of water, but so does liquid cooling and liquid emerging, which is basically the only way to economically call these data centres and and to quote the C E O digital bridge, which is a phenomenal leading alternative asset manager and digital infrastructure, he said, like everybody, he's focused on the power backup today, which is significant as he thinks is more related to transmission than generation. So the crisis that is ahead that no is talking about yet as water. And when you look at all of these areas, well, it's almost too perfect for data center to ultimately end up in west texas.

You can argue about latency, but you know I think that that's something that not every application needs to have instant little lencs. But again, thinking about the optionality of land that so many people wrote off as a zero now maybe or probably that could be worth multiple of what the minerals are there. There's two different assets within T, P, L, which makes IT very distinct from most royalties, is 在 most royalties is just mineral。 So the mineral is a subsurface right of the revenue related to the extraction of oil gas that is separate and severed in ninety nine percent of cases from the surface of day.

The surface state is a fee simple surface ownership, like if you own a house, you own your house lot. Probably feasible in due to the nature of the trust and then the separation of the original assets, which are now part of several of the Operating assets. Tp l retained both the surface and the minerals.

So they have a million giver take surface makers. And that surface makers is what people have said for decades was worthless. Now it's pretty apparent that it's worth a tremendous amount of money. And there's another company that's come public recently called landa's, which is kind of the market has basically certified. Yes, west texas surface average is worth a considerable amount of money.

So looking at T, P, L four main revenue streams, oil, gas revenue still over half than their service leases even and material basically, I guess, building pipelines, whatever you want doing the land. There's water sales, selling water to go into the ground and there's products. Water world is, I guess, to to deal with water that comes out.

So tell me this transformation with A I R people already building data centers in the desert, or you know the the dust pass of of west texas, is this just people talking about? Or you know, are these projects that are in the process of being having built already? How quickly is is this happening?

There are bitcoin mining facilities, which are low tech. Low sophistication. But you know some of these facilities are hundreds of megawatts and they exist in the permanent they exist in texas.

And the big trend in bitcoin mining companies is converting these to high performance computer. So hpc is basically saying we're onna convert to data centers and the data centers are for G, P, U and LLM training. Why are they doing this? Well, they their acid is not facility. You you're talking millions of dollars per member to upgrade a bit coin mining facility to an hpc facility which .

high hard computer.

right is busy yeah high performance computer. The distinction is they what do they have? They have the land, they have the power and in some cases, they have the water.

And so that's where the value sits, that the value isn't in this box. It's basically, in our condition, low, sophisticated box to just run these chips. So that is up and running and happening.

You've seen my november s at galaxy digital. They in more of the greatest transactions ever bought helios out of bankrupcy, I think for like thirty million dollars. And you could argue that, that hpc conversion is worth billions alone. But yes, so yes, you're seeing that happen.

What we think the future is gonna look like, and this is CoOperated by experts in the industry, is you're not going to see hyper scale is just plant their flag and say, give me a digger out data set. You're going to see data center campuses where you're going to see multiple gig lots on a campus where there's micro grids. We're done in infrastructure for water, wind and solar being plugged in advantage gas distribution, which goes into direct generation.

And there are over there are several companies with letters of intent that are out, and there are a variety of these that are pending. You know, we're optimistic that you'll see something executed by the end of this year. So there are very late stage projects, but nothing that I would say is actually broken ground in terms of a four partnership. The hyper scale .

as and how do the texas specific landed st or lander dge actually make money from having these data centres on IT? I I understand that they do make will make money, but what is the technical process of being paid for sure?

So the most basic layer is you on the dirt and you say, here's a ground this and you need to pay me x million dollars a year on a ninety nine year lease for the grounds. So okay, just like any other commercial real state transaction. And in generally from our understanding, you need about a thousand acres to even start this conversation, which is so in west texas, these are sections are in most of energy world.

These are called sections, which are six hundred and forty square acres, which is a square mile, so about a section in half. So that's layer one um layer two though is, well, if you're sitting in the middle of my land, I might as well give you guess and so can you provide gas for that turbine, which is ultimately the only way that you can provide anywhere near the amount of energy? So earning money on pipelines and eases for that, in some cases you could even have royalties.

And off take with that guess you could then develop wind and solar farms where you could earn a royalty on make lot hours generated, which supplement the non intermitted power. Then you have water. So you need to have water constantly cycling in and out of that power generation, as well as into the data center itself for calling.

Then you have access roles, you have power lines. You're probably going to need to see some variation of working camps because I think that if this actually comes to fruition, you're going to actually have to have almost like oil rings where people fly in and work three day, five day, seven day, ten day shifts. And so you can see that based on the original ground, with the amount of iterations of additional revenue streams become really big, really fast. And I think that's why the markets getting so excited about the opportunity.

Yes, you say the market is getting really excited about the opportunity. Just to give people sense, the stock language is up a tremendous amount in. I paled in late june.

I actually got lucky that I just happened. Run across the horizon connect S. I do the second courter commentary and I read about about land bridge.

And back then the the stock was out from a Young gone from twenty three to thirty five. I said, oh, this thing you muris probably right about this, but it's gone up A A bunch. I missed the train at three five, and then I went to forty and fifty, and I went as high as I.

Eighty dollars is now pulled that back to sixty eight. So this the stock has run up a tremendous amount. So you know the last thing I want do is kind of pump the stock on a short term basis because it's lively doubled over over the past two months and what your tripled inception again a few months ago.

But tell I mean, tell us about landwards, let's get let's get into IT. And then how does this differ? Texas specific land trust that does have oil and gas realty as well as I believe you few days ago, they just came with most recent ter .

that you so just quick background on what number is so is created by five point holdings, which is a energy focus P E sponsors n by David coppa. David worked for paul Allen microsoft wolton family office, and he actually saw such a great opportunity in handling water in west texas that he left to create five point. His biggest asset is called water bridge, which all indications suggest should becoming public, probably in the middle of next year.

But that's a huge water infrastructure company for handling that produced water. They noticed very presciently that one of the biggest constraint to that business is owning the land. So they're constantly dealing with ranchers and corporations and and the university system saying, look, I gotta buy an ismet to cross your land to build this gathering system, to move water.

So they said, we should really buy some money. And I believe I was about two or three years ago, they bought the original about seventy five thousand equation. And it's actually intersperse with texas specifics, land rate around state line, the border of new mexico and taxes, which is the time square of oil and gas energy quarter, the best wells, the most activity, everything.

And so that was their origin inal cornerstone asset. And they basically then use water bridge funded by the G. P. So no language capital to develop this massive water infrastructure business. And the ran landfried is a royalty on land.

So you're talking ninety percent Operating margin, seventy two percent fully tax free cash flow margins and the team recognized, look, this is a really interesting asset. We talk to them couple years ago. Loved the loved the management team needed to get a little bit bigger, and they were ultimately able to add another hundred and fifty thousand eight earlier this year through two ranch acquisitions.

Decay boy, in the speed range. So now, now you're talking scale, two hundred and twenty thousand acres verses, you know, call seventy five thousand acres. And the beauty of the asset was we had the blueprint.

We saw what you did on your original average, do the same thing on this underdeveloped additional acreage. And so we were looking at trAiling cash full multiples that the IP placed seventeen, which was about twelve times. And we were just like, well, this is really attractive considering we think it's not that big of a stretch to think this thing you grow fifteen to twenty percent for five years.

So that's the simple case. But then they were also very impressive and realizing the huge opportunity is data set and between their expertise and water and then the ability with gas and infrastructure. They were one of the earliest people in identifying sites. So they've already identified six premier locations where you can basically plug and play very large scale data centers with the supporting wind and solar, with the direct generation, with the water and set.

And so you can see was a really easy story for people like us that understood the land value for gpl, understood the royalty value, but during the IPO road show, and quite Frankly, they didn't know who to talk to, like who would understand this thing. And I think because of that lack of appreciation of the opportunity and the business model is why I Priced where IT did today. You know, we look at we look at the sock that's gone from seventeen.

You know, I know I hit was in the seventies. Maybe it's in the mid sixties today um but in the earnings release they laid out, yes, we're executing the plan just like we said we would on our new footprint. That's the blocking tackling.

But we continue to see very large and considerable in developing these hyper scale data centers. And texas, they reiterated, you know, texas and the premium is a very logical choice for where are you're going to see mass compute going in what Better way to play that? Then through the royalty on the land, the water, the gas, the power, then trying to know day trade, ipp and, you know, liquid emerging technologies and industrial components that are trading at ninety times trAiling earnings.

sorry.

What's I P P H? sorry. So one of the biggest trades for data centers is what are called independent power producer.

So not going to deep in the weeds. Most U. S. Utilities are either rate base, which are government regulated in providing base power. There's a subset of what are called independent power. Producers were essentially they only fire up their plant five, ten percent of the days, but they do IT when the regulator should be. The base load has gone into a maintenance zone where they need to basically pull power to make maintain that reserve requirement.

So you know dala as is one hundred and twenty degrees are right, fire up that energy or you know copy plant to basically supplement the power grid so they might be charging three thousand dollars per mego lot hour. Or when dallas throws a couple years ago, they were charging like, I think nine thousand, the radio tory maximum. But the idea here is, you only run five percent of the time, but you charge such outrageous Prices, they they make a tone of money.

And so the logic is this merchant power or independent power plants, now they can sign these power purchase agreements with data centers to where they're going to be running a lot more than five percent. Are they going to be run fifteen percent, twenty percent, thirty percent, fifty percent, although it's not as simple as meets the I where there is a deal with talent, energy and one of their nuclear facilities in sukhanov. Amazon wanted to coal but not pay the grand fees.

And so it's a tRicky situation. There are more complex than people think. The pod shops love these things, but that seems to be where a lot of the hedge fund and you know the hot money has been going to play the data center thematic.

And so what what are a few examples of the names of, uh, independent power producers .

are not definitely with IT. sure. The big one uh, is the biggest ones or talent energy, the energy, vista energy, there's some other among conStellation energy is another one coal pine. There's another really idiocy tic one that's called halo energy, which basically in I P P with its own source coal. But that those are all in that ecosystem of having the ability to really reflect their cash flows with direct power project agreements.

Yeah hello, I company almost went back up up in twenty. So a lot of these companies when they have caped ds.

yeah well, that's when I was. That's when I was just a coal miner. They signed a an ter transmission agreement with inDiana power to for this powerplant that everybody thought was worthless because I was basically a peaker.

So there's all these different, even call that merchant power, independent power or peaker, where they only they only generate power when you need peak based, where they they basically almost gave this thing away to them in twenty. And then people realize way to second these things might worth be a lot of, might be worth a lot of money. So very different asset today than when I was basically a captive to took to feed this indian.

a power play. James, a movie I like A A lot of people like i'm i'm sure you like as well. There will be blood two concepts from that film that I think are well in here.

Number one is getting getting an eaves. And that is when you have to get someone either to sell you the end or get them to agree to give you the right to build a pipeline a across IT. And the second one is, of course, the famous, I drink your milkshake, which is, if I own land here, you're my neighbor.

I drill in my thing. I got your oil. The murray has written about moral has written about how the taxi ifc entrust has benefit from the rather diversified holdings that the they are not continuous ous specific trust they own, some here, some over here, some here.

So they actually get to drink a lot of the milkshake just because of of of where they're not non continuous. However, lack bridge is continuous ous. Can you talk about that geog geographic difference and how that makes IT into A A different to of pitch， different reason for for wide growth?

Sure, there's merits to both. But as you're looking into tps, land is primarily in a chessboard alternating pattern, and that goes back to the land grants in the nineteen eighties. And the benefit of that is further water for their infrastructure.

For a lot of their businesses, they can almost block off entire sections of the permit. And based by virtue of that checkbook pattern. And so with water awkward, they have that milk shake theory because it's kind of IT.

It's that's kind of how water is still regulated in terms of source water. But with energy now there's it's it's very technological and we know of usual vertically and a horizontal into somebody else. This section you have what's called a polling agreement or a or a shared drill spacing unit so that that analog is a little bit dated, but its still pertains for water at the margin.

But the value of the land being so vast and alternating has created a lot of value for T P, L to landfried. It's actually Better in some instances. So I mentioned earlier that we think you need about a thousand acres for a data center campus, and that's one and a half sections.

So if you have one six hundred and forty acre section, you need to anx another section to basically have the ability to develop that base. But then all of that out, all of that perform action is also relevant for getting the gas, getting the power, getting the water, getting the wind and solar and set up. And so there's merits to both. But you know, the real value here is if you have large lots of land in the right zip code in west texas, the surface is worth a lot of money. And that something that I don't think is any longer .

for the way to talk about the companies that are not royalty companies. You also own companies like internet, mental exchange, cake international, a singapore exchanges. Why do exchanges or detective financial and financial intermediaries? Why do they benefit from inflation?

So I can go back to your master carton, this example. They they have zero proprietary risk. It's a toll booth on flow through their system with almost zero variable cost for each transaction.

So incredibly high margin, incredibly capital light business exchanges are essentially the exacting business model except they have half the multiple of the credit card companies because their revenues can be a little bit less smooth. And so the great thing is not that different, but what drives volume on exchanges? So volume equals revenue.

What dads volume? Well, its nominal GDP growth, its velocity of money and its volatility. So in a world where we see higher nominal growth, higher Price levels and seta, clearly, that's going to be very conductive to revenue for the exchanges.

Analysts are a little analysts see the volatility. So in the first quarter of twenty, twenty to thousand, two thousand and nine, spreads boil out, volatility bows out, trading skyrocket. It's actually as the rest of the world is emerging, they're having it's their supermom.

They're having their best quarter ever. But so that illusion of variability in earnings results in these companies having a much lower multiple than almost identical businesses elsewhere. But again, if you were to drill down further water of the products Better driving these exchanges, well, it's derivatives.

There's really no money in multiple sted options or cash equities anymore. The real is in these proprietary derivatives were then you have a captive clearing through the clearing heth get an admin itt if you want. But what are those biggest markets? Well, its interest strates.

It's currencies, its commodities and its index futures. So think about the old three, twenty, twenty world. Well, no need to heads your effects. No need to worry about interest strates comedies are going nowhere. Maybe you could speculate on a low on a ten val index future, but you know take an between fast forward to today. Yeah probably want to look at your effects, definitely want to look at your interest state exposure, probably when to heads your commodities and definitely a lot more action in the index. So it's it's almost a perfect environment for the excess exchange businesses and capitally forty percent Operating margins convert almost all that into cash flow and then have this circle of recurring revenue businesses related to data and analytics and subscriptions to wear are just incredible businesses that honestly do well in almost any maco regime, but particularly the regime that we think that were entering to that.

You said that you talk about the type of companies that benefit when spreads blow out. When you mentioned that I thought of typical market making type businesses, city sah, ana, I think one of the only companies the trading businesses that is public traded is virtue financial, which has to be very under perform the S. N.

P. Drastically since and they say no, but talk about how exchange is from spreads going out. I really don't know how that exchange business works at at all to on and then .

talk what the current do yeah so the market maker, so the mark maker, the city deals, the of the world and the virtues and a je streets. There are some of the largest customers of the exchanges where they're making markets. So what they want to ideally do is they want to take flow from cell book and buy book and then basically matched doesn't make something in the middle.

The exchange is where this transaction volume takes place. So the market maker, they have funding. So they're basically paying somebody for their funding and then they're taking rist.

They are taking proprietary risk in the case of matching buyer and selling. So the more that they're able to generate profits from doing that, the more revenue that the more volume of the exchange. So okay, let's job.

Suppose these businesses, the exchange when spreads blow out, it's the super for these mark makers because now they're just clipping quarters and pennies and dimes just left and write on all this volatility because nobody really knows where the market cleared in Price. So it's phenomenal for that when there's no wall and markets are very trank, all the spreads get much, much tighter and there's there tends to be less volume. Although you know the algos and the city also of the world can sit there and clip lip lip clip, clip away.

But again, there's risk you're taking for prieta risk are taking baLance sheet risk. Things can move quickly and hurt you at the exchange. To the extent of all these tail winds driving the volume, they're simply the toll buth saying we're we have no proprietary capital at risk. But as you trade, i'm just going to take my tariff as you keep going to my tolbooth that all day. And so that's why we love the exchange rather than kind of the more capital intensive, whether is proprietary risk on a lot of their constituents and a trading right.

And so international, international continental tal exchange, which your fun does they owe the new york exchange is obviously well known. Uh on my previous al for guys, I actually interview the uh former your senior executive from that business. So I learned that actually the new york exchange is a small fraction of the business.

A lot of IT is clearing in in in credit. They also bought some mortgage. I think black neither when I was mortgage type thing.

Tell us when we did an interview games in twenty twenty one, almost exactly three years ago, you also owned C M E chicago mercantile change. I don't believe you on that. Now perhaps you had the boot out C M E to make room for for language.

Why did you choose to boot out A C M E versus ice? And maybe another time company you see below? I don't know if you ever on that, but the chicago in your options, I just check you don't own that now and I know I N F L. Why and how do you talk about how you have to make these decisions where this company is, you know and need of ten and this one eight point one out of ten? And how do you make that decision?

So IT all comes on evaluation and the risk associated with where they can ably position. What are the K. P.

I. What are the business drivers than what's evaluation. And we really like where ice is and was positioned. They bought l may. People were very critical of that, a mortgage technology company, then they bought black night.

But their core businesses in derivatives, whether its rates or energy, they have a great clearing business as well. And they were trading well below the market multiple. So love that business, C M A or c bo.

But so C M E has always been the gold standard of global exchanges, and that's because they have a phenomenal interest rate, uh, particularly so far in shorter interest state and treasury business. They also have a dominant position in U. S.

energy. So around the W T, I. complex. But two developments have happened this year that i've made us just take a pause and, you know, wait and see.

One is Howard letters c of entering. Its are bcg partners, are B, G, C partners. He is launching one of the latest iterations to chAllenge cm s, dominant position and U S, rates and treasuries.

Phoenix P. A. I think they are calling IT. A lot of market participants think and thought that, that was going to create a meaningful dent in cm is business.

And quite Frankly, people that we were talking to were hoping that at what is something, a lot of people were becoming disenchanted with the dominance there. To be completely fair, if you look at how to perform to date, the volume is not there. The bitter reads are very wide.

So thus far, chok went up for team dona. You are a dufy at D I, D R, at the C. M. A. The other rich, again, was a little bit confusing to us as they just were granted a license to Operate an fcm.

James.

what's an cm a futures commission merchant. And so basically what that means as they can almost compete with their clients in directing trees. And so you've seen some backlash there as well.

And so because of these two events, you've seen this historic kind of golden boy of the business now trade come down and traded a discount to the global peers. And so now it's one of those things where we don't have enough confidence and what's going to happens. So what's going to wait and see and you know not wouldn't be outside of the world of likely how that we would reengage in the position seibu.

Again, very interesting business by their core business is multiple ted options, but their real cash cow is the fix sweet. So they have a strangle hole on the vics. I think the vics is an a very crude, imperfect way to trade volatility or implied volatility.

You've seen a lot of competing products come out there, but it's really a fairly concentrated business and so trades at a discount to peers. But I think because it's much more singularly focused on single product. And so when you look at these new answers between each exchange, then that I think puts the multiple in perspective and gives you a lot more clarity around what type what types of multiple you're paying for, what types of business drivers.

right? So how that nau is in involved both with that other the front, but also counter with geral. Uh.

so B, C, B G C is the parent of a OK.

Okay, thank, thank you. So he is now rumor to potentially be trust, treasury security, other main horses, Scott, the sent to I got that would be, we will see. So let's see.

So but just example of how heart that is to display this. I know there, texas, to socket. Shame that people say display the new york socks.

shame. I don't know that's going that well. And likewise, there is A A guy who literally invented interest rate futures, and he tried to create a thing of called marble to display sofa.

And I don't I don't think so, has been displaced. And I actually enjoy him, he your fatti c legend in the business. But it's really hard to display these these platforms once to get started, James.

So I tell us to chicago, mark change. See me. I know they just grew tremendously from two thousand and two thousand and seven or eight during that commodity. Bm, because they trade commodities.

Has the growth in their business been similar with interest strates over the past four years? Because I say we kind of had an interest strates bloom in the same way. There is a commodate boom from two thousand and two thousand and eight.

I mean, go from zero to five point five and now to four point seven five. That's a you people like to speculate on that and i'm sure they have how how do you compare that? Or has the growth been good but just not as as good?

yeah. So i'll touch on that once. Second way, if you brought up a really good point, I don't want to gloss over, but typically, once you have the liquidity in a product, you are so deeply entrenched, known e's budging you.

And so a great example is, why does the little change even exist? They were electronic exchange in the nineties in atlanta. And so everybody thought these these companies never going to even touch the dominance that the chicago board of trade, the C, M E and nine x hand.

Well, they launched a digital branch contract for global crude, where they were concerned with W, T, I and U. S. benchMarks.

They got the liquidity. They got the participants. They ve got the clearing today.

It's actually bigger market cap than C. M. E. So IT shows you once you get the liquidity is almost impossible to move you. And Terry duffy at C.

M, E has said work, many have come, many have tried and many have failed so hard. A lot of people seem to think that this slut nic endeavor was going to do something. And right now, I mean, duffy IT looks like duffy is right.

Although the stock hasn't really cm s has in traded to reflect. But going back to your direct question on how they benefit from rates, and the answer is absolutely. Every single change with interest rates in their product weet has benefited immensely by virtue of the Normalization of interest strates.

And it's really there's a lot of different ways that rates have helped these businesses. So one you do need to hedge to now you have people speculating and it's also created new products. And so now you ve had different tenters one rate versus another sofa or a liberate sofa transition.

But also the clearing houses an interest on the collateral. And in some cases, that we made IT to customers, in some cases, the clearing house keeps that is permitted back to the exchange. And so yes, rates are immensely important to these exchanges. And IT was actually very detrimental to them in that zero interest in era, although they performed quite well in .

spite of James. And now want to asked you a question, which is so you are adviser on uh several horizon connects mutual fund, mututulo fund um I think several mutual funds but but definitely flagship mutual fund for for horizon and connect ics is is quite lopsided. IT has since its inception um since the turn of the century, IT has outperformed the benchMarks.

But I believe a key reasonable than so is because IT has owned xt physic grand trust and not sold. And as a result, around sixty percent. I don't have the exact number of that neutral fund is taxi specific land trust.

And so is IT is IT fair to say that the reasons I performed is because murray uh and the other investor professions that areas such as yourself have not sold and have a key way to outperform market is just to never sell good asset or really sell good asset. And you know if if something goes up sixty percent, a lot of people sell IT, but you don't actually want to sell. And you know, selling walmart well for one thousand ninety three to one thousand ninety four after raley is is a bad decision.

Talk, talk about that. And then also, you know is that is this kind of ironic if if IT is the case that it's actually harder to get inflows into a mutual fund that is lob sided? But love site stuff tends a performance, and the reasons love sited is a result of that perform. So I don't know if if what I said IT is accurate CT me if there any acacis. But yeah, you you thought .

of that short answer is yes. So the concentration of paradigm has been directly attributable to its very substantial APP performance of any relevant benchmark and olivet's peers. And short answer also yes, that what if you find a once in a lifetime asset, as murray did? He believed that IT was detrimental to shareholders to sell that, both from attach perspective but also deluding the returns of the exceptional asset.

And so what most managers would do is sell that, and they're not even if they one hundred percent agreed with muris, they would have sold because their asset gathers and not asset managers. And what I mean by that is what you eluted to is you can't raise very much capital in an ultra centrist vehicle the way you can, if you have a nice diversified fun, has all of that has negligible tracking error to the index webs. So I think that there's really uh, a an increasing change in the investment management landscape where passive has become so dominant.

And there's all these funds and you know a lot of legacy mutual funds are effectively cause a the reason that nobody y's really selling knows is that the the tax consequences. But pretty tough to an asset management business today. If all you're going to do is we weight s five hundred constituents. And so I think that the emergent class of managers is going to embrace idiot syncrude opportunities, in this case, marie, embrace concentration and other products. That guy, I felt we have a lot more diversification, but IT really is a prioritization of the compounding a capital a instead of just trying to optimize to release capital outside capital.

And so in your etf, I N F L, you said you want to be more diversified. Tell us about data. Is that to meet the needs and demands of the investment community who don't want to own a thing in that has sixty percent in one asset? And if so, you are you sacrificing performance maybe maybe you know, the next twenty years in the same way you want to be concentrate in T, P, L, and not be reducing as IT goes up.

You want to be not reducing in language as IT goes up. This is not my prediction, I M ers, and in the potential case. But what if the investment community is to know, for lack of a word, shallow, and they say, James, what are you doing when language is getting to be thirty percent?

Are you get that issue? yeah. Now we've told investors that were limiting positions and I, F, L, five percent at costs and and seven and a half percent of market.

So you will let those run a little bit within bands within thirty, sixty, ninety days to correct. But over the long term, those are our limits and we're going to stick by them. And the reason for that is several food.

So one is we're trying to provide investors here with a quality reality at portfolio that's going to provide differentiated returns over full cycles. And so we want to concentrate it's a forty four stock portfolio. So by some standards, that's pretty concentrated, but we and that will allow our stock picking to drive investment returns without being overly dependent on one sector, one industry or one company.

And so we think that this provides a much more a very eloquent solution for people that are either looking to supplement or diversify their S M P exposure, their M S C awy exposure or look at Better risk adjusted ways to play. Things like real assets or nominal yields. And that basically requires some degree of diversification, although again, we believe that our level of diversification still will allow our stock picking and alpha to shine through returns. The return profile.

is there any demand from investors or from the u and people connecting to start a fund that is more concentrated? And yet talk about your other products and you have a many accounts. But I mean, what horizon connect everyone to a hedged fund.

a poll vehicle? Yes, we we have a very concentrated hedge funds. Some of them own a lot of the same things that we own in in, in our other funds, but then have some interesting things that they do on the short side and with leverage.

Murray in, you know, I think two things that he's been known for, one as texas specific, the other as he was very early in identifying bitcoin as an as an investment opportunity. And so both of those make him look quite hit this year. And so we also have products around that. Plenty of estimates, summer more concentrated than other than others. And so we have a lot of things for a lot of different people. Another really interesting thing that we're actually in the process of launching next month is a private royalty vehicle where we're looking to do early in smaller stage private royalties in energy and precious metals, in base metals in a lot of these a collective areas where the discount rates are much higher, the yields are much higher, the optionality is much higher. And so doing that in a private vehicle, in an inner val structure, where we're also going to have some public, so it's going to be a public, private royalty fund vehicle that allows us to access a lot of opportunities that just aren't available in public markets today because just look at the divergence between small and liquid securities and large liquid securities, there's this huge pool of opportunities of these companies to really help them in years one through five and earn really outsize returns as they scale. And so that's a really exciting product launch that we're looking to, to close by the summer first.

So that is investing in private transaction. So one hundred percent of them are not publically ded now.

So the the base of IT will be private royalties, but there will be some public securities that are in the royalty arena that tend to be smaller, less liquid, idiot sync rates. But now we're looking at basically initial lockup of five years to do, let's say, eighty percent private royalties, twenty percent public and an interval quarterly liquidity there.

After James over the course, this interview even very different for the try and insight. Get some very the weed questions. I want to zoom out, ask some very macro birds die questions.

The the first is, do you think you know you have an inflation benefit iy etf. So I I feel like I got to asking this question. President trump was elected in a sweeping republic lan Victory, and part of his economic, uh, vision involves terrify. Many people say, tears are inflationary. What do you .

think I think that we need to see what is actually negotiated. So yes, I at face value, if you put a terrible on something where there is not an alternative domestic supply, then that's going to be inflationary because chances are that's going to be passed onto the consumer. But if you look at his first administration and you read his book, they both suggest that he uses a lot of these as negotiating tactics. And so I I think that will have to see as the administration and the cabinet forms and then they take office. But all those equal inflationary are definitely supportive of higher Price levels.

right? My my final question for you is I know you read a history of industries. Fantastic, fantastic book.

You you talked about IT when we get our view three years ago. Since then I I have read the well to great read free finn's out there. I I recommend IT IT is a commitment. Where do you think interest rates are headed long term? And we did interview the short term rate was at zero a peak at the top five point five percent. Now at four point seven, five percent on on the where do you think were headed your short term the next few years? And any thoughts on the long term, you know three, five, ten years where interest strates are headed with the academy that no one knows, that inherently know nobody but you .

are we talking overnight rates or are we talking ten year .

overnight rates? Said, yeah.

sure. And so yes, I will. I will echo, nobody knows anything, myself included. And this is someone along the lines of a blind test.

But I think let's simplify the simplification here, is that barring something exogenous, we need nominal growth. And one of the components of nominal growth is inflation. And whether you call IT that or whether you calculated differently, you need some sort of ominous way to debase or marginalize the debt.

And I think that's why you're going to see pronominal growth policies because you're going to continue to see spending. All that being said, I think that, that is going to preclude rates from going to extremely low levels. But because of the growing interest burden that the united state's treasury is facing, I think that they are going to try to get rates as long as they can without seeing any type of consequences.

And so I guess if you're going to if you're going to put a gun in my hand, seeing me a number to say three eh percent, yes, it's it's hard to see them getting much lower than that. But you imagine an upward sloping curve where it's three percent overnight in a four and a half ten years. So all these assets that are longer duration and their cap rates and their a cost of capital benchmark to the ten year that are hoping for all these cuts helping their businesses.

Well, if the long and stays kind of pick up where IT is today just because the shape of the that's going to be a very different environment for profit margins and also valuations. And so no, not a straight forward as people fake. But I think structurally, again, Prices are going to be pg higher. And so the era of zero rate borrowing, some sort of financial pressure scenario, I think we're in the rear view mirror. And so that environment.

you describe an upward sloping yellow curve, which is a Normal souping curve, three percent on the overnight rate, four or five, ten, five percent, wherever on the the ten rate, uh, that is Normal. His people often so see that Operate loving curves are good for banks. I think that is generally true.

Of course, the tons of exceptions, entirely absent, I believe entirely absent are banks. Maybe you some of the financial companies obviously business with banks, but they are no, no J P Morgan, no city group. Why not do you think banks do do well in period high inflation and also entire, very frequent, uh, absent, I say are are companies that are cues of of politicians of of Price gouging in which which politicians say are inflation benfica's aries such as alpert or robs.

Do you agree with those allegations? And then why are those type of company is benefit? I mean, maybe you don't think they are efficient benefit. Aries.

well, we're getting the gross that's comical. You just need to pick up their ten k and see that their Price takers, the food distributors, give them their their, their merchandise at a Price they have a fixed margin that they marked IT up. So to target a retailer distributor of third party products is just category ally wrong.

So no, that once you know I can I I don't know who who put that on there on there. You know that they need to fire some of their political ages if that's what they put in on to their breathing. In terms of book, yes, the core lending business, IT, is a spread based business.

And so you have your deposit rates and then there's a spread on what you can basically do in terms of your mortgage lending, your commercial lending, your personal one ones. And in most environments where there's a Operative sloping yellow curve, that's a very beneficial to the banks, to the insurance companies, any type of institution that is a spread based bank and a spread based business. And so going forward, all else equal, that should be beneficial to these banks.

And you know, one thing that was implicit, but I want to make explicit about my forward guidance or forward view, is central banks have certainly made IT clear that there is little possibly no tolerance for a true recession. And what I mean by that is they have combined every type of economic hardship very aggressively with liquidity. So and I think this is the scars of two thousand and eight and two thousand and nine.

So let's go back to twenty nine, long before the pen will, not long before the pandemic, the repo market was blowing up and they injected, I think he was thirty billion dollars, seems like nothing today, but quickly came to the rescue to make sure that that plum was working again. Clearly, they did not hesitate, and they went very aggressive in combating COVID, which I think obviously they needed to. Subsequently, no one needed to bail out sick valley back, but they came into the rescue very aggressively and bail that out.

In united kingdom, you had a liability driven investing, a crisis where guilt blew out when you reap ze budget was released. They build Better there. Those tell me that western central banks do not have the capacity for a true recession where there are bankrupt, as on in solvents, at least at the current moment, because of the amount of leverage in the system and the vulnerability of the system.

But I think go back to all those fiscal states that I that I references before, if we're spending seven percent fiscal deficit during an economic expansion and we have a garden variety recession where you start seeing bankrupcy and there is some risk of companion, what are we going to spend fifteen percent this time? So again, IT seems as though the central bank s want to remove part of that left tail. This might be famous last words, but if that is the case, and there is not a capacity for the creative destruction that comes with a true default cycle, then things shift to the right. And I think that that's again very supportive of both higher rates and higher Prices.

Well, I would say the credit markets certainly agree with you, uh, hide. Credit spreads are among the tightest ever. The stock market evaluation is is very expensive as well.

Uh, I might say that the fear did hike interest strates over five hundred basis points during a period economic volatility to fight inflation but power seemed willing to uh, inflict pain on the the economy of america, risk the recession in the order to find inflation he he said so in the twenty twenty two Jackson holes, basically, prepare for pain unpaired ating. Not an exact quote. I IT just happened that we did not have a recession, but I think that was.

Kind of luck. And of course, now is now that we know that we did not have a recession, we obviously, well, in the future we may soon, who knows? But you know, the reason we didn't have a recession in two is always easy to diagnose and said, oh, amErica had all this fixed rate debt so the industry burden did not increase that much on on borrowers.

But it's it's it's easy to say now, James, it's been an absolute pleasure getting a chance to to interview you. Uh, I hope we can do this again more frequently than once every every three years. But people can find you work on a process at arizon connect ics. And I appreciate you. Sit down with me .

and thank you for listening. Thank you.