VALUE: After Hours (S07 E33): Liquid Real Assets With Will Thomson Of Massif Capital; Natural Gas, Tungsten And Tin

TRANSCRIPT

Tobias: I think we’re live. This is Value: After Hours. I’m Tobias Carlisle. Joined as always by my cohost, Jake Taylor. A special guest today is Will Thompson of Massif Capital. Great name. He invests in liquid real assets. We’re going to find out what that is. How are you, Will?

William: I’m good. How are you?

Tobias: Very well, thank you. Thanks for joining us. Liquid real assets, what is that?

William: Yeah, so, we invest along four industry verticals. So, energy, which is everything from utilities to oil and natural gas to renewables. It is material…

it is chemicals, mining, construction equipment, that type of– or construction materials, and then select industrials, which would be companies that provide services to those industries, and then infrastructure.

So, what private companies or private equity talks about when they talk about real assets, “We’re investing in the same types of assets, except we’re just doing it through the publicly traded companies that invest in them and build out of them.” A lot of the companies are project companies. They’re building some big asset, whether it’s a refinery or it’s a mine. But that’s what we invest in. So, big projects in the, I guess, old economy.

Tobias: It’s been a tough decade for that style of investment. So, you launched in 2016?

William: Yup.

Tobias: Maybe a decade in 2025. How have you survived or found good projects through what’s been a pretty tough run for the old economy?

Surviving a Tough Decade in Real Assets

William: Yeah. So, I think one of the edges that we bring to the table is a very different portfolio construction approach, which I think has yielded benefits. So, we’ve delivered 14.5% annualized net of fees. So, pretty good. But the key has been having a concentrated portfolio. And so, rather than being exposed to say, commodity price beta in a dramatic way, we have picked individual companies that have very specific catalysts that we think will overcome any associated drag associated with commodities.

And so, what we found is that especially in energy, mining– Infrastructure is a little different. Infrastructure is just really hard to buy well, because it never trades particularly cheaply. But for a lot of the natural resources businesses, what we found is that about 50% of the time, the catalyst that’s moving the stock is commodity price. The other 50% of the time, it’s something else. But what’s most interesting is very rarely do those two things occur in the same year with a few rare exceptions.

And so, what you do is you focus on the company that is turning on an asset, copper mine or something. If they’re turning it on and copper prices are going down, it doesn’t matter, you’re still going to get a cop out of it, because you’re going from no revenue to revenue, things of that nature. Is it going to be as good as if copper is running with you at the same time? No, absolutely not. But by being focused and concentrated in those assets, it’s a very different portfolio than you see out of a lot of say more natural resources focused ETFs or funds.

It’s 15 positions on the long side, a handful of positions on the short side. 50% of the portfolio in the top 5, 80% in the top 10. So, very concentrated or relatively concentrated, I guess. It’s all about what the management team is doing in the operations. That’s how I think we’ve produced good returns through cycle.

Jake: What’s more important, the asset or the management team?

Betting on Management vs. Assets

William: I would say consistently through cycle, I’d rather bet on a management team, even if it’s a mediocre asset. But mediocre assets can do really well. So, right now in gold, I’m okay with a mediocre asset if I can buy the company cheap enough, because they end up having tons of operational leverage, the gold price. But at the bottom of the cycle, you got to have both a good asset and a good management team. So, it depends on where you are in the cycle, I guess, is really the answer to that. You can get away with a lot more, obviously when the commodity is running with you.

Tobias: I like one of these lines that you used in your presentations. “You focus on bottlenecks arising from megatrends.” So, can you perhaps help us differentiate that from traditional commodity type investing?

Finding Bottlenecks in Megatrends

William: Yeah. Well, so, before we started, we were talking about water, right? I said I hadn’t figured out a lot of good ways to make investments in water. But it did come up with one interesting way.

Earlier this year, I was in and then I was out of it. But one of the things we tend to focus on is areas where there’s overlap between hard material sciences, geopolitics and– Well an overlap in those two things, we find interesting. And so, one area in our industrial sleeve that we’ve looked at is people who are producing the equipment to manufacture the inputs into the semiconductor processing chain. And so, they use a lot of water in semiconductor processing.

And so, one of the companies that sole sourced all their– TSMC, sole sourced all their water purification equipment from is a company on Japan called Organo. So, that’s an interesting bottleneck. There are three companies that manufacture the equipment to make the ultra-pure water that is necessary for the world’s best semiconductors. There are a couple other companies that have small lines in it, but really, it’s three small Japanese companies. They manufacture it all. One of them specializes exclusively for semiconductors. So, that’s an interesting bottleneck, because as this semiconductor explosion happens and building all these facilities, they have giant order flow for new equipment to create ultra-pure water. So, that’s an interesting bottleneck.

Now, everyone’s aware of some of the obvious bottlenecks and say critical minerals, but what’s interesting is that with those types of bottlenecks, some individual commodity has a really good press age. So, like rare earth metals. Gosh, whoever their press agent is, [Tobias and Jake chuckles] they’re great, [crosstalk] because every morning you wake up and you hear about rare earth metals. The stories being told aren’t wrong. They’re not lies. It’s just that’s the headline.

But you look at say, US critical metals list, and you say cross off rare earth metals, cross off copper and nickel, the big guys, and you’re left with this list of other critical metals. Some of them like tin, antimony, tungsten, these guys, they have no attention on them. But if China stops shipping tungsten, it would be a similar situation to if they stopped shipping us rare earth metals.

Or, you look at say titanium. China controls like 60% of the titanium sponge refining. That’s a precursor to the metal. You’ve got a bottleneck there too. And so, those are some of the types of bottlenecks we look at. I used to underwrite political risk insurance policies for Lloyd’s of London insurance syndicate. So, we’re really interested in situations where political risk creates a dislocation. I’m probably the only investor. You guys know who hear the sound of guns, and I’m like, “Oh, maybe there’s a company there too.”

Jake: Someone’s making money.

William: So, that’s some of the types of bottlenecks we’re interested in. Places where the supply is both an immediate issue, but there’s also a time to build problem.

Jake: I wonder if the public markets are long-term looking enough sometimes for these projects. And do you get a mismatch there where that can create problems to get a project finished to have the patience to see it through for if it takes five years to get it up and running?

Patience, Cycles, and the Orphan Period

William: Yeah. With all the companies I look at, base case should be there’s something that’s going to go wrong while I own this.

Jake: Twice as long, twice as expensive.

William: That’s why the most important thing is buying well with real assets. Like, there are other places you can afford to not buy well, get bailed out by compounding or something over time. You can’t do that with liquid real assets. But no, there’s definitely– I end up in things oftentimes a little longer than I had initially expected or wanted, and so patience is critical. The willingness to average down is absolutely essential. If you can’t do that, then you should not be looking at say mining companies or chemical businesses or anything like that.

But then, the other thing I think, and this can be really hard for some value investors in particular I think, is that nothing can be held forever. Maybe Exxon Mobil, maybe Rio Tinto. Maybe there’s a few exceptions. But I’m dating everything for anywhere from three to seven years, sometimes two years. Sometimes I get lucky being– We all get lucky. Every once in a while, something pops. But everything’s got to be–

I got to be ready to cut bait and get out, because despite the initial pop that comes from say turning on an asset, eventually everything starts to go with the cycle if it lasts long enough. There’s a small window where things can buck the greater macroeconomic trend in my spaces. That’s the window we try to focus on, but you can’t buck it forever.

Tobias: How are you identifying catalysts outside of commodity trends? What sort of catalysts are you looking for?

Identifying Catalysts Beyond Commodities

William: It’s all operational things, basically. I said earlier, a lot of the companies I’m looking at are project companies. One of the interesting things that happens, and it happens in other spaces as well, the most notable being like biotech. When projects get going, you actually are progressing a project. And in theory, you’re reducing risk as you go. But in public markets, that’s the orphan period, and nobody wants to own it. And so, you get this trend, it’s called The Lassonde Curve, where you get– Over here, it’s geology, no one’s interested, discovery, it pops, oh, we got to build it, it crashes.

And then, you get an orphan period where that’s actually a whole management team doing stuff. A lot of things to due diligence, a lot of people to talk about or talk with, a lot of people with experience that can help inform your insights. But nobody wants to own it during that period. And so, that’s actually my favorite period to play in. So, most of the work we do is really about understanding the day-to-day operational tasks that have to get done in order to achieve some greater goal.

That greater goal is often well understood by the market, like, we’re going to build a mine or we’re going to build a refinery. That’s understood by the market. But the market doesn’t want to deal with the challenges associated with getting to that end goal. Whereas I’m like, “That seems like there’s a lot of stuff to do research on. There’s a lot of things to understand. There’s a lot of opportunity for us to really have a clear understanding of what our risk is.” So, that seems like a great time to buy.

As opposed to say, buying Barrick Gold. Yesterday, they came out with some good news about a mine that moved the stock, so there are exceptions. Barrick Gold is just going to trade with the gold price. So, what’s your risk? Your risk is your gold price forecast. I don’t want to have anything to do with that. I don’t know where gold is going. Generally, I think I’m directionally good on commodities, but beyond that vague directionality, I’m like…

Jake: Does that then mean, William, that your strategy is not as traditionally centered around inflation protection, which is a lot of times the story behind a real asset play?

William: Yeah. No, I mean, we pitch and marked our strategy around alpha. That’s our focus, is generating, maintaining a correlation of nothing to everything and producing as much alpha as possible with a very low beta. And so, that’s our strategy. Do we offer inflationary protection just by nature of the assets that we own? Yes. But my sales pitch centers more around–

I find that a lot of competitors, if you will, have portfolios that have bold macro bets on timid equity bets, and I want to have a bold equity bet on a timid macro forecast.

Tobias: It seems like it’s a little bit endemic in commodities that you’re a little bit more macro than a lot of equity guys say that they are, “Ah you have to have some view,” but you don’t feel like you need to have or you don’t trust the view?

William: There are definitely certain companies that I do at times feel the need to have a view on the commodity, let’s say. But oftentimes, I don’t feel the need to have a view on the commodity. It depends on the company. I think it’s really important to be crystal clear about what you’re betting at all times. As long as you’re crystal clear on what you’re betting on, it’s okay to have some macro bets, if you will. But you got to be really clear that you’re making a macro bet via equity. It’s like a derivative.

Equity actually becomes a derivative. Derivatives get complicated. They get complicated for a reason, it’s because the causality gets messy. So, I don’t like to make that bet. So, yeah, at times, I don’t feel the need to have an outlook or a view on the commodity whatsoever. It’s probably– [crosstalk]

Tobias: Talk to us a little bit about shorting. How do you think about shorting? What are you looking for?

Approach to Shorting Cyclicals

William: Shorting is tough. We are very opportunistic about it. So, I do not always have a short book on. So, for instance, bought a couple of shorts on this year, but mostly, shorts have been off and they were all in the first quarter and they were all closed out by the end of the first quarter.

Shorting, by its nature, in my opinion, you want to get in, you want to get out, time is not on your side. So, I like to short things that are already turned over and sort of, let’s call it, negative trend and momentum, if you will. And so, that’s how I approach it.

And that works fairly well I think with cyclicals. The way we short things is almost the complete opposite of the way we go long a company

And so, on the short side, say when lithium peaked a couple of years ago at $80,000, by the time it got to $60,000, I was like, “Okay, this looks like this is going. I’m going to short a bunch of lithium companies that I don’t like now, mostly companies with management teams who I don’t think are going to be able to execute,” and so, you get like a double whammy, you get the macro and the operational and so, we’re shorting this year as much– [crosstalk]

Jake: The macro and the bozo? [chuckles]

William: Yeah. I like that, the macro and bozo. And so, the short book is in many regards just the mirror opposite or the complete opposite of what we do on the long side.

Tobias: You had at one point, and I don’t know if you still have this, but you had an overweight position in European natural gas. Do you talk to us a little bit about European natural gas? I don’t know anything about European natural gas.

Opportunities in European Natural Gas

William: Yeah. Our oil natural gas exposure at the moment is three companies represents just about 25%, 30% of the portfolio. Equinor, Vår, and Harbour Energy. The thesis at very high level each company is a little bit different. But at a very high-level, the thesis is well, these companies all have good solid balance sheets, they all have double digit capital return in the form of dividends with a little bit of share buyback, as opposed to a lot of share buyback and a little dividend. So, something like Vår Energi has a 14% dividend yield and they’ve already penciled it in for next year. So, I’m sitting on say, like, three and a half years in a row of 14% dividend yield.

You’ve got an interesting situation in that the North Sea, Norwegian continental shelf area where they are the only domestic source of energy for Europe outside of renewables. You’ve lost Russia which creates a bit of premium value there. The marginal gas into Europe is LNG, so you’ve got something that increases the price there.

And then, in the North Sea and in the Norwegian continental shelf area, what you’ve got is an approach to production that is much closer. It’s offshore. But despite the fact it’s offshore, it’s much closer to say fracking, if you will, than Exxon going to Guyana. So, what that means is the infrastructure basically around those areas is incredible. You have pipelines running across the ocean floor, right, left. If you look at a map of the pipelines on the ocean floor, your mind– [crosstalk]

Jake: Plate of spaghetti.

William: Yeah, it’s like a bowl of spaghetti. And so, there are these great opportunities to be infrastructure led with your exploration. You have a single oil and natural gas platform, and you can go off a couple of miles that way, a couple miles that way and drop some things on the ocean floor, drill some holes and then pipe it all back to the core infrastructure.

And so, the lifting cost, the cost of production for a lot of these companies is– Well, they’re all sub $20, some of them are sub $10. Now, there’s taxes and other things that absolutely reduce their take home, but they are giant free cash flowing assets with a faster cycle, if you will, than more traditional offshore. And so, there’s a little bit of geopolitics, there’s some operational efficiencies and you’ve got multiple return streams in the form of the dividend, some share buybacks and then you have the potential for capital appreciation which is higher than it would be in the United States, because Europe just doesn’t like oil and natural gas.

Now, whether that ever changes and I benefit from those companies trading the same way they would in the United States? I don’t know. That’s an open question. But they don’t need to appreciate that much, as long as they can sustain a double-digit dividend yield either.

Tobias: How do you feel about energy and natural gas generally do? You have a view? Are you agnostic?

Jake: He’s pro.

William: What’d you say?

Tobias: He’s pro. [laughs]

William: He’s pro. Well, there were two different things there. I’m all for all forms of energy. I don’t care what it is as long as it is economically sustainable. You do it as cleanly as you can afford to do, or as cleanly as you can. I don’t want to pollute any more than I need to, but in this day and age, in this world, there’s some pollution and that’s just the way our economy is set up. So, is what it is. In terms of long-term outlook–

Tobias: Yeah. In terms of the price of it.

William: Not my area of expertise, but what I would say is there’s been a continuous fall in reinvestment, and so the dollars that need to actually grow. There haven’t been dollars going into the oil natural gas industry to grow production. There have been dollars to keep us running in place, but not for growth. The fact of the matter, is that renewables haven’t made a dent yet. Now, maybe that changes with EVs and them growing faster, but that too is running slow. Why anyone would assume it wouldn’t have run slow is beyond me.

Jake: We’ve mandated it, so it has to happen.

Tobias: [laughs]

William: So, I generally like that setup for the medium-to-long-term, 5 to 10 years or something. Within that, there can be a lot of volatility.

Tobias: Yeah, I like energy. I’ve got my risk limits in energy. Domestic US energy.

William: Domestic US. So, Domestic US is one place where outside of pipelines, I’ve never done any actual EMP stuff. You got guys out of Texas who just know that, and they know the management teams, and they know the tech, and they know the operations and they’ve been to every well.

Jake: It’s hard not to feel like a tourist in that, right?

William: Yeah. I’m a tourist in that world.

Tobias: I don’t mind being a tourist. Tell us a little bit about– [crosstalk] That’s it.

William: [crosstalk] I started out in mining as a tourist and then I was like, “This is the coolest thing I’ve ever seen. This is all I wanted.”

Tobias: I grew up in an oil and gas patch, so I feel like that’s just by osmosis, I osmos some of it.

Jake: You are T. Boone Pickens now?

[laughter]

Tobias: Let’s talk a little bit about tungsten. What’s attractive about tungsten?

Tungsten, Tin, and Critical Metals Risk

William: Well, tungsten is the rare earth metal store in more of a microcosm, and with easier processing and fewer mines. So, tungsten is used all over the industrial world mostly for making stuff harder. When you alloy steel with it, the steel gets harder and stuff like that. It’s used a lot in the defense industry. But demand grow is slow, GDP level growth until you hit a defense cycle where they need to ramp production and defense and stuff like that.

Tobias: What is tungsten useful? Just hardening?

William: Yeah. It’s got other use cases, but I think the largest use case tends to be as an alloying substance in creating harder metals, more heat-resistant metals. So, the fan blade, say in a natural gas turbine are going to be made from a tungsten alloy, although they make them from ceramics now also. There are substitutes. But any place you need something really hard that isn’t going to change shape, that is heat resistant, tungsten alloy of some kind is a viable use case for tungsten. So, lots of machine parts, anything spinning, stuff like that or the defense industry.

So, if you want to bomb an Iranian nuclear power plant, for example, your bunker buster is going to have a bunch of tungsten in it. Tungsten weighs a lot. It doesn’t change shape. You shoot a bullet at it and a bullet fractures into pieces. But there aren’t a lot of tungsten mines, because the growth has been slow. The processing has all shifted to China. And so, you’ve got the same rare earth story, except you do have tungsten smelters and refiners in the West and you just don’t have a lot of mines that are producing tungsten.

And so, tungsten, up until this year, there was really for all intents and purposes, only one publicly listed tungsten miner, Almonty. So, much like rare earths, up until a couple years ago, there was really only one rare earth publicly listed company and mines. We’re entering a cycle where it’s a critical metal, it’s in demand and you’ve got a couple of companies that are looking for and have great discoveries and are building mines in Western. That’s the other thing. They’re finding tungsten in places like Portugal, which is historically where tungsten has been mined. South Korea. There’s some in Canada, and a couple of other places in the United States that have it.

So, you’ve got a geopolitical need, you have a bottleneck, you have an underinvestment cycle. They happen to also be finding worthwhile economic deposits in the Western world. That doesn’t happen very often. So, that’s a nice mix. There are only a handful of publicly traded companies. So, if the press agent for tungsten gets better, [Jake laughs] they got to go find whoever it is, rare earths, the flood will be useful or productive forever.

Tobias: Yeah, the tungsten marketing boards got to get busy there.

Jake: Get their stuff together.

William: Yes, yes, yes.

Tobias: JT, we’re coming up on the top of the hour. That’s time for veggies. What have you got for us today?

Jake: Yeah. With Will coming on and talking about things in the real world and supply, and I thought we might bring in a little piece from physics and see what we can do with it.

So, I’m going to start the story off with prices are popping, and one shudders when they’re heading to the grocery store or the gas pump, and it leads to shouting matches and political pin the tail on the donkey. Is it the fault of these greedy capitalists why prices have been going up, or is it money printer going brr? Is it profligate consumers, or is it something else entirely?

We’re going to borrow a law from physics to give you a comprehensive, and dare I even say maybe definitive understanding of the raw ingredients of inflation. So, we’ll learn one equation with four knobs and hopefully like a minimum of hand waving.

So, physics and economics can sound like different worlds. And one certainly envies the other, but both are obsessed with these systems. They’re big, messy networks of interacting parts where tiny individual actions add up to powerful collective results. So, in economics, those tiny actions are daily choices that millions of people make. One person grabs a latte on the way to work, instead of making coffee at home. Good luck ever retiring, buddy. That decision alone won’t shift the price of coffee beans worldwide.

Or, maybe one family decides it’s time to move into a bigger house on its own, that’s just one transaction. But when many families all start looking to buy at the same time, maybe mortgage rates are lower or wages are rising, suddenly sellers can price higher. Builders see an opportunity, then contractors get busy, material suppliers raise lumber and concrete prices. What started as a lot of little, small family level decisions become a nationwide housing boom, and maybe eventually overheat into a housing bubble.

And on the supply side, maybe a farmer decides to plant soybeans instead of corn this year, a shipping company cuts back on orders for new containers, restaurant decides it can’t afford to stay open for lunch anymore. Each action seems totally inconsequential in a $100 trillion economy. But you add them all together across millions of farmers and shipping companies and restaurants, and you start to see shortages, bottlenecks, higher costs for consumers. So, no individual consumer or business really decides to create inflation. And neither does any central banker, I think, despite all the helicopter talk.

And just the same as in physics. No single gas molecule decides to increase pressure inside of a piston. So, a molecule simply is following its energy. It’s bouncing, colliding, rebounding. But when billions of them are doing it together at the same time, the container walls feel that pressure. So, that brings us to this equation that we need to learn, which is the ideal gas law, which is expressed as PV=nRT. And so, P is pressure, V is volume, N is the number of molecules, also called molarity, R is a constant and then T is temperature. And that’s it, just these four variables and one constant. But with these, we can explain why a balloon expands, why an engine fires, why a star explodes.

And for this particular thought experiment, just imagine a piston filled with gas molecules, okay? Very simple. Billions of them are bouncing around and colliding. Pressure is the force of these collisions. Volume is how much space we have to move around in, temperature is how fast they’re moving their energy and then quantity is just how many molecules are crammed in there. That’s the molarity. If you heat the gas, the molecules zip around faster. And if the piston can’t move and the volume stays the same, the pressure rises. I’m not telling you anything you guys don’t already know. But add more molecules, same thing, more collisions, more pressure. Shrink the volume, the pressure is going to spike. That’s the gas law.

Now, let’s translate this all into economics. Because inflation is really all about pressure as well. Not molecules hitting a pistol wall, but money colliding with limited goods and services. In fact, this economist, Wilhelm Röpke, had a nice turn of phrase in the 1950s about inflation. He said, “It was a riot of claims and an insufficiency of goods produced to meet them,” which I thought is quite a nice bond mo. So, here’s the mapping of our analogy.

Pressure becomes the price level, volume becomes the real output capacity, how much stuff the economy can produce. The number of molecules, N, is the money supply and temperature is the velocity of money. So, this is the energy of economic demand. So, when you think of inflation through this lens, you see it as a dynamic system. So, too much money in too little productive space or too much economic energy without enough output and prices are bound to rise, just like pressure. And in the physics version of the gas law, R is this universal constant. It’s a scaling factor that ties together energy and temperature and pressure, so the whole equation makes sense.

Crucially, R doesn’t change. It’s a background feature of the physical universe. And that stability is what allows the law to hold across all these different conditions. Well, when we shift economics, it’s tempting to dismiss that R as irrelevant. But in fact, I think there’s a very strong analogy here still, which is R is the institutional constants that make the economic system function. So, like rules, norms, customs, trust structures that don’t show up directly inflation statistics, but they’re essential for the system’s coherence.

So, think of property rights, contract enforcement, functioning courts, capital at risk being treated fairly, the credibility of central banks. Think of the cultural trust when you accept a dollar or you swipe your credit card and you know that that same dollar will be honored tomorrow. These constants, they don’t fluctuate like money supply or demand or velocity, but they’re invisibly reliable in the background. But if R gets wobbly, if trust and money erodes, if institutions lose legitimacy, if contracts stop being enforced, if government starts to take random pieces of ownership of businesses intel, [chuckles] the economies can then deviate as well, and it starts behaving not ideally. So, that’s where you start to mess around with things like hyperinflation and currency collapses or failed states as examples of where R effectively disappears.

So, just for fun, let’s run through some additional examples to see how well our analogy holds. Let’s look at a little bit of case one. So, expanding the money supply. Government prints a bunch of money, central banks ease credit, it’s like adding more molecules into the piston. Unless that chamber expands i.e., the productive capacity of the economy grows, pressure is going to rise.

We can see that Milton Friedman’s old line that, “Inflation is always and everywhere a monetary phenomenon,” is only correct. As you can now see, there’s a lot more to it. Case two is rising demand. So, even if the money supply stays the same, if people start spending faster, the temperature goes up and these molecules are then bouncing harder, prices rise. This is why inflation can accelerate during specular booms or when households feel more wealthy. Or, imagine yourself in a hyperinflation when you need to get rid of your wheelbarrow full of cash before lunchtime.

Case three is a supply constraint. What happens when the piston shrinks? Say a pandemic, a war, labor shortage. Suddenly, there’s less space for the same money molecules chasing it, pressures rises, of course, that’s stagflation. Case four, productivity growth. So, the opposite can also be true here. Expand the chamber, which is really technology, doing more with less. More workers, new resources and that pressure can ease. So, the same amount of money can circulate without driving prices higher.

Technological progress is inherently deflationary, like we are trying to do more with less. So, that slow glide path of deflation, I think is a beautiful thing actually. Modern economists treat deflation like this boogeyman. And that may be correct for that sudden collapse of a debt deflation in the 1930s, but otherwise, price levels drifting lower really helps the average person, so why we fight against that is beyond me.

Let’s test our analogy against a little bit of history. So, Weimar, Germany in the 1920s, classic inflation. Molecules were skyrocketed. They were printing money endlessly. The chamber was damaged by war, so volume was constrained. Pressure, of course, explodes into hyperinflation. 1970s oil crisis, the piston shrank due to oil shocks rippling through the economy ended up cutting productive capacity. Pressure rose even though money supply wasn’t wildly higher.

Post-2008, central banks, they desperately wanted to add molecules through this quantitative easing that they were doing to fight this scourge of deflation, but the pressure stayed low for years. Why is that? Well, it’s because the temperature collapsed, banks were hoarding reserves and the velocity of money cratered. So, the molecules were there, but they were inert. They weren’t moving fast enough to hit the walls to create much impact. Only later, after COVID, when you had demand came back strong and then supply chains were fubarred and that shrank the piston, and then that’s when we started to see inflation spike.

So, one last little thing, and we’re getting close to the end here, so hang in there. The US Isn’t just any regular piston. Because the dollar being the world’s reserve currency, the chamber is kind of leaky. So, the dollars flow out into foreign reserves, trade settlement, global commerce, basically. It’s if some of the molecules had been dispersed into an adjacent chamber from the existing piston that relieves this domestic pressure. This is why the US, has been able to run deficits for decades without runaway inflation slowing us down.

So, those extra molecule cools were basically vented abroad. But what happens when those dollars come home? When foreign central banks sell Treasuries, or when global investors repatriate cash to purchase assets or goods or services that we’re producing, suddenly that piston reconnects to that external chamber and maybe molecules flood back in. And of course, that seems like pressure would have to rise. So, who knows when and how quickly, but I think it should be a little bit of a cause for concern.

So, let’s just wrap this thing up. Think of every headline as a piston reading. Is demand running hot? Has supply shrunk? Are dollars flooding back, or maybe most dangerous, has trust in the rules eroded or has started to wobble a little bit? Because that’s the last one that really actually breaks this model and the one that you want to avoid.

Tobias: Good one, JT. Where do you think we are at present? How do you assess all of the inputs at the moment? Lots of molecules?

Jake: It’s hard to imagine less molecules. So, trillion-dollar deficits for as far as the eye can see, and no real appetite to even talk about, like, is this the right thing to be doing. Then you have the productive capacity, the output. Tariffs to me seem like totally the opposite direction if you wanted to control inflation. Like, you’re adding costs to things that you’re importing. Chasing off cheap labor, that creates a lot of the productive capacity for your economy through ice raids, it seems like an interesting idea if you want to keep inflation under wraps.

But then, on the other side of the whole thing, what if AI really does create huge productivity gains where effectively expanding the chamber in ways that we can’t even imagine right now and we may get bailed out by a technological Hail Mary, or maybe there’s some energy breakthrough that we get fusion or something that unlocks the productive capacity and we all get saved by it.

Tobias: And then, a miracle occurs.

Jake: Yeah. Well, it does feel like we’re trying to walk along this very steep ridge, where if you fell off one side, you fall into inflation and getting out of control again. Or, maybe if technology is so amazing and the singularity arrives and P doom kind of stuff, like you fall off onto the other side of the cliff. So, I don’t know. It’s not an easy time, I would say.

Tobias: That’s what a lot of people are hoping for with their credit card bills. Got to get that singularity before the end of the month.

Jake: Mm. You need to [crosstalk] raptured.

William: I did like that analogy. I always thought that the idea inflation is always and everywhere a monetary phenomenon was very limited. I always responded, well, it’s also always and everywhere a behavioral phenomenon. I think I would expand R a little bit to include consumer behavior and stuff like that, because that seems stable and that changes and it’s stable and changes in cycles. But that’s a good analogy for bringing all of it together in one place. I like that.

Tobias: I’ve got a question about tin for you.

Jake: Is this for your hat that you want to wear, Toby? [chuckles]

Tobias: No, this is a history question about the Bronze Age collapse when they couldn’t find tin, set back the empire by 300 years. No, I’m kidding. Tell us a little bit about the tin market, and where you see opportunity right now.

William: Yeah. So, tin is, again, critical metal other than rare earths. Tin has historically been mined in all sorts of different places. Bolivia was a huge place to mine tin in the 1970s and 1980s, then there was a big collapse. There’s a lot of tin in Myanmar and parts of southern China. And then, there’s tin sprinkled throughout the rest of the world. Cornwall up in England or over in England. Tin was one of the earlier metals to be mined, because it’s nice and soft. I don’t actually know if that’s the reason why it was one of the earlier metals mined, but historically, it’s got a long history.

Jake: What do we do with tin these days?

William: Well, so, everything that is electronic is soldered together with tin.

Jake: Okay.

William: It’s very important for solar panels. It’s very important for– Electronics. You flip over your motherboard, that is all tin. It’s also when ASMC goes to make a semiconductor at the nanoscale with extreme ultraviolet light. The way that machine actually works is it drops– There’s a droplet of tin, and it’s going to sound crazy, but I think it’s a thousand droplets per second, which sounds more like a stream to me, but apparently, [Jake laughs] it’s individual droplets that have to be the right size of liquid tin that then get vaporized with a laser to create the right spectrum of light in order to make those nanoscale sub, five nanometer scale imprints on a silicon wafer. That’s all– [crosstalk]

Jake: That’s the lithography.

William: Lithography. So, very heavy use of electronics. Most tin over the last 10 or 20 years has been mined in Indonesia, Myanmar, southern China. Processed in China. There haven’t been a lot tin developments outside of that area. One of the more successful developments is a mine called Bisha in the Democratic Republic of Congo, right up nice and close to the Rwanda border where they like to get skirmishes. There have been some tin mines in Australia, New Zealand area probably called Metals X. But outside of that, there haven’t been a lot of developments. Tin prices didn’t really move. Tin stocks didn’t really grow, and nobody really paid attention to it.

Now, of course, all of a sudden people are like, “Oh, really, only been one new tin mine built in the last 15 years.” It’s Bisha and the Democratic Republic of Congo. And outside of that there’s nothing that’s going to be built, nothing that’s going to go into production at least for the next five years. And then, the mines in Myanmar, the grades are getting very low. It’s also a horrendous operating environment from a humanitarian and environmental perspective. It’s just like anything goes wide scale artisanal mining, and then China collects it all into a big pile that they then bring across the border.

In fact, the mines in Myanmar have been shut down for two years at this point, I believe it is. You’re talking about 25% of the market supply or something when those mines went offline, they just turned them off. Indonesia had a ban on exporting tin last year. Looking to continue to try and move up the– Indonesia has a strategy, if you will. They’ve executed it with nickel. They’re trying it with copper. I guess they tried it with tin, but I’m not exactly sure what that was about, where they basically say, “You can’t export it unless it’s smelted and refined here.” So, we want to move up the value chain. So, you got to do an extra step here. You can’t just export the concentrate. It’s a very simple story.

But one of the challenges I think with a lot of the companies I invest in, and the perfect example of this is uranium. You get this great macro story. It all lines up. Supply, demand, all of that. That is insufficient in my opinion for an investment. Because that story, in the case of uranium, for example, the story you’re hearing now is the same story they told 10 years ago. But it took 10 years and your opportunity cost was huge.

You have to have a company and a management team doing something that you can really bet on, because that big macroeconomic story, while it is a perfect backdrop and nice to have is insufficient in and of itself unless you have an infinite timeline and can afford the opportunity cost. Very few people can– It just might take forever. So, that’s the story with tin. As I said, nothing coming online for like the next five years. There’s some interesting stuff.

Trying to restart some mines in Cornwell in England. There’re some theoretically interesting assets in Portugal and Spain. And then, Bisha, which is publicly owned by a company called Alphamin, is sitting down there in the DRC producing what’s probably about 10% of the world’s tin supply and paying a very healthy dividend of, I don’t know where it is now, maybe 7%, something between 7% and 10% per annum.

If you accept the political risk, you can clip that coupon, if you will. The real question with something like Alphamin would be whether or not everyone gets over the DRC risk…

They had to shut the mine down because of conflict in the area. Stock took a dive, fell about 40% over the course of weeks. My expectation was that it was going to be probably two years before they turned it back on.

The Trump administration came in and I guess have negotiated a peace agreement of kind between the DRC and the government of Rwanda, which was backing some of the troops with a group called M23, which was the impetus for the conflict in the region. They turned the mine back on in six weeks. Whether that peace agreement holds or not, whether there truly is a change in the political environment in that area of the world, that’s a story that is going to take some time to play out. But the stock’s back up to where it was before that happened.

Jake: If someone made the argument that being long commodities is being short human ingenuity?

William: That’s a great question. It’s a great question, because I suspect that most people will answer that question by saying, “Well, this is all stuff we still need, and it’s all stuff that is the backbone of–” You don’t have AI without copper. You don’t have silicon chips without tin. We’ve already established that. But I guess what I would also say, is that that is a very poor understanding of how innovative these businesses are and how critical the innovations they come up with. You guys had that guy on just recently who talked about PhDs.

Tobias: Yeah.

William: Who employs the most PhDs? Well, Exxon employs more than Apple does. They’re all in material sciences. They’re all in chemical engineering. They’re geologists, but they employ more PhDs than Apple does. Chevron is going to employ roughly the same number. Every junior miner employs a PhD. Why? Because geologists get PhDs.

Exxon Mobil files something like 1,000, 2,000 patents a year globally on the latest, greatest way of cracking X, Y and Z chemical to produce a new synthetic polymer that can be used to keep your iPhone together. So, I would say that, in fact, you’re investing innovation, you’re just investing in a different component of the innovation.

It is not the innovation that will lead to the fourth or fifth act to order a taxi, but it is the innovation that will allow you to keep the iPhone running at a hotter temperature, because it’s a new material that is more heat resistant. So, it’s chemical sciences, it’s material sciences, it’s physics, it’s geology. I don’t know what I missed there. Okay. It’s just not computer science.

I was talking with a geologist this morning about a project he was working on in the United States in an area where he said, “Well, they used to mine here in the 1970s and 1980s, and they came to the bottom of the obvious deposits and they moved on.” And he said, “But what I’m really excited about is the fact that all of the technology that we now use to prospect, none of it existed in the 1970s and 1980s.”

You’re talking about new geophysical methods, new geochemical methods, new biogeological methods. These innovations all occur to help these businesses do what they do, and so they’re internal and so they don’t get out to the consumer. The consumer doesn’t know anything about them. But they are critical to advancing our understanding of the world we live in and how we can better use the world we live in to make our lives better, and none of the other innovations that occur after that can happen without it. So, I would say that I’m not even sure if the question is properly formed.

Tobias: Well, let me ask you a question at the other end of the scale. I’m glad JT went first with that one, because I have a question. I was joking a little bit earlier about the Bronze Age collapse, because they couldn’t find tin, and that set them back 300 years. It seems to me that there are a lot of critical minerals in a highly, highly complex economy. The situation you’re describing with tin, it sounds like all of the tin in the world comes from these fairly unstable places.

So, what do you think the highest risk minerals are in the world, and what are the consequences for losing the supply for political reasons or just running out?

William: So, the running out one is really tricky.

Jake: Yeah. At what price is the question.

William: Because we don’t what’s there.

Tobias: Because the technology gets better for finding this stuff?

William: Yeah, the technology gets better for finding stuff. I’m invested in a company now that’s looking at ways of recovering copper that wouldn’t be recoverable with traditional mining methods, but rather the– basically what’s called in situ mining, they’re pumping sulfuric acid into the ground, trying to dissolve. Well, it’s not sulfuric acid, but they’re pumping an acid into the ground,-

Jake: Sounds bad.

William: -trying to dissolve the copper in the ground and then suck it back up on the other side. So, there are ways that people come up with and stuff like that.

I would say that the loss of any of these critical metals, but also, I think equally importantly, the loss of understanding of how to process them, the loss of understanding of doing research on how to innovate on them make them into new things, all of that is as damaging as the loss of any–

If China figures out how to manufacture semiconductors the same way TSMC does, that’d be a bad situation. But if they cut off the magnet supply, that’s a bad situation too. It can be catastrophic. It definitely is getting pressed now, but it’s the kind of press that’s going to go away quickly and we’re going to lose sight of it. I certainly worry about the loss of them, but more importantly, that mindset, if you will, Jake, that if you will with your question about investing in– How’d you put it? Investing–

Jake: It’s being short ingenuity.

William: Yeah, being short ingenuity. We lose people going into these industries. I go to a mining conference, and it’s me and three other guys my age, I’m 40, and then it’s a bunch of guys who are 50 and 60. So, I think the loss of the minerals, direct access to them, the metals, etc., that is absolutely damaging. But in the long-term, I think the loss of people coming into these industries is perhaps even worse and more problematic. I don’t know if that answered your question. I went off on a bit of a tirade.

Tobias: We need a commodity, not comedy. We need a commodity super cycle to get us back on–

Jake: To get people out of McKinsey and into– [laughs]

William: Yeah. We’ve got to make it sexy again or something. But the problem is that people don’t– I want to go to the DRC and go look at a– [crosstalk]

Jake: Plastics.

William: Yeah. Or, I want to go to a Dow Chemical facility and understand how they’re making plastics from natural gas. That’s not terribly interesting to a lot of people. For some reason, I don’t understand why, but–

Tobias: It’ll come back.

William: I’ll buy Rembrandt instead of Van Gogh or something. It’s one of those types of things.

Tobias: Hey, Will, we’re coming up on time. If folks want to follow along with what you’re doing or get in touch with you, what’s the best way of doing that?

William: So, we do run a Substack. You can get to it via our website, which is massifcap.com. M-A-S-S-I-F-C-A-P dotcom. We also run a mirror image of the Substack on our own website, so we don’t have to pay Substack 10%. But some of this stuff is behind a paywall, some of it’s not. I’m on Twitter at– I don’t know what my Twitter handle is. It’s like @wthomson13 or something. But if you look @massifcap on Twitter, you’d find me. I’m the only one who reposts @massifcap tweets.

Jake: [laughs]

William: So, that’s how you get in touch with us. Run a fund for credited qualified investors onshore, offshore, but we’re not really supposed to market.

Tobias: JT, any final words?

Jake: No. Be kind to each other.

Tobias: Check out Journalytic, folks. Once again, the comment section, for some unknown reason, was turned off. So, we’ll have to figure out why that’s happening. With any luck, we’ll be back next week with a comment section, same time, same channel. I’ll have a special announcement next week. I think it’ll be no guest. It’ll just be JT and I talking about a new project that I have.

Jake: Oh. Tease it, baby. [chuckles]

Tobias: All righty. Thanks, folks. We’ll see you then. Peace.

William: Yeah.

[Transcript provided by SpeechDocs Podcast Transcription]

VALUE: After Hours (S07 E33): Liquid Real Assets With Will Thomson Of Massif Capital; Natural Gas, Tungsten And Tin

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