China’s Role In The Coming Commodities Boom

With anti-Chinese sentiment in the US rising faster than one of Gordon Ramsay’s pies, it’s probably a good time to think about what China means to the global economy, where it’s come from, what its aspirations are, and what all of this may mean for us as humble investors.

In this episode of The Big Question podcast, I talk to our in house mining expert here at HMS Capitalist Exploits, Jamie Keech.

Jamie and I talk about China in particular, and what lies ahead for commodities and how investors can best capitalise on what we both believe will be a massive bull market in commodities in the coming years. Talking points include:

  • How to look at China’s global ambitions when it comes to resources
  • China’s strategy for fostering economic relationships in Africa
  • China’s growing global political influence
  • Why OBOR is the Marshall Plan on steroids
  • The intricacies of the Russia/China relationship
  • Understanding the nuances between economic, political and military influence
  • How China is transitioning from producer of low-cost goods to high quality goods
  • China’s growing importance in tech
  • The role of resources in turbulent times

As a primer to this, you should definitely read his article from last week where he talks about natural resources and China’s plan for the next 5,000 years if you’ve not done so already.

And, as detailed at 1:11:50, Jamie and I will be launching a new service for accredited investors in the resource space. To find out more and get yourself on the VIP list for when it becomes available, go here.

– Chris

“Gold and silver, like other commodities, have an intrinsic value, which is not arbitrary, but is dependent on their scarcity, the quantity of labour bestowed in procuring them, and the value of the capital employed in the mines which produce them.” — David Ricardo

Full Transcript

Chris: Today, I’m having a chat with Jamie Keech here and we’re going to be talking about some of the sectors that he’s much more knowledgeable about than I am; in particular, resources, but the resource space is kind of an interesting one and it’s… it ties in with geopolitics and so on and so forth. And so, one of the things that I wanted to bring to your attention was China and what’s going on there. So, I’ve got Jamie on the line. You there, Jamie?

Jamie: Hey Chris, how are you?

Chris: Good day, mate. Good. Yeah. So, let’s dig into this. Maybe if we just start off with a little bit of your background, many of the readers have been introduced to you and then know who you are, but for those that haven’t and for those that maybe aren’t readers or listeners that are getting to listen to this podcast, just run through your background a little bit and give us a flavour as to what your thinking is and your expertise.

Jamie: Yeah. Well, first of all, thanks for having me today. My background is primarily that I’m a mining engineer. So, I’m a Canadian mining engineer. I went to the University of Toronto here. And then, I worked in exploration both while I was a student there and after the University, I worked in Uranium exploration in the Yukon. I worked in Gold exploration in Mexico and Nevada. And I worked on VMS deposits in Albania. After that, I did a Masters in Engineering at the Cambourne school of mines. And then, I’ve worked primarily in mining and mining finance since that time. So, first, I worked in Asia – both in Hong Kong and Mongolia in mining – primarily coal mining, and then I worked in Canada for some time, in the Arctic building a big iron ore mine and since that time, probably the last 5 years, I had worked in junior mining.

So, I had worked with Junior and mid-tier miners that are in the project acquisition stage or in the construction stage. So, that includes projects in Peru, Ecuador, Brazil, a few projects in Brazil and the United States as well. And that’s been mostly focused on gold, although we have had some copper assets there. And my role for that stage has really been looking at new assets, evaluating them and then figuring out the best way to pursue them and acquire them, if that’s the tactic we’ve chosen to take.

Chris: Very good. So, you wrote an article the other day on our blog with respect to some of your experiences when you were teaching at Nanjing University out there in China. Let’s just quickly cover that because I think it’s really important to delving into the topic that we wanted to cover today, which is our friendly folks over in China.

So, you know, you mentioned that you’d gone and you were studying a course… but let’s just run through what you found and then cover off what that means and what China are doing in a global playing field and that space.

Jamie: So, some background on that. I was invited by a friend of a friend, who specializes in bringing foreign lecturers to China, primarily British, Canadian and American. And it was to teach at a University called Hohai University located in Nanjing, and the students there would do 2 years at Hohai and then they would do 2 years in the UK and they get a joint degree from two universities.

So, these students were environmental science and earth science students and I was invited to teach a course on mining and geology and environmental science. So, I spent 6 weeks in Nanjing. I did that 2 years in a row and I interacted with a group of Chinese students who got a 100 and kind of got to get a better idea of how university in China works and just how people were thinking there because I did not have any experience in the mainland before.

What I mentioned in the article the other day was: one of the first things I noticed being there was the campus was full of African students. And, I mean, that might not seem so odd here in Canada where I am, or Australia or New Zealand, but there were no other foreign people in Nanjing that I met at that time. It wasn’t something I had anticipated. As I spent some time there, I ended up finding out that most of these students were there on scholarship. So, the Chinese Government had sponsored these students to come. They were studying mostly Masters or PhDs. And, as a part of their curriculum, they had to learn Chinese. They had to spend about 2 to 4 years there depending and then they go back to their country, fully understanding Chinese culture, the language and I mean, feeling probably pretty indebted to these nations because they got a free education; they got flown out there; they got paid, you know, a modest salary essentially, but it was generally for most of them and not to send some money back to their family, wherever that may be in Africa and probably more than they would have previously made at home. And I mean, my PA, that I had while I was there, and he was from Ghana and he kind of explained that situation really well. I mean, he found a challenge in being in China, but he had pretty warm feelings to the opportunity that was provided to him.

Chris: And the important takeaway from all of this is really… this is a strategy by the Government to create and foster economic relationships in places where they need something. They are not doing this out of the goodness of their heart.

Jamie: I mean, that’s exactly it. So, they go back wherever that may be, for the person I was talking about, Ghana, and most of them would be far better educated than their peers there. They will move into positions of power or authority, be that in private business or be that within Government, which a lot of them tended to do from what I understood.

And call it 5, 10, 20 years later, these guys are in positions of authority. And so, when foreign companies are coming in to mine, to work in oil and gas, to build infrastructure projects and what have you. This is going to give the Chinese a massive advantage because they are going to be dealing with people that understand their culture, understand their language, know exactly what they are getting into and it’s this 20-year planning that you are not seeing anywhere else right now.

Chris: And so, they’re doing this because if you look at the growth that China has had for the last 30 years, which is easily being the biggest macroeconomic story, I think, of our lifetime. I mean, we’ve got… I think it was 30 years ago, China made up less than 3% of Global GDP and today, it’s about 15% and growing rapidly. And it’s already the world’s largest economy as measured by purchasing power parity, which is by the way, the metric that has always been utilized. Even though when that first came out in 2015, which is when they surpassed the U.S. as the world’s largest economy, there was a bit of a hoo-ha and we had a bunch of Harvard grads and staff coming out and saying, “Oh, no. We shouldn’t… that it shouldn’t be measured that way. It’s not fair and I’m going to measure it this way and…” whatever because the argument was that, “Well, they’ve got 1.4 billion people and so, that’s not the same thing. You can’t measure it against U.S., which has got 350 million people.” But anyway, the point is that that’s how it has always been measured and we can argue whether it’s measured right, wrong or otherwise, but the point is that China is, for all intents and purposes, it’s already the world’s largest economy and it’s certainly, with the rate of growth, even if the rate of growth collapsed to half of what it is today, it will still continue to grow at a more rapid rate than the West, and the U.S.

So, that’s a reality and it’s interesting because it’s not one that’s actually fully understood by many Western people. I was just on the phone with a friend just recently this morning actually and we were talking about it because I was in a business class lounge the other day, telling to these Americans, who were there and they were all doing business in China. There was four of these guys. And I was running a non-analytical test just to try and gauge some ideas. Anyway, so, I asked these guys… First, I was asking them about, you know, the perception of China and what was going on and… you know, they were unequivocal about the fact that it was growing and there was a lot of capital available and it was, for all intents and purposes, good. There was a few bitching and moaning about, you know, doing business with them and the hard, you know, hard nosed businessman, right, Chinese are not known for being philanthropic or anything. But, you know, they were pretty positive about it. And then, I said to these guys, “Do you think that the Chinese economy is going to be substantially larger than the US or what? And where do you think it is at now?” The reason why I asked this question about China because I had already been looking at the numbers. I knew that China was already the largest economy and they turned around and said, “Oh well, you know, China is going to be big. It’s very big now, but it’s going to be big. I think it will probably sort of…” One gentleman said, “I think it will probably, like, reach the US”, reach where we are at in the US in about 20 years time. And I just smiled to myself and I thought, “Hang on a second. This is a guy who is in China.” Average Joe has not even been to China. Right? This is a guy who is in China, doing business in China and he has got this perception that “Are they going to be reaching us in 20 years time?” And…

Jamie: That’s kind of shocking. I mean, these guys are… China’s what? It’s 4 times the population of the United States. Something like that.

Chris: Yeah. So, they got 1.4. America’s got about .350.

Jamie: Yeah. So, 4-5 times. And they must know that. Right? Working in China would have some rough idea of the population…

Chris: It just made me think, Jamie, it just made me think that if your average businessman who is actually doing business in China, and look, this is by no means a statistical example. This is a bunch of guys in an airport lounge, okay, sitting in a business lounge. So, if these guys didn’t know then, didn’t figure that out, then what chance does the average person have of fully understanding that as of today, right now, the Chinese economy is the world’s largest economy. It’s the world’s largest market. And you cannot split economy, politics and military. They are all intertwined. Okay? So, when I look at it, you’ve got China, which is the world’s largest economy. You’ve got the US, which is the world’s largest military, and on a political level, I think it’s fair to say that China is not, at this point, adequately considered an equal with the US.

Jamie: What do you mean by that? Do you mean the effectiveness of operating politically or the political system is not considered on par with democracy?

Chris: I think this is a western viewpoint in that they are not… For starters, they are not considered legitimate, right? You know, the idea coming out of the cold war was that the US proved to everyone this is the model. And the model is 2 things – democracy and capitalism. It works. You know, it’s better than anything else. And so, there is the viewpoint, “shit guys, we proved it to you. Why would you try anything else?” And so, this… You know, you still come across people who will harbour this notion that China, at some point, is going to become democratic. And I think it’s just like that dog won’t hunt. That’s not going to happen.

Jamie: I have a story I would like to share with you.

When I was teaching there, one of the experiences that really stood out for me was: I had this student, one of my best students and she would always walk with me after the class to the cafeteria or wherever I was going. And she is telling me about her days, her problems and she was talking about… I think, the next day, she was scheduled for one of her other classes to participate in a debate. And the debate was: What is better? Having many choices and many options to choose from on an issue, or only having one choice and one option? And she said to me, “You know, I don’t know what to do, I didn’t get the side I wanted. I don’t know how to argue for it.” And I said, “Yeah, that would be really hard. I don’t… You know, I don’t know how you’d argue for just one option.” And she was like, “No, no. I wanted that one option. Choices are bad. You don’t want to have choices. You just want to have the one option because that makes life much easier and much better.”

And that one experience for me… this completely highlights that both of us assumed the other side was just the obvious choice, and it was such an eye-opening experience, and that’s how that whole… presumably a big part of that nation thinks. And it’s… I would never have guessed it, to be honest.

Chris: I mean, look, the Chinese Government and Xi Jinping in particular has one of his main mentors was Lee Kuan Yew from Singapore and so we look at the Singaporean model. It’s one choice. It’s one political choice. Economic freedom, but one political choice. And as you mentioned the other day, mercantilist. And, we can’t… You can’t argue. Well, you can, but I think you’re going to fail. You can’t argue that Singapore is a failed state or anything of that nature. You can argue about what it might mean going forward. You can argue whether it is meant to becoming dystopian, you can argue whether it rests too much in the hands of… control with a few. There’s all those arguments you can have, but doesn’t really matter what you and I think, it’s matters of what’s likely to happen. And that’s the most important thing. And the important thing is that the West does not legitimately see China and the Chinese model. I don’t think it’s legitimate. And so, on a political level, I made the comment that they are not seen as an equal and that is certainly a case across Western nations. Yet, they are economically a massive force far bigger than even businessmen doing business in China realise, right?

Jamie: Sure, yeah.

Chris: So, there is a disconnect there. And that could be a risky one. And I say risky because it could lead or potentially lead to significant miscalculations. Right? If you think you’re dealing with someone that’s like, it’s kind of a punch-up, right and this kind of looks like a he’s a wispy little puny guy, but you don’t realise he is a taekwondo champion. That’s a significant miscalculation to make.

Jamie: Well, you’re just essentially underestimating your opponent. Right? When Trump sits down at the, you know, trade negotiation table, how is he going to approach her if he thinks he can just push these guys around?

Chris: Exactly, and that’s so… Let’s go there. Right? Let’s think about this and how this can play itself out because it’s happening today. Alright? So, let’s go back to the Obama era. Obama era, they said, “We’re going to have a pivot to Asia”, which never really happened. They stuck in a quagmire of the Middle East and are still there. And so that never really happened. In that time frame, China wasted no time in dominating an entire region economically, politically and even increasingly on military basis. And we only need to look at the South China sea to see how that’s been playing out. And if you think about… and the way that they play the game isn’t… if I punch you, you don’t punch me back. It’s like if I punch you and you take away my pencils, kind of thing. Right? So, remember when we had… It’s not the best example, but… So, you go back to the spat over that China East had with the Philippines over the islands in the South China Sea. And Philippines said, “Okay. Well, let’s take this to the United Nations Convention of the Law of the Sea and take it to arbitrage because, you know, they didn’t have a political and military might to tell the Chinese, “Go away and you know, kind of secure the islands.”

So, that all happened and the result was that they said, “No, no, no. It’s the Philippines own those islands.” And the US had the veto power on all of that and there is certainly a lot of significant influence that the US has with respect to that decision. So, that was now considered to be like this world power that said yes“This is the way it is. It’s the Philippines. China, you need to back down and behave yourselves.” And so, China turned around and said, “Well, we don’t like that.” But, they didn’t go to the court of appeals or anything of that nature. All that they did was they just waited for shipments from the Philippines bananas, in this case, to come in and let them rot on the dockyards and they said, “Oh, it doesn’t have the right papers.” And they just created a bloody mess so that it’s just roted there and they couldn’t get paid and they couldn’t get paid and they couldn’t get paid and they just kept doing it until the Philippines turned around and said, “Okay. well the islands are basically yours.” So, the US is an economic power to get an influence as they wanted to have it shaped.

So, they just surpass the whole world council (UN) decision and because at the end of the day, what happens is more important than what everyone thinks should happen. And they are realising it. So, anyway, that’s a good example, but the point is that their economic influence around Asia is, at this point, I’d say it’s pretty untouchable. It’s very, very strong. There’s Japan in there which is causing some problems and you’ve got obviously the South Korean things and you still got military bases with the U.S. in all, but that…

Jamie: Would you say probably, besides Japan and South Korea, do any Asian countries rely more on the U.S. than China?

Chris: Economically, China is the largest trading partner of every single one of those countries. China is the largest trading partner of the U.S. too. So is the largest trading partner of Africa, so is the largest trading partner of Australia. So, economically, it’s this behemoth. What haven’t yet seen is that they politically have flexed their muscle. They kind of did with the Philippines, but they don’t use military, there were no gun boats or anything like that. They just, like I said, they just hit them economically and they got what they wanted. Right? It’s like Sun Tzu- The Art of War. Right? The best way to win when you fight is to… what was it?

Jamie: It’s basically to win it without fighting.

Chris: Yeah, exactly. And so, they did that with the Philippines. So, that’s the case right now. Then would say, “Okay. We’ve got these trade wars that are happening today.” Okay. Well, what does that potentially mean for impacting on China? Well, I know what it does mean. It does mean that China is going to push more towards doing trade with friendlier parties. And those that got under the influence are going to be easier to deal with. So, this is going to push them into doing more trade with Russia, more trade with Asia, more trade with Africa. And then, that in itself, probably creates greater economic influence with those countries. Okay.

Jamie: Well, I know, as these countries become reliant on China, I guess, that puts them in a position when… when push goes to the shove, I mean, that’s, you know, international issue. Who are they going to side with? They are totally relying on China. I mean it’s an obvious choice.

Chris: Well, that’s where I said that, you know, where there is this disconnect in narrative, it can potentially be quite dangerous because of miscalculation. So, take for example, Australia. Australia’s largest trading partner is China. Now, philosophically, Australia has always been more aligned with U.S. interests and, you know, when there was the war in Iraq, Australia sent soldiers to fight in that, war in Afghanistan – Australia sent soldiers to fight in that, and so on and so forth. China doesn’t send soldiers to fight with the US in Iraq.

So, you’ve got philosophically this much stronger, closer alignment between the U.S. and Australia than there is between Australia and China. However, the economic might sits with China.

So, let’s pose a hypothetical situation. Let’s say that Trump doesn’t manage to inflict the kind of force or pain that he wants to inflict on China, and he decides that he is going to use a different chess piece, and he is going to bring out a different one. And he’s going to go to Australia and say,

“As an ally, I need you to assist me in on this and I want you to impose tariffs and restrictions on trading with China because we’ve designated them as a rogue state” (or whatever the hell you want to call it, pick some narrative), “and we need you on board.”

What do you do if you’re the Australian Government? What do you do? Do you say,

“Yes, you know, we’re philosophically aligned. We’ve always stood by your side. Blah, blah, blah, blah, blah, we’re going to join you.”

Or do you turn around and say

“Well, hang on a second. This is our largest trading partner. And we know that if we hit them, they are going to hit us. How do we even manage this?”

So, and that’s why I say, you can have miscalculations that could be quite significant. Now, that’s without having military intervention on any of these things and we do know that trade wars can turn out into real wars. That’s clearly evident from history.

Jamie: Yeah, and with China as well.

Chris: Look, we’re not dealing with some sandal wearing nomads in the fucking desert. This is a global nuclear power, with the resources to tackle these things. And again, we’ve seen that they are very reluctant to bring out and waste time and energy and money on things that they don’t need to. They are prepared to play the long game. So, one can hope that we don’t get into any shooting wars, but nevertheless, these are risks that increase everyday.

But, if we think about what they have been doing in terms of this economic influence, OBOR is a perfect example. I mean, this is literally, you know, marshal plan on steroids. They’ve already spent a trillion dollars in this space, and they are spending hundreds of billions annually. Building economic relationships with these countries throughout Europe, throughout Africa, throughout Asia and you realise that, at some point, that… Look, they are buying political influence, they are buying economic influence, but with it comes political influence. And behind political influence is always military to back it, if needed. So, that’s where you don’t want to have these miscalculations, you know. And, it’s interesting because I gave this example the other day. We know that China, for example, owns the ports in Greece and the airports. And they have been doing this likely in the SriLankan ports. And so, anyone can go and research all the stuff around OBOR. The point is that they own significant resources across the globe, in Africa and everywhere else, but let’s just take Greece as an example, which is their conduit into Europe.

So now they own the port there. And let’s say that Russia and China get a bit of spat going (with another country). And the U.S. says, “Oh, hang on a second. We are going to just going to put a warship in the port in Athens. Well, may be a couple of submarines.” And, they’ve always had fairly friendly relationships with the Greek Governments. They go to the Greek Government, and say “guys we need to make this happen” and the Greek Government would go, “Well. We could maybe, but you know, we got a little bit of a problem. The problem is that we don’t own the port, the port is owned by the Chinese. So, we need a, you know, have a little discussion with them.”

And now you realise that the alliance between China and Russia is a strong one. Is China going to be happy about the U.S. bringing in maybe nuclear submarines into the port in Athens that threaten Russia? I doubt it.

Jamie: So, what interests me the most about this is that, “Well, Western democracies have been, you know, thinking about the problem with terrorism and Islamic terrorism. There is essentially this paradigm shift that’s going on that the average person has no idea that it’s happening. You know, it sounds like, you know, maybe even the average person with links to China doesn’t even understand it’s happening. And you know, under the surface, the structure of global power is completely shifting and probably something is going to happen one day. People are going to wake up to this and it maybe too late. You know, the western world hasn’t been positioned to take advantage of it or counteract it or establish itself. So, what are your thoughts on that?

Chris: Well, look. There has never been at time before where you had a global power, economic power that hasn’t translated that into political and military power. It never happened.

I mean, there has been times when you had an economic power rising and tried to translate into political and military power and done so unsuccessfully and they have receded. Okay? Japan’s a good example.

Just because something is going right doesn’t mean that it’s a linear path. It might succeed. It might not succeed.

What we do know is that China is the rising economic power. That’s unquestionable, undeniable.

It’s also an increasingly strong political power and we only need to look at the, again the economic arrangements like trading in oil and gold contracts and all that kind of stuff that is taking place, which by the way, just de-risks their currency for them and if it de-risks their currency, their economic risk, that also decreases the risk of civil strife, which gives them stronger political power to be able to manage anything. So, those are all happening and they are happening increasingly at speed.

I’ve been looking at this and I thought, “Okay. Well. What does it look like from a military standpoint? And they’ve been growing… they have been increasing military spending, but it’s still a far way off what the U.S. spends and the military is nowhere near as large or as powerful.

But, what is interesting and I’ve looked at this. If you look at where China is spending enormous amounts of capital, forget about the military, but just in general, that spending a lot of capital in trying to change China from a low-cost producer of goods to the world to a higher quality provider of goods.

So, it’s going from… and this is not unusual. Remember this happened with Japan, you’ll remember that Japanese used to with produce crap, like you had “Jap Crap”. It was as though anything coming out of Japan was rubbish. This was probably like when we were all kids.

And what they were doing is copying German goods and British goods and so on and so forth. And then, doing them cheaper and that’s fine. So, they did that until they got to the point where they had a larger middle class and anyway, to cut the long story short, now Japanese goods are high quality goods. Anything coming out of Japan, you associate with quality. You don’t associate it with rubbish. On the other hand, much of the stuff coming out of China, we associate it with rubbish. So, people make the calculation, “Oh, like, China is good, big and all, but now they just make rubbish.”

But, they don’t understand it. They are just part of a transition.

And China is spending enormous amount of money on transitioning to a higher quality production society, and they can do that now because they’ve got a growing middle class. So, they can sell to their own middle class.

Jamie: So, where will that be mostly focused? Is that going to be cars and whatnot, like the Japanese or…? What do you think on that?

Chris: Okay. So, Firstly, China is now the world’s biggest filer of patents. Okay? So, this is developing Chinese technology. And you could say, “Well, they are the largest filer of patents because there’s a bloody hell of a lot of them.” Right? And that’s true, but it’s still significant and it shouldn’t be dismissed without consideration. But, here’s the thing. Guess what the leading sector within those patents is?

Jamie: I would guess technology.

Chris: It’s Artificial Intelligence.

Now, in particular things like Quantum Computing, we already know that they have the largest, most powerful quantum computer on the planet. They have been sending satellites into space, all that sort of stuff. And then, so, we know that’s taking place. They’re spending and they are increasingly the leaders in technology. You know, it’s funny because there is a chap that I’ve known for years, and ex-Silicon Valley, who spends a lot of time in China. And he made the comment to me a couple of months back and he said, “Look. Silicon Valley is still a hub of intellect and is still this coalescing capital of human intellect”, he says, “but people got no idea what’s going on in China…” and instead it’s just like… it’s not just a competitor, it’s beyond that. And, you know, people just in the west don’t seem to understand how significant a player they are.

Jamie: That’s interesting, because I mean, the typical stereotype you would hear often is that innovation doesn’t really exist in China. You know, they are great at copying and they are excellent worker bees, but they are not creating new technology. They are not inventing new things. So, this guy, this VC guy, he is discussing that. He is saying that’s not true.

Chris: Correct. But, think about it. If they have already built the world’s most powerful quantum computer, how can we turn around to our world, they are just monkeys who just copy stuff, like they’ve already beaten you. Like, so, meaning you can say it and I understand it and you understand it because people are looking in the rear-view mirror and they are going, “Well, you know, a lot of the stuff coming out of China’s rubbish, and certainly when you go back 10 years and it was more rubbish and in 20 years…” So…

Jamie: And we probably have to think of the number of Chinese-born US, Canada, Australian educated engineers and scientists. I mean, I went to a University in Canada and probably 30% of my class in engineering was Chinese.

Chris: Yep, yep. So, so, now, let’s go back to the military side of things. So, they are spending huge amount of capital on Artificial Intelligence and on Quantum Computing. And then, you look at wars, and you look at major wars and there’s that old saying that “generals always fight the last war”. So, in the West, you’ve got things that they are spending more money on, like more fucking bombers, and you know, navy ships and rubbish like that. And you’ve got the Chinese, they are spending it on technology. Now, if you think about the Iraq war, the one… the first Iraq war, that was a devastating defeat. It was over in weeks, and I remember reading about this sometime back. The reason, apparently, that it was such a catastrophically favourable defeat (depends on whose side you’re on), but it was such a rapid “success”, wasn’t necessarily the fire power. Yes, the US had much more firepower. They had better technology and so on and so forth. But, main element behind it was that the U.S. went in and took out their communications infrastructure. So, the generals couldn’t talk to the guys in the field. No one had any communication. So, they were completely lost. And then, somebody just took them out. They just picked them up like fish in a barrel.

So, you know, when you think about the cyber war, right, that’s where the next war is.

It’s cyber war.

If you could have battle carriers off the coast of Beijing, entire fleets of formidable power. But, if you… if their communication systems are hacked or taken out, they are pretty much worthless.

So, you’ve got the central point of risk that is really central. I mean, it’s significant. And I look at who is spending the most money and time in that space, I’m like, it’s the Chinese. So, I’m not making a judgment call one way or another, I’m just saying this is interesting.

Jamie: It sounds like someone could be in danger of essentially being… the Polish riding into WWII on horseback, against tanks. Right? It’s not as technology speeds up, even a small difference in computing power presumably can make a big impact.

Chris: Well, look, Jamie, I mean, you know, it’s asymmetric bets. Right? We’re always looking for asymmetric investments. So, what’s more asymmetric than having the ability to hack a system and take out an entire field of operatives or a military fleet of navy fleet, with a computer?

That’s true asymmetry and we keep seeing that in wars.

I mean, it’s like, you look at Afghanistan and like, “Well, how is it that you had a bunch of goat herders in sandals fight off the world’s largest military?” They did it to the Russians and they did it to the U.S. Like, how did that work? One of the reasons was the stinger missile. So, the stinger missile costs you $300,000. I think it was about a million dollars when that first came out. That was it. It was under the million. It was like a few hundred thousand bucks for a stinger missile, and now they are even cheaper. So, these guys have access to these things. Now, that can take out a black hawk helicopter, which costs millions of dollars. So, there is the asymmetry and it can be used without… like you don’t need significant training in the thing. You just need a guy strong enough to hold it and aim it in the right direction, and you know, you’re away.

So, that was a significant development in technology that allowed the Taliban to fight, and they are still fighting there. And like, you know, the U.S. still hasn’t won. Years and years later, and billions and billions of dollars later… so that’s true asymmetry.

So, I look at this and I’m like China is spending a lot of money on the stuff that will probably be utilised in the next war.

Jamie: Don’t you think the US is as well? I mean…

Chris: I’m not saying they haven’t, but again, all of this just comes down to the dynamics. If you’ve got the most… got the strongest economy, you can divert more resources to whatever you want and where you’ve got a political system there, which decides how that capital gets diverted and as, like, no one’s going to argue with you, right? Because this is not a democracy. There are… we could argue that there are certain advantages to that. You can argue that it’s not the best deployment of capital resources, depending on what it is that you are trying to get, but you can’t argue with the fact that if they want to develop and deploy resources in a particular fashion, there is nobody stopping them doing so. When they want to build a highway through your town, they build it. You’ve seen it. You’ve been over there. It happens. It gets done and it happens blindingly fast.

Jamie: No, no, no. That city where I worked, I mean, one year, I worked just outside of the city at the University campus. Then, there was no subway there. The next year, I came back, there is a fully functioning subway that went downtown to the city in a year. I mean, in one year. I live in Toronto where they have been trying to build new subway there for 25 years, I think. Every 4 years, the plan gets cancelled and they start again.

Chris: Yeah, I mean, it’s like… if you go back to the ‘08 crisis, right, everybody, like again, I made the comment that all the central banks went and coordinated policy, and in the US, they spent, I think, was, don’t quote me on this, but it’s about 968 billion. And what they did with that 968 billion was that they basically bailed out the banks and the insurance companies and kind of restabilised the system.

So, you could look at that and go, “What did they get for that?” Well, they got a system that didn’t implode. That cost them 968 billion. China spent, I think, about 400 and something billion. Let’s call it 500. It was just under 500 billion. Guess what they got for it. Well, they got high speed trains, the best in the world. They have got villages that now connect with cities, and they got infrastructure that they can have for the next 100 years. That’s what they got for the half a trillion.

Jamie: And the US treasury just propped up a system that had previously collapsed. You know, that analogy kind of makes me think of WW I, where Europe was the wealthiest place on earth by an order of magnitude, and then it just imploded in WW I. They burned up all that money. And then, that was it. I mean, that’s when the slow transfer of power to America took place.

Chris: Yep. So, that’s kind of how I’m looking at it and then saying, “Well, that’s a long view. And it’s one that has got many iterations and we might be wrong. So, you got to keep on top of it and understand that we don’t know everything. You know, you keep looking at these puzzle pieces and see where they are moving, but all of that is still going to take resources. Coming back to the trade wars thing that China has an increasing middle class. Much of Asia has an increasing, booming middle class. Trade between China and broader Asia has been accelerating. I don’t see that stopping because there is nobody there that’s… again, none of these Asian countries are going to turn around and want to have a trade war with China. The only way that I could see that potentially having conflict as if U.S. or Europe or… probably the U.S. turns around and force their hand with potential so called allies and says to… It wouldn’t be the Philippines because Duterte will just call him a “son of a whore” or something, but it would be… That guy’s a classic.

It would be, you know, trying to influence some of those countries to put pressure on China. And so, like, it could be South Korea. You know, “South Koreans, you guys need to do this or we’re going to pull out our military bases. And we’re not going to protect you against Kim Jong Un.”

They can do that, right? And then, South Korea is in a pretty sticky situation.

Jamie: They are not going to ride off their foothold in Asia though. That’s the other thing, like, I assume the U.S. doesn’t pull out of Korea and Japan and completely lose their base there.

Chris: Completely, 100%. The only thing is that the economic influence is not there anymore from the West. It has already shifted and it’s shifted sufficiently that those players on a political level are very reticent to give up what they have currently got, which is what’s keeping them going and that’s the China relationship. So, what that means, I guess, is that the trade between those countries will continue if not accelerate, because it’s like, there will be a bowl string, like, if you are not currently trading with Joey over in the corner and he is making your life a bit difficult, and we’re already, you know, trading with Freddie and Susie. We’re just going to focus our attention with Freddie and Susie. It’s just common sense. So, it’s going to push us to doing more business with those that are friendly to us and push us away from doing business with those that are not that friendly.

It’s not to say that the one having big impact, U.S. is still a massive market and this will hurt China.

You know, these trade tariffs are definitely going to… They are going to hurt. It’s just trying to understand how that plays out and then what that means for various asset classes. Right, and how to best to actually go about positioning for that.

The one thing that we haven’t discussed and I think this kind of just rounded up my thinking on this and, throw rocks at it… this is under the sort of world economic order that we’ve had and certainly post ’08, we’ve had global coordination amongst all these central banks. That’s all fragmenting now.

We also know that most of these countries being, let’s call it Japan, Europe… I know Europe’s not a country, but an economic region, and the U.S. are all running balance sheet that should scare the hell out of anybody.

And they are not going to be able to pay those debts back, which is why I don’t believe this is going to be a deflationary outcome. Corporates will pay back debt. So, you got a corporate with a big balance sheet because that’s deflationary. We’ve always seen that, but I don’t think it sounds true for sovereigns because they have got a printing press, and they are going to use that well before they led any deflation take hold.

So, that’s one element.

The other is that, in an environment where they take that stance, and we’re coming close to that now because we’re already seeing the virgins, like the Fed’s raising rates, the ECB are not. Like, Trump doesn’t give a flying toss about what the Europeans want to do at a policy level, and likewise, anyone else. And so, we’ve… you know, this “rise of the strong men” I’ve been talking about is important to understand because it means that the coordination is gone. It’s finished. And that’s going to create diversions and all of those main currency blocks, Euro and Dollar, which is what has been holding everything together. So, now, I mention a world where all of those become problematic, much more problematic than they have been.

And there is an escape valve.

And that escape well is basically, not sure that’s the right terminology, but where you’ve got, for example, the U.S. on a relative basis is now much more favourable, US bond market is much more favourable than the European bond markets, say German bunds. Right, because they are pursuing a different policy like raising rates.

So, now you get capital shifting towards the European bond market as opposed to European bond market. So, it starts moving around a lot more quickly. It creates more volatility, it creates more risk, increases interest rates. If you get a point where the interest rates are… which is basically inflationary, we don’t need a lot of shift of capital to things of tangible value. So, we only need to look at some of the…

Jamie: So, stores of value?

Chris: Stores of value, that’s right. You know, we only need to look at countries that have been through these inflationary environments. When you see that the things that people want to own- things like equities and commodities that will hold their value. That seems like a really strange world today when you look in the rear-view mirror. Actually, it shouldn’t be a strange thing to look at, Jamie, because it’s exactly where we are. It’s just that the rear-view mirror that we’ve had has been something very different. But, it’s actually not. It should be on everybody’s mind in my thinking, because you’ve got this central bank balance sheets that are completely insane that we know they are not going to pay back the debts. Then, you got them all fighting with each other. So, the coordination is gone. You’re not going to… Like, the next crisis comes on that the Fed’s not going to open swap lines with Germany. They hate them. Russia is a problem. They are not going to help them. Forget about it.

So, that creates a very, very different market environment and in that environment, people want to have some store of value, and you could argue and say, “Well, it’s gold.” And then the gold bugs will love that and jump up and down. And that’s kind of partly right because if you go back to history, the strongest and best thing to own in that space typically is actually energy. It’s not gold. Gold does well. Sure, but it’s energy. So, that’s one thing to think about.

But, in that sort of environment, resources are very, very attractive. And then, as you and I know, we look at that space and go, “Well, okay. What’s resources look like today?” Well, for many of them, they had been decimated over the last decade. So, it creates a different… it creates an interesting setup of kind of moving pieces of the puzzle. I think the risk’s relatively low, and then, the reward potential, given the different outcomes could run from okay to extraordinarily high.

Jamie: Yeah. I mean, a couple of years ago, Robert Friedman was talking about resources being priced for essentially end of the world prices. That, you know, the prices of copper, of nickel, of iron ore, you couldn’t mine it for that much. There was almost no or very few mines in the world that were profitable at these prices. And all the money had been going into tech, into, you know, other industries and the only way you… I mean, his point was that if it keeps going on, it’s an end of the world. We stop building things, we stop making things. There stops being materials to support these other industries. And I mean, I think people are starting to cotton onto that and starting to be aware of that. I mean, we’ve seen nickel in the last year or so get back up to $6 after its crash. I talked about it the other day, you know, platinum and palladium. And, you know, palladium, I believe is at an all time high. Rhodium has had a spike and you know, platinum is, I think, waiting to take off over the next year or so. And this store of value, these real things, I think, are starting to become appealing to investors again.

Chris: And that’s what a lot of these other geopolitical things we talked about, right. That’s just supply and demand. It’s just like Friedman said, you know, you ask yourself the question, “Is this entire sector going away?” Like, are we going to have a situation where we don’t use nickel again?” Well, I mean, in an Armageddon situation, sure, but then we’ve all got bigger troubles than that.

Jamie: We’d have bigger things to worry about than nickel price, but you know, you said something kind of interesting a moment ago and we talked a little bit about this before, but that, you know, instead of going for gold or typically it’s been energy. Now, do you think investment in energy is going to shift over the next few years from, you know, typically oil and gas, maybe a bit of coal to these new sorts of battery electricity metals like lithium, cobalt, vanadium, but also nickel, also copper for…

Chris: I don’t need to really think whether that’s going to happen. It’s already happening Jamie. I mean, if you look at that sector…

Jamie: But, you are saying, it’s almost like these are being shifting from just metal commodities to kind of merging with the energy space, which is kind of interesting.

Chris: Yeah. So, if you think about traditional energy – natural gas, oil – there is no tangential stuff to it. Like the natural gas is just natural gas. Unless you get into oil sands, and then you go, OK what do you need…water components and you need like this other sort of periphery materials that are utilised in the processing of energy in that space.

For the most part, things like natural gas and oil are very simple. It’s the product, and yeah, there is transportation costs and logistic costs and all that kind of nonsense, but you’re going to get that in any sector. When it comes to the battery storage and this kind of “alt energy”, there is more components to some of them. So, in batteries for example, there is no commodity called “batteries”, right. That’s… It’s like vanadium redox and you go, “Okay, well, that’s Vanadium and it’s a couple of other… it’s nickel and…” So, there’s a bunch of components within that technology, which is now energy… was energy containment with… not energy source per se, but… So, there’s other factors that come into that.

And that is absolutely a 100% gaining traction and it’s not something that people are paying much attention to because that is the future of mass energy storage.

And we only need to look at the percentages of the energy complex. And what that has looked like over the last 20 years, in the last 10 years and you know, now. And we’ve had this… And you know, I’ve discussed this before. We’ve had this wonderful setup in the early 2000s and mid-2000s, where we had a huge amount of capital go into the alt energy space and it built out some wonderful infrastructure and then we had the busts it all went tits up and… I say that’s a wonderful thing because all of that technology that was built and all of that infrastructure that was built, then got placed into the hands of a few, who now have a completely different op-ex structure. And so, it doesn’t matter what that original technology cost to build, right.

It’s like your project that you got in Brazil. You got a mine which has had 100s of millions, over 300 million dollars spent on it. Okay? And it wasn’t… Didn’t all just get pissed away, right?

Jamie: I mean, the underlying infrastructure is still there. There is deep lines to the ore body. There is roads, there is buildings, there is all those things you’ve to pay for that, all the capital costs are gone now.

Chris: And so, they are gone and today, the cost of that is literally a few million dollars. And you go like, “How does that work?” Well, it only works when someone else built it and for some reason, like, strangely nobody wants it right now. But, we get that…

Jamie: I mean, it’s shocking you see this. This project, as an example, was worth a billion dollars at one point – a billion dollars. And I think it was 400 million dollars was sunk into it. You know, millions into these ports, millions in plants and in other infrastructure. And then, all of a sudden, it’s valued at nothing. It is zero. So, I and a few partners were able to pick it up for… I mean, I don’t even know if it was pennies on the dollar, it was fractions of pennies on the dollar.

Chris: Yup. No, no, we’ve looked at the project anyway. So, that’s a good example of the same thing. And so, coming back to your question around energy, we had that in the alt energy space. And so, today, there’s a completely different structure allowing for margin expansion in that business and for many of those technologies to be utilised. So, the competitive advantage is now quite different. And then, we were talking about China. So, we go back to China and we say, “Well, forget about these… all the world leaders coming together and agreeing on climate change and trying to reduce carbon emissions and all that stuff.” China has got a much more significant reason why they want that to happen and why they are now the leaders in the world in terms of actually reducing carbon emissions and that reason is quite simple. Their populace are literally dying from…

Jamie: Yeah. Millions die per year from particulates in the air and I think… So, I was there. It was smog everywhere. It looks like fog on the ground. I couldn’t believe it. I had a hacking cough for weeks after that.

Chris: Yeah. I mean, it’s terrible. So, they are putting huge amounts of capital into that whole space. They are spending more money than anybody else in renewable energy. They are… They have gotten ridden of like their last… in certain provinces, they got rid of the last coal fired power stations. Like, they are going full on into Uranium energy, vanadium redox flow, you name it. Solar, they have got the world’s largest floating solar farm. And they are the world’s largest generator of solar power now. So, with all of these things, are a number of different tail winds behind it and there’s different reasons. There is quite a political reason for doing that. Aside from the fact that it’s environmentally far more friendly. And so, there is all, you know, really important sectors to look at. And then, looking at, as you know, the metals behind those energy systems, you know, whether it’s cobalt or nickel or whatever.

Jamie: It’s interesting to look at that because there’s obviously then a sense of urgency that they need to employ in switching to these alt energies or “green empower”. I mean, in the US, it seems it’s nice to have and people want it, but there is not the economic incentive, where your populace or your work force is dying out.

Chris: There’s two things. One is that they have got the economic incentive for sure. The other is that and I saw this in Britain. So, Britain came out and it was… 2012 or something and they came out with a number of, you know, so called initiatives to reduce the number of diesel cars on the road and then, they said, “Okay. Well, we’re going to have this by, I think, it was 2015.” Like they have a set of policy in this. “This is what we’re going to do and we’re really tackling it and… da da da.” And guess what, 2015 rolled around and hardly anything had happened. It was just politicians making a big noise and then they had signed papers and like… but at the end of the day, it didn’t get pushed through. It was just ineffectual non-sense and that’s not at all what’s happening in China.

Firstly, they get shit done because they are not a democracy, because what happened in Britain was like, you had all of these lobby groups that came out and they just… It just went through the courts backwards and forwards for years. And so, nothing ever really happened. So, you had all of these policies that they had decided they are going to have happened, but then behind the scenes for the next 2 or 3 years, it just got fought about and the lawyers made a lot of money, but nothing happened.

And we know that Europe and well, mainly the European countries and Britain included has come out and said, “Oh well, we’re going to get rid of all petrol cars and it’s all going to be electric vehicles behind that given dates.” And some of them are like 2030 and some are 2035 and anyway, they have given all these dates, and that may or may not happen. I suspect it probably won’t unless there is other dynamics that make it really economical to actually do that, but in China, it’s like they haven’t even seen this initiative. They are just doing it. Like it’s just there. They are doing it. They are not wasting time. They have already got the more electric vehicles than any other country in the world. They are producing more, like everything. You don’t have to pontificate about and say, “Oh. It could happen. It couldn’t happen.” It’s like it’s happening. Right?

And here’s the other dynamic and anybody who understands economics would understand this. When you’ve got more and more something being produced, the cost of that per unit falls, which makes it more economically useful. And so, then you have more usage of it, which then brings down the cost of it. And so, we’ve seen those with solar and things like that. I mean, like, the house that I’m in now, which we’ve built about 15 years ago, when it was built, I remember looking at putting solar panels in the roof. And guess what, it was going to take me 30 years to pay it back. So, I was like, “bugger that… I don’t even think will be here in 30 years”. Now, today, so what’s that? Like, 15 years ago… just under 15 years ago. Today, my payback on that is under 3 years. So now, I mean, if I was to do it all again, I would be like, “Yeah. I mean, I’m probably going to do it now. Just got to toss all that solar panels on roof.” Because it’s actually economical, right?

Jamie: Yeah.

Chris: So, and then, me buying it creates, you know, better scales of economy for the companies, so on and so forth. So, all of that, that pivot has taken place already in the alt energy space. It’s happening. Now, we’re just at the forefront of it. So, then, you look and you go, “Okay. What are the commodities that are utilised in all of those technologies? And then, is there something there?” Because sometimes, there’s not. Like, you look at it and you go, “Oh! Maybe, it’s…” I don’t know, copper or whatever… You look and you go, “Well, it’s actually not that cheap and there is massive supplies of copper and whatever.” Now, just, I’m talking rubbish here, not just using it as an example, but where you can find them and you look at them, you go, “Hang on a second. This isn’t being factored in at all. We’ve come out of a bottom of a commodity cycle and actually, half the companies have gone away, and half the mines are being shut down and so on and so forth.” And you got all this demand coming through for this technology that’s economically viable. It’s like, “Hang on a second. That’s the way to play it.” So, when we look at China, there are things that can halt some of its growth and like I said, it’s trade wars and things like that. But, on a risk adjusted basis, it’s hard to not be involved.

Jamie: Yeah. I mean, it’s interesting to hear you say that because I mean, after post 2008 and 2012, you know, when commodity prices crashed, people were saying, “this is the end of the so called super cycle”, that you know, China’s growth is halted. It’s over. Commodity prices are going to drop down to whatever percent of what they were trading at and it’s done, “back to business as usual”. But, you don’t think that at all. You were saying earlier that even though… Even if China’s growth is half of what it is, it’s still more than most of the Western world. When you think it’s going to continue to drive the price of these commodities…

Chris: Over the last decade, I was looking at some numbers, China grew quite accounted for 40% of the world’s growth. It’s just phenomenal. So, yeah, a decrease in that is going to have an equally large impact. And so, you could look at it and say, “Well, it’s a risk,” but when I couple the existing supply and demand, the fact that a lot of these technologies are actually now very viable when they weren’t actually viable 10 years ago or 20 years ago. And then I look at the whole geopolitical structure and economic structure such that you have got countries with massive deficits and balance sheets which they are not going to be able to pay back the debts and how that’s actually moved capital, because when that’s taken place, the consequences have been that capital has shifted into certain sectors and a lot of it’s being concentrated in those bond markets. And now, I’m saying that we’re going to have that cracking because of these political divergences which lead to policy divergences.

And then, that capital stock is leaking out and it starts looking for a home either in some of the other sovereign debt markets, which all look pretty bad, but some… It’s always going to be some that look less bad than others. So, it can shift around a bunch, but you only need a small portion of that to start seeking safety. And you say, “What does safety look like in that environment?” And I know what safety looks like in that environment based on my experience in third world countries. And again, people go, “Well, it’s not third world countries.” I’m like, “Well, economically it is. I mean, how can you make a case it’s not? I mean you look at Britain’s balance sheet and you look at… I mean any of these.” And you could say, “Well, they are no different”. “Well, no, but they were like rich.” I’m like, “Well, sure, but I mean, it’s not an argument. Right. It’s not an argument against math.”

So, when I think about it like from that perspective, and I say, “Well, where does capital flee to in that sort of environment?” Again, when you look at history, it’s like, “I know where it goes to. It goes into stuff.” It’s that simple. And so, I think that’s really the nutshell of it.

I think, next week, we got a couple more topics we want to talk about, Jamie. And we’ll have that for listeners next week. We’ll be covering more of a number of different topics. We covered… We kind of touched on a bunch of them today, but I think they are all important to understand, you know, our world view and how we are tackling this and how you and I decided on the best ways forward to actually do that. So, we’re pretty excited.

Yeah, I mean, I am excited for it as well. Especially, I mean, I don’t come from a macro background. I come from mining commodities focus background. So, looking at this bigger picture and seeing the bigger cycles helps put everything into perspective and then finding these companies which can leverage this opportunity and create the most bang for your buck when you want to get into copper, or to nickel or to wherever we decide to focus.

Very good. Well, thank you so much for your time. I appreciate it and I look forward to our next discussions.

Yeah. It’s my pleasure.


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