Fundamentals Tightening Under The Covers (Guests: Paulo Macro & Kuppy)

Episode Overview

• Guest Paulo Macro discusses the major economic regime shift towards "fiscal dominance," drawing on his experience in emerging markets to explain why the US is entering a new inflationary era that most investors are unprepared for.
• Paulo details his framework for commodity investing, using uranium and copper as case studies to illustrate how to identify markets poised for a breakout after long periods of frustrating consolidation and investor apathy.
• Special guest "Kuppy" presents a detailed investment thesis for A-Mark Precious Metals (AMRK) as a "picks and shovels" way to play the bull market in gold, capitalizing on transaction volume rather than mining risk.
• The hosts conclude with a broad market outlook, expressing strong long-term bullishness on gold and oil, skepticism towards the copper rally, and identifying potential turning points in international markets like Japan and Mexico.

Key Concepts

• Fiscal Dominance: The current economic environment is no longer driven primarily by monetary policy but by government fiscal policy. This shift, common in emerging markets, is a new paradigm for developed markets and suggests inflation will be persistent.
• Commodity Bull Market Cycle: Successful commodity trades often go through a long, frustrating "sleepy" phase where prices stagnate despite bullish catalysts. The key trigger for a breakout is the arrival of a "price-insensitive buyer" who needs the physical commodity immediately.
• Investor Psychology and Heuristics: Most modern investors operate with a "belief heuristic" shaped by 40 years of disinflation, making them blind to the dynamics of an inflationary regime. Experience with different economic cycles provides a significant analytical advantage.
• Inflation's Real-World Impact: High inflation is not just a number; it fundamentally alters consumer behavior and creates massive economic inefficiencies as businesses are forced to dedicate resources to non-productive activities like constant repricing.
• A-Mark (AMRK) Thesis: A-Mark is positioned as a "stock exchange" for physical precious metals. As a dominant player in a duopoly, it profits from increased volume and volatility in the gold market, offering a unique risk/reward profile compared to miners.
• Contrarian Sentiment in Gold: Despite gold reaching all-time highs, retail sentiment remains deeply skeptical and fearful. Investors are reportedly selling physical gold to buy speculative assets, a strong contrarian indicator that the bull market has much further to run.
• Market Structure and Fragility: The evolution of Wall Street has led to more consolidated desks and new fragilities from automated trading systems (like Zero-DTE options), creating parallels to the conditions that led to the 2010 Flash Crash.
• Global Market Divergence: Different international markets are on different trajectories. The Japanese Nikkei shows signs of a potential "prairie dog" top (a failed breakout), while the Mexican stock market is staging a major bullish breakout from a multi-year base.

Quotes

• At 1:21 - "It's 13 and a half percent. This is like drinking wine... with milk." - Host Patrick Ceresna expresses his shock at the beer's high alcohol content.
• At 2:37 - "I'm, uh, really nervous, excited. I don't know what the ratio between nervous and excitement is right now." - Guest Paulo Macro shares his feelings about being on a podcast for the first time.
• At 4:05 - "Oh, jeez, this guy really puts his thoughts together in a great way with all the threads." - Kevin Muir recalls his initial impression of Paulo Macro's detailed financial commentary on Twitter.
• At 30:18 - "'You're not going to believe this, but we lost a billion dollars yesterday.'" - Recounting a pivotal moment in late 2007 when quants from the mortgage desk revealed massive, hidden losses, foreshadowing the 2008 crisis.
• At 30:42 - "'We know we're going to lose a billion today and another billion tomorrow and there's nothing we can do about it 'cause the market's just not there.'" - The follow-up from the quants, explaining the complete breakdown of liquidity in structured products that signaled the system was breaking.
• At 36:53 - "The change now, where fiscal matters as much or more... fiscal dominance was not a thing two or three years ago. Like most American investors had never heard of the term." - Explaining the fundamental regime shift from a monetary-led to a fiscally-led market.
• At 53:23 - "The asset management industry at large and the way people even save money has been one way from kind of like a belief heuristic." - Paulo Macro describes how the financial world has been conditioned by the market environment of the last 40 years.
• At 54:31 - "You would try to find where that guy was in the store and get ahead of him because he was taking every price up 2% at midday. So you were getting a cheaper price on goods if you got ahead of him." - Illustrating how consumer behavior radically adapts to a high-inflation environment.
• At 56:06 - "Think of the advantage you have being a minority who kind of gets this joke." - Emphasizing the significant edge that comes from understanding market dynamics that the consensus fails to appreciate.
• At 58:11 - "a central bank needs to stay as hawkish as freaking possible, because the moment you try to chase the market lower with a narrative... you're committing the mistake." - Arguing that central bank dovishness will reignite inflation in a fiscally dominant regime.
• At 83:11 - "anything that's going down amidst bullish catalysts is a disaster. Like, don't be there." - Differentiating between a healthy consolidation and a broken market.
• At 84:15 - "The price insensitive buyer in a commodity is a guy who needs it tomorrow." - Defining the "forcing function" that ignites a new leg up in a commodity bull market.
• At 86:51 - "The move out of it always surprises people as well, because the move out of it is a function of how long and the level of...max frustration it took to put the thing to sleep in the first place." - Explaining why breakouts from long consolidation periods are often unexpectedly powerful.
• At 92:23 - "Inflationary recessions create monetary illusions." - Describing a scenario where real growth is negative but nominal growth remains positive.
• At 113:29 - "The way I think you should think about this is... you're owning the exchange, right? And the stock exchange is a very, very good business." - Kuppy frames his investment thesis for AMRK as owning the central marketplace for physical precious metals.
• At 113:52 - "You have to ask yourself, do you want to own a shitty miner? Or do you want to own the stock exchange?" - He contrasts the risk of investing in a mining company with the broader, ecosystem-level exposure of owning the dealer.
• At 119:36 - "Everyone's selling their gold coins to buy more dogwifhat... But I mean, you know, that's a store of value too, right? That and your NVIDIA." - Kuppy sarcastically commenting on current retail sentiment, where investors are chasing speculative assets instead of gold.
• At 142:12 - "if this thing was to give you a gift of a dip down to 2200, you pull out the wheelbarrow and and buy that dip with anything and everything you've got." - Patrick expresses strong conviction that any significant pullback in gold is a major buying opportunity.
• At 143:22 - "In fact, everyone I know that owns it is scared shitless and selling it or just scared." - Kevin adds color to the lack of bullish sentiment, noting that even current gold holders are fearful rather than greedy.
• At 167:01 - "Look at this thing. No such thing as triple tops. This thing broke out. It's headed to the moon, baby." - Kevin expresses strong bullishness on the Mexican stock market (EWW) after its breakout.

Takeaways

1. Re-evaluate your investment playbook to account for an era of fiscal dominance, where government spending has a more significant and persistent impact on inflation than central bank policy.
2. In commodity markets, treat long periods of price stagnation amidst bullish news not as a failure, but as a sign that energy is building for a powerful breakout.
3. Seek out investment opportunities where there is maximum investor apathy or frustration, as this often marks the point of lowest risk just before a major trend begins.
4. To anticipate the next leg up in a commodity, identify the potential "forcing function" or "price-insensitive buyer" who will be forced to buy the physical product regardless of price.
5. Look for "picks and shovels" companies, like A-Mark (AMRK), to gain exposure to a macro theme like gold with a different and potentially more favorable risk profile than direct asset ownership or producers.
6. Use broad market sentiment as a powerful contrarian indicator; widespread fear and skepticism in the face of rising prices, as seen in gold, is a sign that a rally has much more room to run.
7. In a confirmed long-term bull market, view significant price corrections as major buying opportunities rather than reasons to panic.
8. Recognize that "inflationary recessions" can deceive investors, as positive nominal growth masks negative real growth, creating a "monetary illusion" of prosperity.
9. Be skeptical of commodity rallies that appear to be technically driven short squeezes rather than supported by strong underlying economic demand, such as the current move in copper.
10. Diversify your market exposure globally, as major performance divergences are emerging between regions, such as the potential topping pattern in Japan versus the bullish breakout in Mexico.
11. Challenge your own "belief heuristics" by studying historical market regimes (like periods of high inflation) that fall outside your direct experience.
12. The most difficult part of trading is psychological; master the ability to forgive yourself for mistakes to clear your mind and effectively manage future trades.