Title: Rates Aren't Coming to Save You | James Davolos Show: Market Talk with George Noble (host George Noble) Guest: James Davolos, Director of Research, Horizon Kinetics (lead PM of the INFL ETF) Date: 2026-SEP-12 (YouTube publish date) URL: https://youtu.be/4HK1M_CFTk8 Length: 48:24 Note: YouTube auto-captions. Fillers (um/uh/you know/stutters) removed; wording otherwise verbatim. Auto-caption garbles corrected: "Dvolas/Davalos"=Davolos, "Mary Style/Murray"=Murray Stahl, "Horizon Connects"=Horizon Kinetics, "Peran Bas and Trust"=Permian Basin Royalty Trust (PBT), "SoftBest"=SoftVest, "Whitehawk"=WhiteHawk (NYSE: WHK), "CTO"=Sitio (Royalties), "Michaelast"=Michael Cembalest, "Stan Duck and Miller"=Stanley Druckenmiller, "Camo/Kamico/chemico"=Cameco, "SPAT"=SPUT (Sprott Physical Uranium Trust), "weeden"=Wheaton, "Cobra Panama"=Cobre Panama, "Leo Nielsen"=Leo Nelissen (TOLL framework; best match), "front lines"=Frontline, "Hannesville"=Haynesville, "Marcellis/Udica"=Marcellus/Utica, "LG"=LNG, "straight of form moves"=Strait of Hormuz, "Besson/Bessant"=Bessent. The host (George Noble) speaks in the >> turns; the bearish semiconductor/Micron and Frontline remarks are the host's.
00:00 I think a lot of that crowd to this day has been waiting for a savior in the form of rates going back to zero. And if it's not crystal clear to you now, it certainly should be that the era of near zero rates, sub 2% inflation with growth was a radical anomaly in the history of economics that is almost uncertain to not occur again.
00:27 Especially if you unpack what enabled that at this point in time. It's so interesting because there's a lot of people in the market that are betting and using this backward-looking playbook saying, "Okay, that's the normal. We're going back to that normal. Here's how I'm investing my 40 times revenue business.
00:47 I just need the macro to come back and I'll be fine." >> Hi, I'm here with my friend James Davolos from Horizon Kinetics. James, great to see you. Thanks so much for having me, George. >> This should be a lot of fun. I've been looking forward to this. A big fan of the firm. Sadly Murray Stahl is not with us anymore.
01:07 One of the great thinkers of all time. Always loved reading Murray's stuff and you've been trained well. James, Horizon Kinetics is really the only job you've ever had in your life, right? It's 21 years since you were a kid on the desk. That's the only place you've ever worked. That's right.
01:26 Came up to New York without any idea what I was going to do. 21 years old, right out of college, and somehow figured out a clerkship role at Horizon Kinetics, which was basically taking Murray's handwritten yellow legal pad and then transcribing that into an order management system to enter his trades and figured out how to transition to research and then ultimately PM and now full circle director of research.
01:52 So there is that kind of fairy tale story where you can kind of start at the bottom and work your way up. A little bit of luck. >> Hey, James, wait a second. A 43-year-old kid from Connecticut is now running Horizon Kinetics? Or somebody else running the show? Who's running the place? >> Sorry.
02:06 >> I'm director of research. Okay. Peter Doyle and Steven Bregman are co-CIOs. So, it's still the whole team that's been here forever. >> I'm just trying to organize and put some structure around the research group. >> There you go. Anyway, listen, this is a great time to be alive, as I say. A great time to be together.
02:25 A lot going on. So many moving parts. Every day it's something new. But the tectonic plates of the macro backdrop are shifting. 60 basis points in the 10-year, disinflation is not a thing anymore. Inflation is sticky and up and to the right and you've got budget deficits as far as the eye can see.
02:52 You have a global capex boom colliding with this runaway spending. So globally, cost of capital's rising and that's really resulting in a big rotation in markets. Big debt problem has implications for where things are going to go. And we all like to fancy ourselves as stock pickers, James, but you and I were talking before we started.
03:15 At the end of the day, macro drives the bus. Sometimes macro doesn't drive the bus. Like when I grew up in the 80s, it wasn't really much a thing. But let's start off there. Let's start with the macro a little bit. Just talk about how you approach markets and how is the macro speaking to you right now. >> Yeah.
03:39 And I like the juxtaposition about the different regimes that have existed throughout your career through today because I grew up as a Graham and Dodd, Buffett, Munger type of student and I still recall the Buffett quote that the only reason that economists exist are to make weathermen look smart. [laughter] >> I'm going to steal that one.
04:03 Is that your quote? It comes from Buffett. Where did that come from? I think that I was paraphrasing, but Buffett said something essentially along those lines. I love that one. The verbatim quote. >> I'm gonna steal that one without attribution. Go ahead. >> I'll find the exact quote, but it definitely came from Buffett and I think I got at least 95% of it.
04:20 But because of that, I grew up thinking I don't care about the tenure. I don't care about GDP. I don't care about inflation. If I find a good business, underwrite the fundamentals, that will overwhelm the vast majority of the macro. Rude awakening in 2008 that you need to be macro aware. So, you could have had an incredibly strong business and if you weren't aware of kind of all of these unsustainable factors that were driving consumer strength, leverage, housing market, etc.
04:55 , you think that you have this noncyclical compounding bulletproof business and then you get the rug pulled. >> Wait, wait, wait. James, so you're telling me right here, right now that for all the compounder bros who are watching this, they should just stop watching this like right now.
05:10 Is that what you're telling me, James? >> They might not like where this conversation is going. >> Trigger warning. Go for it. But so yeah, you were the emperor had no clothes if you didn't really understand what was driving the resilience of that business. And then wakeup call number two is then you go through this era which was completely unsustainable in hindsight between 2010 and 2019 where you had extremely low rates, extremely low inflation and okay growth which was really the Goldilocks scenario for long
05:46 duration assets where trigger number two for the compounder crowd, if you're discounting the terminal value of a business where 90% of the valuation in a non-cash flow generating business is by definition in the terminal value. If you're using a 3, 4, 5% discount rate, sure that thing's worth a ton of money and you've just been going up every single year, real cost of capital's introduced post pandemic and then you have a rude awakening. And I think a lot of that
06:18 crowd to this day has been waiting for a savior in the form of rates going back to zero. And if it's not crystal clear to you now, it certainly should be that the era of near zero rates, sub 2% inflation with growth was a radical anomaly in the history of economics that is almost uncertain to not occur again.
06:45 Especially if you unpack what enabled that. >> So basically >> to your point I think >> Yeah. Sorry. Go ahead. >> I was saying at this point in time it's so interesting because there's a lot of people in the market that are betting and using this backward-looking playbook saying okay that's the normal. We're going back to that normal.
07:06 Here's how I'm investing my 40 times revenue business. I just need the macro to come back and I'll be fine. And then there's other people that are saying, "Wait a second, there's a new capital cycle, a new cost of capital, a new fiscal monetary regime. I need to start thinking through how to reorient for that.
07:26 " And there's kind of this push-pull between those two worlds of liquidity. And it's a very interesting time. I think obviously the latter group is going to be proven correct, but paths are never straight, right? >> Yeah. And it's interesting when you said the crowd that's betting, I don't even think, yeah, [clears throat] they are betting, but I don't think they realize they're betting.
07:49 They're making a huge factor bet, a huge macro bet without realizing what they're doing. And in much the same way, if you go back, say, from 81 to 21, I'm dating myself. If I start at Fidelity in 81, the great moderation, long bonds were yielding 14, 15% on their way to 60 basis points in 21. And so what that did to valuations, it's like you didn't have to be smart.
08:22 The force was with you as it were. You had a gale tailwind behind you. Now it's the opposite. And I think you make the case extremely well. So what does that mean, James, in terms of how you're investing? Where does that lead you sort of structurally in terms of the portfolio >> even before the pandemic and then I'd say all of these variables that were at play but let's say smoldering instead of spreading fires, whether it's kind of the debt, the debasement, the inflation
09:00 etc., Murray had developed a framework that we had elaborated on around an all-weather real asset capital light thesis. And so I know you've had Leo Nelissen on and I love his analogy of the TOLL, the tangible asset oligopoly, low incremental capital intensity, long-duration cash flow. It's really explaining the real asset capital light because under almost any environment, if you combined that tangible scarce real asset with the high quality capital-light compounding business model, that should not only protect you in an adverse
09:44 economic environment, but then you have the ability to compound and kind of leverage the right tail distribution. And so whether it was fully conscious or not, you're combining a fundamental framework of high-quality compounding businesses at attractive valuations with a macro-informed view around real assets and scarcity.
10:11 And that's why we think that this strategy is really well positioned for not only the uncertainty of today, but also the increasing likelihood that at some point in time we're going to be proven correct with our real asset thesis. >> So let's zoom out a little bit. We're speaking from the same prayer book.
10:34 I think your view and mine is pretty well aligned. So you have deficit spending, irresponsible spending by governments around the world. Rising cost of capital, global capex boom meets runaway deficits, repricing of the risk-free rate. I tweeted out a couple weeks ago Bessent opened his mouth and they had the twist thing.
11:04 Oh, they're buying $4 billion of bonds instead of two. >> And I said to everyone, it was a call. It was a reminder to everyone to go short the bond market. It's kind of funny. Scott Bessent has become Norman Lamont. Here we are 35 years later and he is the Bank of England basically.
11:24 But when you look at the debt problem and the fact interest expense is surging, it's what, the second biggest line item of government, whatever. At the end of the day, isn't the only way out, they're just going to have to provide more liquidity, and we're going to have, you can either have a hard default of the debt, which we're not going to have, or a soft default.
11:46 We just devalue it. All right. And so bigger picture, what would you say about that? And what are the implications of that for real assets, scarce assets? >> Yep, you're right. The math of the macro situation is difficult and only getting more difficult. And I love, we've been doing this math internally, but we've never really formalized it.
12:12 And Michael Cembalest at JP Morgan outlined it as this kind of cliff. I think it's next year or the following year where mandatory government spending plus interest expense, so Social Security, Medicare, Medicaid, veteran benefits, everything that's mandatory in the congressional budget plus interest expense consumes 100% of government revenue.
12:34 >> Just for those keeping score at home, the mandated spending. Forget about discretionary, the mandated spending. >> Correct. So every penny that the government chooses discretionarily to spend has to be funded by debt. Now you've got a trillion dollars of defense. You have our parks. You have our highways.
12:56 You have our federal aid programs. And looking at all of those areas and the politicians who tend to like to remain in office, that's pretty much sacrosanct at a $2 trillion deficit. Now the bond market vigilantes will say that at a certain point they're going to basically cry foul. Okay, one measure is people say once interest expense exceeds defense. There is no hard line where I think the bond market has an aha moment and says we're no longer going to fund this and I do think that there are
13:29 unconventional measures around, who knows what they could do, could they change statutory requirements of banks and financials to hold certain things, but some form of high nominal growth and debasement, I think it really is the only way out because to your point, sure you could default and restructure the debt, but we don't even want to fathom, I think, what that would mean for society and the economy.
13:58 The other option is some form of austerity, which I think if they actually did get their house in order, with all respect to Stanley Druckenmiller and all these brilliant people who were saying cut the spending, I think there would be a violent recession in very short order if you turned off that government spending growth spigot, which every single time there's a crisis, it ultimately requires bigger deficits to get out of that crisis.
14:28 So you do something that you think is good in the short term, but ultimately it makes the problem worse in the long term. The only sliver of hope, which maybe you're seeing more and more of these people advocating for, is this productivity miracle with AI that's going to bail this whole thing out. And without getting into the math in too great of detail, if you reorient the GDP equation, it's a function of labor force and productivity.
14:57 So labor force is certainly not going up between immigration and demographics. If anything, the advances in AI productivity are almost certainly going to result in lower labor force participation. But let's just say that that's static. That means that all of the growth burden is on productivity. And the internet resulted in about 3% annualized productivity growth in the US.
15:25 And so that's an astronomically high figure to do that sustainably, but that's not enough. If we have a 3% nominal GDP growth as a function of productivity, add on some inflation, that can kick the can down the road, but it's not a saving grace with this fiscal situation. So again, looking at all of those scenarios and kind of probability weighting all of them, it looks like a combination of okay, can we get some productivity gains, but then also you're going to have to have a higher nominal growth environment, the other function of
15:58 growth. You have real growth and then you have the inflation factor. And so I think that's why they're going to have to let that run hot. Maybe they redefine it. Maybe they let different areas of inflation run while they tell you that your cereal and your car and your owner's equivalent rent is going down.
16:18 So, not a lot of options. As much as people like to opine on what the right and virtuous thing to do is, the math is the reality, right? Got it. So, you lay out a very clear vision. I'm reminded actually, I think it was Alan [clears throat] Greenspan in the late 90s. You probably recall this and there was concerns over Social Security going bankrupt in a congressional hearing when asked about the ability of the US government to pay its Social Security obligations.
16:50 Greenspan said something along the lines of well sir I can assure you that we will be able to pay our Social Security obligations. What I can't guarantee is what the value of the dollars will be used to pay that. So, I think it's kind of what we're looking at here. It's really kind of interesting because you look at where the debt accumulation is.
17:12 Historically, it's always been the private sector and credit spreads have been a good warning sign for when the cycle's [clears throat] about to turn. But corporate sector, we'll leave the hyperscalers out because now they're spending like drunken sailors. But the real excess in debt has been the sovereign.
17:31 It's been the governments and >> so history rhymes, doesn't necessarily repeat. Okay so let's get into the portfolio. So what does this mean in terms of the kinds of stocks that you like? It seems like you're making a case broadly defined for reflation. So what are the kinds of stocks, industries that you're invested in right now? So the end goal is you need a nominally indexed cash flow and so a lot of people focus on companies that can nominally grow revenue but cash flow is
18:09 a product of both revenue and expenses. So who can actually grow that revenue on a nominal basis while controlling expenses? That's where the capital light comes in. But one of the biggest predictive attributes in the ability to generate those nominally indexed cash flows is that scarce real asset. >> So obvious areas would be the natural resource complex and so that could be traditional energy, that could be non-ferrous metals, that could be precious metals.
18:43 We tend to own all of those in royalty companies which have very high margins and then kind of much longer reserve lives. We also have more unconventional types of real assets. So assets in land, raw land, water and water infrastructure. Also financial exchanges which I view as financial infrastructure, brokerages, other types of unique infrastructure assets where again there's an oligopoly nature and a scarcity nature to the business and the asset and then the business model promotes those high margins and high free cash flow
19:22 conversion. So let's start off with, you mentioned the royalty companies. You prefer to own some of these plays in the form of royalty companies as opposed to underlying producers themselves. Why is that? >> The economics of the royalty business is incredible. I mean, if you were to look at their operating cash flows, generally these companies run around 90% gross margins, 70 to 80% operating margins, and then depending on your tax rate, basically all of that flows down into free cash flow. And so there's two
20:00 really important structural elements. So that cost structure, people get excited about thinking about the upside leverage. That's actually not the right way to think about it because actually a very high cost producer has more leverage to the upside because once you cover a high break-even the marginal impact on the equity gets higher and higher.
20:21 So yes, you have plenty of exposure to the upside, but it actually protects the downside because invariably when you have the cyclicality in these markets, you want the business models that are resilient such that not only are they generating the cash flow, they don't have to issue debt, issue equity, they can actually go out and acquire new assets, >> but then also on the right tail distribution, one of the hardest things about producers in any commodity is that these are procyclical businesses and as they're procyclical, that's when
20:55 you're generating the most cash flow. You're generating all this cash flow and you as a CEO of a gold mine, a copper company, an energy company, what are you inclined to do? You're inclined to reinvest that capital into new projects at ever higher starting prices, then also all-in higher break-evens, so on and so forth.
21:18 So that's the nature of kind of the Ed Chancellor capital cycle and that is a big part of why these are really difficult businesses, is that most commodity companies don't have this inventory that they can just use forever. The royalties don't either, but they tend to have much longer duration assets and then they have non-producing assets which at higher prices and as a lot of the existing assets get developed then those options can go from out of the money to in the money.
21:48 So, it's a very asymmetric type of payoff in our opinion where you have a very strong ability to underwrite the downside and then a pretty wide distribution on the upside that can really compound your capital. >> Yeah. To the point you made about capital cycles and what companies tend to do, even at the top of the cycle they go and they just expand more at the wrong time and I'm thinking particularly of Frontline, I don't know if you follow tanker stocks much but John Fredriksen did incredibly well
22:26 over the cycle because he knew he was always paying out the dividends so, it's not really a shipping royalty company, but one key ingredient is it's not reinvesting at ever higher prices, which is an important thing. It's kind of what momentum investors do. So >> I like your example of tankers because that is the ultimate cyclical industry and then all of these people are adding capacity, but it might be three years for you to take delivery.
22:55 And so the bottom of the market's already fallen out. You take delivery of a vessel and then by the time you can contract on a forward rate, it's actually below your economic break-even. >> Hold on, James. Just a second, James. We're not talking about semiconductors. Oh, sorry, [laughter] sorry.
23:12 By the way, I do want to go down that rabbit hole. I actually triggered some of Bottleneck Bro and Tech Bro the other day. I was likening semiconductor stocks to shipping stocks. I said, 'Look, they're capital intensive. They are commodity businesses despite what people will tell you.
23:33 As you well know, you set the price of bananas too high, supply of bananas increases and consumption goes down. You set the price of bananas too low, supply contracts, demand goes up. And so, to your point, these are very capital intensive businesses. It's only a question of time before the capacity comes and whether or not you have excess capacity back after 27, 28, whatever.
23:59 The fact that people are capitalizing current levels of profitability into perpetuity to me is just total madness. So I don't hold myself out to be the world's greatest semiconductor analyst, but I do understand cycles and I think you do as well. So, what would you say to my less than glowing endorsement of semiconductor stocks? I mean, to me, there's a cycle to everything. It just blows my mind.
24:30 Shipping stocks, I mean, think of it. You're old enough to remember when shipping stocks last cycle would sell on two or three times earnings and some misguided individual investors would chase the P/Es or the high yields. No shipping person does that. No serious shipping person, right? [clears throat] >> And now you take something like Micron.
24:50 I know we're going off the deep end, but hey, it's me. Gross margins have gone from whatever 20% to 85%. And like this is the new normal. Yeah. Right. Okay. To me, it's madness. What say you? I'll preface this by saying I am not a semi analyst nor expert by any stretch of the imagination but read Ed Chancellor's book on capital cycles and he goes through any number of hypothetical capital cycles where it was thought to be different.
25:23 There was no ability of supply to come on. There were these huge moats around these businesses. But every single time there proved to be a crack and the margins mean revert and sure maybe you can make some money but you need to be very aware of the eventuality that all that capital will chase it out.
25:45 And with that caveat, I will say if I were a semi investor capitalizing these margins and growth into perpetuity, I'd be very concerned about the fact that Google and Amazon are now developing their own chips. Those are typically people you do not want to be competing with. And people refer to Nvidia, as great as their products are, as the Jensen tax.
26:08 And you incentivize people to avoid that type of tax, and you incentivize people to avoid being subject to bottlenecks and order delays and restocking issues, they're going to do it, especially when they're multi-trillion dollar companies that can ultimately figure out a way to remedy those issues.
26:32 And so again, this could go on for longer than people expect, but you're incentivizing the best and best capitalized companies in the world to figure out a solution here. >> Yeah, there's nothing new under the sun. Anyway, no matter. All right, so let's get back to where we were. So let's drill down a little further.
26:58 So you mentioned the different groups, types of stocks you can be involved in. So let's go through a couple of them. I don't know where you want to go with this. You want to talk about energy? I think energy might be a really good place to, let's do energy. Let's do gold. Okay.
27:18 Because energy is front and center, top of mind for everyone right now because of the Strait of Hormuz. But you were bullish on energy having nothing to do with the Strait of Hormuz. As a matter of fact, you could argue it's actually been a distraction. Takes people's attention away from the regularly scheduled programming, the real reasons you want to own energy.
27:36 So talk a little bit about your energy outlook and in particular what's going on with the Iran situation, how that's influencing your thinking. So what are you thinking about energy? I think you really need to distinguish between oil, the liquid stream of the barrel, and then also the gas stream because there's very different end markets.
27:59 There's very different supply and demand. There's very different ability to transport and then refine those into end products. The heuristic and all of these geniuses on X that are counting barrels and telling you that once the Strait is open oil's going to 20 bucks and then on the other side there's people telling you that nothing's getting out and the fair value is 300 bucks, I don't think any of that is necessarily value additive. I think the fact of the matter is that China was such a huge part of the oil
28:36 supply and demand balance that any analysis that doesn't factor in what Xi's motives were to basically stop importing and then basically change all of their refinery runs as the Strait of Hormuz was closed and the West was getting squeezed. Now he's doing the opposite.
28:59 I'm not even going to pretend to know what's going through that man's head or what his motivations are, but people that are doing these, counting barrels and they're telling you what a genius they are, clearly you can't make an analysis without trying to understand the China factor. But there is a growth surge in the world that is related to AI capex that's energy intensive.
29:24 There's also a very large rising population in the world that has a rising GDP per capita, Southeast Asia, Africa etc. And that's very oil intensive. And so yes, there are a lot of hydrocarbons in the world. And I think that people take for granted that a lot of the very inexpensive, easy to access, a lot of those levers have been pulled, particularly in US shale.
29:53 So we have an upward bias around hydrocarbons. And obviously a hundred bucks is not something that we're necessarily underwriting for a long time because that's going to bring on a lot of production. But in the 60s we were very constructive. Gas is a different story. Gas is a critical input in the buildout of data centers and the power generation.
30:20 The problem is getting gas from where it is to where it needs to be. You also have the enormous buildout of LNG to supply the abundant US gas to countries around the world that are either relying on geopolitically unstable gas or relying on coal or they made their bed thinking that it was always going to be windy and sunny and that magical batteries were going to basically power their economies forever.
30:48 So I think if you zoom out and look at what is being installed for US LNG plus the incremental demand of gas for power generation, not only gas prices but differentials in certain basins where gas is very cheap or negative has a lot of optionality and so again it's very asset specific, so where is it, what is the basis, what could change.
31:20 And so I think underwriting these through good vehicles with good management is a really interesting way to kind of gain exposure to this for like a three, five, seven-year outlook. >> Got it. You guys manage over 11 billion. Can you speak to, we want to be careful with the lawyers here, but can you speak to a couple of your energy names in this context? >> Sure.
31:53 I mean, I'll give you two that are royalty oriented businesses that have a bit of a special situation tilt to them. The first one is a company called Permian Basin Royalty Trust. So for the past 40-some-odd years, it was basically a sleepy little trust in the Central Basin, which is basically the uplift between, sorry, the Central Basin Platform, which is basically an uplift between the Delaware and the Permian Basin.
32:26 And it was structured as a net profit interest. So instead of a royalty, yes, you as a shareholder are getting the cash flow associated with these wells, but it's after you net out the operating expenses, the taxes, and the capex. Mhm. >> So, a group that we know very well, SoftVest, who has been a big long-term investor in companies like Texas Pacific, they sought to restructure the trust along with the operator Blackbeard into an NPRI, which is a straight royalty. So
33:03 now you basically don't participate in opex nor capex, and the contributed land where there's a lot of optionality around a nascent water business, potentially power distribution etc. So, it's a restructuring and kind of a new growth company in this Central Basin Platform that doesn't have the competition of the majors who are basically all tripping over each other in the Delaware Basin and Midland Basin.
33:32 So you combine a royalty which is driven by volume and then pricing of the oil and gas along with the optionality of the land which is using a lot of this water which needs to be treated, recycled and then disposed of. Plus there's some power generation, substations that run through the ranch which then could easily be repurposed for different types of high performance computing.
34:03 So again, it's not just a straight simple royalty. It's a great royalty with a really interesting new management team being restructured with the land component. For the time being, a lot of the revenue is going to be very sensitive to the price of oil because it's a fairly liquids-based royalty stream. Another similar asset which is a more conventional royalty is a recent IPO called WhiteHawk.
34:32 WhiteHawk is the first pure play publicly traded natural gas royalty business. It was a private business that was formulated by a management team that used to have a public asset that was consolidated by what ultimately became Sitio before it merged with Viper. And so everybody loves the oil mineral royalty business because it's large, it's liquid, and if you think about it on an energy equivalent basis, so gas is about $3.
35:06 That on an energy equivalent basis is about $18 compared to a $100 barrel of West Texas Intermediate oil. The other reason why gas hasn't really scaled as a royalty platform is people have been burned by prior gas cycles where it seems as though every time gas starts to get a little bit of positive momentum, the rigs start stacking up and ultimately you oversupply.
35:32 You've also had LNG facilities go down where the US doesn't have adequate storage. So if Freeport LNG goes down, you don't have export for a few months, all of a sudden storage tanks are full. And then lastly, it's a much more fragmented market. So there's a large liquid market, both public and private.
35:52 If you wanted to go put to work 5, 10, 15, 20, $100 million in buying oil and gas royalties in Texas, much different proposition if you want to gobble up gas royalties, particularly in the Marcellus and Utica shales in Appalachia. So, this team started off with a ground game buying up some of these disparate packages, particularly up in the Utica, Marcellus.
36:21 Great operators like EQT. Then they started buying in the Haynesville which is in East Texas and can actually get a lot of that gas down into the Gulf for export capacity. So we have an upward view on gas. We also think that the basis, so the discount of Marcellus and Haynesville gas relative to Henry Hub, could improve, whether that's getting that down for LNG export or taking some of that gas and then using it for in-basin power distribution for these power plants.
36:54 Plus, the company has a unique ability to assemble more and more of these royalties because they're really the only natural scale buyer as people look to monetize royalties. And so a very, very long runway of accretive M&A to kind of bolt onto this portfolio. So both interesting special situations where, to your point, is there a factor sensitivity to energy, whether it be oil prices, gas prices, production or, taking a second derivative, economic growth?
37:29 Yes, [snorts] but there's also a special situation kind of value proposition where you're not just underwriting the beta of the commodity themselves. And in our opinion, the valuations are very accommodative of that compounding as well. Sounds really interesting. Just in the interest of time, we need not go too much deeper, but what kind of upside are you thinking about that each of these stocks has? I mean, you're not in this for 10%.
37:56 Is this a multi-year compounding type thing or how do you think about the valuation of these two stocks? >> Yeah. And again, without getting too deep into the weeds, we underwrite at a base rate of 8 to 12%. In both of these cases, we think that very visible organic cash flow generation, organically doing nothing at normalized commodity prices.
38:20 So lower for oil, kind of right around here for gas, you hit that base rate of return. And critically, you do have that kind of nominal indexing. So if you do have kind of an inflation tilt, probably going to have upward to those normalized commodity price assumptions. But in the case of PBT, there's a lot of optionality around that land, their ability to then kind of monetize that with water, with power, with easements, also maybe bolting on other Central Basin properties because if you have an assemblage of assets, it's
38:54 much more valuable if you're a neighbor to combine your assets with their ranch than trying to compete with them. Similarly with WhiteHawk, I think their ability to bolt on acreage as a scale publicly traded gas producer adds a lot of kind of upside optionality as they scale this business as well.
39:17 So again, I would say call it minimum base rate underwriting of that 10 to 12. If a couple of things go macro, there's some turns on that. If they can do some accretive inorganic things, some turns on that. And not all that creative to kind of see these things as mid-teens, even low 20s compounders. >> Wow. Really interesting.
39:40 And you said WhiteHawk just came public recently, so does it have much street coverage? >> You've got a couple of kind of the regionals, your RBC, Raymond James. It's a little bit small for them, but I think that they're probably looking for some decent size M&A opportunities, and I think as they do that, that'll unlock a little bit more coverage and some more liquidity in the stock.
40:07 >> Sounds interesting. Really interesting. Okay. Let's talk about metals, gold, silver. You own some of the royalty stocks. I think you're in Wheaton. I was looking through your holdings before. >> Speak to maybe one or two of them, the folks love to hear the granular.
40:29 So take one of your royalty companies, whether it's Wheaton or one of the other ones, and just give us the elevator pitch. I think Franco-Nevada. So Franco-Nevada is heavily focused on gold streams whereas Wheaton used to be Silver Wheaton and now they're more gold than silver but it actually still trades with a fairly high beta to silver because of its history and it does have a lot of silver exposure.
40:53 But we were having an internal discussion in our research and our investment committee and somebody said well don't these have a higher sensitivity to gold and silver than they did historically and the answer is yes, absolutely. These companies, so Franco-Nevada is the first and largest gold streaming and royalty company. Buying this 15 years ago when you kind of had gold go to 2,000, retrace to 1,000 an ounce,
41:27 it was just, there were almost no scenario unless every mine in the world was operating below break-even, you were going to make money in Franco. It was just a question of how much. They bought some world-class assets. So think Central American copper mines with multi-decade, potentially century-long gold streams associated with that copper.
41:49 Today it's a much more mature scaled story but we still like a couple of aspects about Franco-Nevada. One, there is a very visible growth in their production over the next decade. Number two, there's a long tail of what are non-producing assets. So today the cash flow and the growth and the NAVs that the sell side put out, that's basically only on what's producing.
42:19 But if gold holds here in the 4,000s a lot of that option value is going to kick in. There's another special situation with Franco that I think is really interesting, is that 20% of their NAV was in a mine called Cobre Panama which is a copper mine operated by First Quantum in Panama. Without going into the details, for a very bizarre reason, the mine was closed, I want to say about two years ago, right as it was getting started. It's almost certainly going to be restarted.
42:54 It's a question of how quickly and that's going to then kind of rerate the growth profile and upside of Franco. You could argue some of that's priced into the stock, but again, at its core, this is a high margin operating leverage exposure to world-class gold deposits throughout the world. And yes, I do want to have exposure to gold.
43:19 I just don't want it to be a decaying gold futures roll, a static physical gold position, >> or worse, a mining CEO who's just going to be chasing higher and higher cost gold deposits. >> Gee, they would never do that. Let's spend a brief minute on nuclear and uranium. I see you have Cameco as one of your biggest holdings.
43:47 There are many sketchy small cap uranium names out there. Cameco is the monster. Maybe just the elevator pitch. Why nuclear and why Cameco? >> The need for nuclear is so obvious worldwide and the thesis used to be where is growth going to come from? The uranium supply and demand is such that all you basically need is a sustained operation of the existing fleet, not even growth.
44:25 Now you're talking about growth in the western world. Whereas China continues to have very robust growth. And so the shortage of uranium is acute and it's here today. It's not a hypothetical future event. So very constructive on the supply and demand picture for uranium in particular, and this could only get higher; if AI is what people think it's going to be, nuclear has to play a role in that.
44:56 But to your point, there's a quality problem in the uranium world. And in my opinion, if you're investing in quality compounding businesses, it's really Cameco or physical. And so personally, I own the SPUT physical uranium trust. You can buy yellowcake which is also physical, but Cameco is a strong jurisdiction miner with world-class deposits that is going to have a lot of operating leverage in that higher uranium demand world.
45:32 They also have an interest in Westinghouse, which they took out of bankruptcy with, I think it was Brookfield, and a big part of Westinghouse, if the West leans back into nuclear, they're really the only scale developer of these AP1000 turbines. They do have uranium treatment businesses. People have floated the idea of separating that and floating that publicly.
45:58 But so it's not just a directional exposure on uranium price and mining. You do kind of have a special situation around the optionality of Westinghouse in a nuclear renaissance. >> Wow, that's fascinating. James, we could talk all day, but in the interest of time, we're not. We'll have to do this again before too long. Just spend a minute or two.
46:22 Where can folks find Horizon Kinetics and how can you help the individual investor who's interested in your approach? >> Sure. So, we have a website, horizonkinetics.com, where we post a lot of our content. We're actually in the process of upgrading that. It's a little bit dated, but we also have a Twitter account, which we're not the most active and the most responsive, but you can obviously find a lot of our content there.
46:48 We're pretty generous getting our word out. And as always, you can reach out to our client service group and, excuse me, our relationship managers and marketing staff can get you any information you need as well. >> And you have an ETF, INFL, as well as some mutual funds. Is that correct? >> Correct.
47:09 I'm the lead manager on INFL, which is the Capital Light Real Asset Fund. It's about five and a half years now since inception. About 1.65 billion of AUM in the US and >> approaching 100 million in Europe. >> Sure. >> And then we have some legacy mutual funds, the Kinetics mutual funds which, I know you actually love this concept, they embrace concentration.
47:38 So letting the winners run and compound and so that could be right for some people, less appropriate for others. But Murray really believed strongly in individual stock picking and what he would call intelligent undiversification. >> And also as my former mentor Peter Lynch would say, I'm sure Murray would agree, Peter was opposed to diworsification.
48:04 So >> absolutely >> yeah. All right, James, this has been fabulous. We'll do this again in a few months. Really, thank you so much for sharing your time. This has been awesome. Learned a lot and wish you the best of luck. >> Thanks. >> Sounds great. Thanks so much for having me.