Podcast: Play in new window
In this week’s commentary, David McAlvany looks at the massive spending behind AI and asks where the more durable opportunity may actually be. Goldman Sachs is calling it HALO: heavy assets, low obsolescence. Rather than chasing the front end of the AI trade, this episode explores the commodities and hard assets that may benefit from the buildout. David also previews the upcoming June 17 webinar and why this conversation matters for investors right now, register for that presentation here.
- Goldman Sachs Calls It HALO: Heavy Assets, Low Obsolescence In AI
- Commodities Bet Is A Pick & Shovel Play On AI
- Register For The June 17 Webinar
“If there’s a lesson to be learned from Buffett and Munger, it is that cheap is best, but if you can find reasonably priced assets, those are worth considering based on the quality of the company or on the quality of the thesis. You want—I dare say, you need—to own hard assets in the years ahead.” —David McAlvany
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Kevin: Welcome to the McAlvany Weekly Commentary. I’m Kevin Orrick along with David McAlvany.
David, right here in the studio we just experienced something that was very interesting. You’ve got some statistics that you want to go over in the show today, and you checked AI to see if they were accurate. Every time you asked the question you got different answers. I’m just wondering how much we should rely on this, and is it worth the capitalization?
David: Radically different answers.
Kevin: Yeah, yeah.
David: And so, if you were buying the 490, the bottom part of the S&P 500, leave out the top 10, what would that cost? And it’s 30 to 40 trillion dollars. But if I ask the question differently, if I use Berkshire Hathaway’s cash position today to buy S&P 500 companies, how many companies can I buy? And it says 497, which is absolutely false.
Kevin: It’s wrong.
David: So, which is it?
Kevin: Right.
David: Do they have 30 to 40 trillion dollars in cash, or do they have 397.4 billion in cash, and how much does that buy you? Context matters. The way you ask questions matters. And we’re still dealing with a very imperfect, imperfect technology. To your point, it’s not the kind of technology that you would want to, on autopilot, land your plane.
Kevin: Yeah, not if you’re on it. Not if you’re on the plane. Okay. Well, we were talking today at the meeting about some IPOs that are coming out, and the numbers are astronomical. What was that? $965 billion?
David: That’s in their H series, that is their current valuation.
Kevin: Okay. And SpaceX is—
David: SpaceX, they’ll look for a trillion dollars, over a trillion in market cap.
Kevin: Wow.
David: Yeah. I mean, we’ve got potentially $3 trillion with three companies coming public shortly. And the question is, what are the ramifications of that in terms of sucking liquidity from other positions, or perhaps it’s just a reduction in current cash for mutual funds, for ETFs, and for individual investors.
Kevin: So, this does sound like a bubble. I mean, when we’re talking about bubbles, we’ve probably never seen anything quite like this. Now, bubbles can go for a long time, but when they pop, they pop big.
David: Yeah. Bubbles are unique depending on the asset classes and focus. They share similar drivers. Investors want a piece of the future now, and they believe the future to be so different than the present, so radically transformed, that price becomes a very secondary consideration.
Kevin: All right. You’ve been talking not only to your son, but to several others that are going to become interns here this summer at the company, and they’re asking you, how do you measure value? What’s your answer to that?
David: Yeah. A few college students joining the team for summer internships, local kids that will learn about equity valuation, stock selection, portfolio construction. Where do they start? They start with sort of the textbook for security analysis, and Graham and Dodd on value investing—the title of the book, Security Analysis. It makes me reflect, oftentimes our biases are expressed by what’s on our bookshelves. What influences our thinking and what has shaped the processes that we employ.
Kevin: That’s one of the things that, when we have visitors to the office, one of the things that’s impressive is that there’s bookshelves everywhere. And it’s not to impress. You actually need far more space. How many books have we had to get rid of, Dave, Just to fit in the space that you have here at the office?
David: Yeah. Last year, I had to have some custom bookshelves put in because there was about 20 boxes in a Zircon container outside the office.
Kevin: And almost all of them are irreplaceable. I mean, think about the guests that we’ve had on this show for the last almost 20 years. A lot of them were authors of books that were very, very helpful to the way that you actually would answer that question on value.
David: Yeah. And I think, too, there’s a variety of perspectives reflected in those books because the last thing you want is blind spots as an investor, where you think you know something, but you’ve missed a very, very important aspect of whether it’s valuation or broader context. It’s not what you know that sometimes hurts you. Most often, it’s the things that you don’t know that surface as surprise.
Kevin: I was just talking to a friend of yours, Justin, who we’ve interviewed here on the Commentary, and he was talking about how important it is. And they’ve actually used large language models, so speaking of AI, to validate this, but you need to have a number of deferring opinions to have a better answer in the long run.
David: Yeah. And to have different opinions is super important. That is the nature—or it should be the nature—of a college experience. You go and you battle ideas against other ideas, and to have a field of play where every view gets its hearing is super important. So, viewpoint diversity, absolutely critical if you want integrity within that process of learning.
Kevin: Well, and it helps you not move with the masses. Your dad always used to say the masses are generally almost always wrong.
David: Yeah. I think he said very emphatically, “The majority is always wrong.”
Kevin: It’s always wrong. Well, that was a Don McAlvany statement. Yeah, always, always.
David: Yeah. I mean, you have a shelf of cookbooks that guides your culinary experimentation. It defines the rules and recipes you’re comfortable with. Maybe you’ve got self-help books that inform your view of aging or emotional and spiritual development or communication styles. Your spiritual inputs, they could include commentaries, language studies, topical issues within a wisdom or faith tradition, and investing should be no different, but often it is.
When we don’t know what to do, we operate as a herd. Social trends, whether it is social trends, spiritual fads, quick online search for a recipe, and what you do is you just count the number of stars or positive views to make your choice. This is the one I’m going with. Everyone seems to like it.
Without a background or formal exposure, investing tends to homogenize around the current popular theme. That is not value investing. That is not Graham and Dodd. Quite the opposite. You’re looking for the neglected asset. Buffett did evolve over time from a purely Graham and Dodd guy looking for cheap assets to also looking for extraordinary businesses at reasonable prices, and certainly Charlie Munger helped in that influence and growth process. But in either case, price was a relevant factor in the value equation and in the allocation decision.
Kevin: Yeah, but value investing, Dave, leads to loneliness. If you think about it, the people who want to move as a herd, they’ve got an awful lot of people who are saying, “Hey, you’re doing just right, just right.” And we’re seeing that right now with AI. But value investing, usually you’re buying something that nobody you know has because you see that there’s value and you have to wait.
David: Yeah. I mean, Buffett was so emphatic on that point. He would often say the stock market is irrelevant. It’s about the company that I bought. It’s some indication of what social trends are and what people prefer, but I don’t care about the stock market. He cared about what he bought and the price that he paid for it. So, he knew that, over time, that patient process would play out positively.
Kevin: And that doesn’t always play out, right? Sometimes, it takes too long for that value to be recognized.
David: Well, I mean, the process is long. It’s somewhat tedious. When you’re looking for areas of neglected interest, you’re not looking for immediate gratification, whether that be an asset class or a singular company. You’re finding things that are either misunderstood or underappreciated assets, and you’re uncovering them by asking a basic question: what is this asset worth today compared with the price that it sells for? And so, maybe you’re buying a $3 stock for a dollar or a hundred-dollar stock for $30. Maybe you’re buying a hundred-dollar stock for $300. And so, again, what is this asset worth today compared with the price that it’s selling for?
The value approach, even in its modified form reflected by that sort of evolved approach that Munger helped Buffett with through time, you’re looking for extraordinary companies at a reasonable price, and you’re still searching for or looking for margin of error. And you know that according to, again, that basic question, what’s the asset worth today compared to the price it sells for?
Kevin: Yeah. But you have to have enough capital to be able to hold onto that until the value’s recognized. Now, let’s contrast that between value investing on one side and then what you were talking about, the herd. Momentum investing is really moving with the herd, and sometimes that can be very lucrative if you’re early, as long as you get out in time.
David: Right. The preference by the value investor is to pay less and build in a measure of downside protection, knowing that if you pay too much and your predictions of the future are not quite right or off even a little bit, that’s going to reveal itself in underperforming in terms of returns.
Kevin: And that goes back to Buffett saying, “I buy the company.”
David: Yeah. What could this asset become? That’s the question that the momentum investor is focused on. Not the price that I’m paying versus what the asset is worth, but what could this asset become? For the momentum—or really the narrative driven—investor, it’s the unknown, which is the opportunity, and it’s where you have sort of uncapped upside. So, the unknown is the opportunity. Embedded in uncertainty is opportunity, versus value investing, which focuses on present value, downside protection. Again, narrative driven momentum investing looks to capture upside asymmetry with the imagination being really the primary or only limiting factor.
Kevin: Well, and imagination seems to be what we’re really seeing with AI right now. Not that it’s not going to be valuable, useful, but the capitalization that’s going into that right now is imaginative for the future.
David: Over time, you get to know yourself as an investor, and there’s different dispositions, predispositions that you have. Just what is your personality? And so, for one person, uncertainty is where the opportunity is. The experience of uncertainty for the value investor is quite different. Uncertainty requires a discount. I don’t know what the future holds, and I better buy it right because I don’t know what the future holds. Again, the contrast in initial questioning is between, what is it worth today versus what it could become.
Kevin: But both approaches have risks. Okay. One takes a long time in the value. It could take a long time for that value to be recognized. The other, the risk obviously is, what if the imagination over-imagined, right?
David: Yeah. For the value investor, the biggest risk is the value trap. Some assets are cheap for a reason, and they’re going to remain cheap or go broke. For the momentum investor, you may be overpaying for greatness. And so, wherever your imagination took you, however that narrative and the story was told or sold, you may be overpaying for greatness. The value crowd often under-owns the narrative-driven allocation, and the momentum investor at the end of a cycle often overowns the same thing.
Kevin: So, how do you balance those personalities out? You were talking about Berkshire Hathaway. You had two different personalities that actually created one of those uncommon balances, right?
David: Yeah. A balance is hard to come by. We are bent by personality, going to favor one or the other approach. Sometimes, rarely, there is the person or group of people that’s able to sit uncomfortably between the two approaches. So, yeah, Charlie Munger balanced out Buffett, and as a team they gradually embraced both. You shouldn’t forget that even an extraordinary company fell off the buy list for this duo when it was not fairly priced. So, it had to be a great company, right?
Kevin: Right.
David: But even at the wrong price, it’s the wrong decision.
Kevin: Which is a model, this is the same type of thing that you employ with the team here. You have models that basically force a decision that maybe emotionally you don’t want to make.
David: Yeah. For instance, we have mining stock positions, which we were trimming in the fourth quarter. Why were we trimming? The momentum was getting to be too great in too short a period of time. So, trimming back those positions to target was a prudent thing to do, not because we didn’t believe in the quality of the company, but “at what price” is still very relevant.
Kevin: And that’s painful sometimes.
David: Yeah. The Berkshire Hathaway cash pile I think tells you a lot about how that group views valuation today. Just shy of $400 billion, Berkshire Hathaway could buy a large number of the S&P 500 companies.
Kevin: Almost all of them.
David: In their totality. Of course, the cap weighting in that index keeps the top 10, 20, 30 companies out of reach. And yet they’re not doing that. They’re not buying the majority of the S&P.
Kevin: They’re sitting on cash right now.
David: Yeah. Even the new CEO cautiously allocates capital, drips it out a little bit at a time. Greg Abel spent roughly 2% of Berkshire Hathaway’s cash recently on a home builder. Are you the patient investor compounding off of a low basis, or are you the bold adventurer compounding growth through some sort of revolutionary adoption cycle?
Kevin: So, let’s go back to the book that you’re recommending to the interns right now, a starting point. It’s the Dodd book that you’re recommending that they read?
David: Yeah. Again, our books, there’s other influences of course, but those define our biases. And so my son asked the question as he dove into Security Analysis, the Graham and Dodd text. He looked at it and was like, “Do I have to read the whole thing?” It’s 800 pages.
Kevin: Hey, it’s on summer break, right? Of course he’s got to read the whole thing.
David: Well, it’s one of six books I’ve chosen. So I said, “No, you don’t have to read the whole thing, but if you add that to all the other books, you’re probably looking at 1,500 to 2,000 pages of reading.”
Kevin: And welcome to summer. Welcome to your break.
David: Yeah. So how can you lose money as a value investor assuming you’re patient and have done good research before investing? Because his first look at the book raised this question, if you’re not overpaying and you’re patient, you can’t lose money. I mentioned the value trap. Some stocks are cheap and deserve to be.
You can also second guess the work that you’ve done, lose patience, not enough time frame for the rest of the market to figure out what you’ve already figured out. Or perhaps your research has missed a vital detail. You believe you own an undervalued, unpolished gem, and what you really hold is something else unpolished, pile of poop.
Kevin: Unpolished poop. Well, I think back to the dot-coms. Okay, think of what we thought were polished gems, or what people thought were polished gems, like pets.com or even Blackberry. Dave, looking back at Blackberry, you would go, “All right, how does that not work?” And I had a client who just continued to plow good money after bad into that company until it was just completely gone. And so when you talk about the value trap, some things do have a great value but they don’t have a future. Investment, it’s uncertain, isn’t it? Whether you’re going for momentum or whether you’re going for value, you have to price in—you said discount for—uncertainty.
David: Yeah. And I think to your point about an investor who is throwing good money after bad, one, that ignores some fundamental principles of asset allocation. Position limits are one way of mitigating risk in a portfolio. So the scale of any position needs to be limited in its total size relative to the rest of the portfolio. But I think it also suggests that that person believed what they believed regardless of the facts. And you’ve got the fundamental facts, which is really what Graham and Dad is about.
In a managed portfolio, if you’re not mitigating risk, if you don’t have rules and disciplines to apply when performance is moving against you, that can be an issue. And in fact, that can be when you sort of auger in, like the plane on autopilot and unaware that it’s heading towards an elevated mountain peak.
Kevin: Right. So back to uncertainty. We really do not know the future. We’re humans. We can just speculate.
David: Yeah. And that’s a reality with any investor. You have a degree of uncertainty to weigh out because no one can see the future. Because of that it’s fair to say that all investment is speculation. It’s speculation about the unknown. It’s speculation about what happens next. You’re speculating on a series of events and factors and developments which may prove to be otherwise.
Kevin: Well, and this goes back to models, Dave. Everything that we do involves models. Okay, you were even talking about flying an airplane. There’s a model for flying an airplane on instruments. There’s a model for flying an airplane visually. And there are certain rules that you abide by, like you hear about flying by the seat of your pants. Well, the truth of the matter is, when you learn to fly, you find out that flying by the seat of your pants will get you killed. Okay, you actually need to look at the gauges, and that takes discipline and it’s a trained discipline.
David: Follow your checklists.
Kevin: Checklists is the same thing.
David: Yeah.
Kevin: One time I took my dad on a Cessna. I rented a Cessna and went through my checklist, and then we flew, had a great day. I was so happy that I impressed my dad. We got back and the checklist was laying on the tarmac. I had accidentally left the checklist on the top of the plane when we got in and flew away. So sometimes the model doesn’t— The checklist didn’t tell me to put the checklist back into the plane, right?
David: Minor detail.
Kevin: Minor detail. In front of my dad.
David: Yeah.
Kevin: It’s unfortunate.
David: Well, the number of unknown variables, future permutations, is always greater than what we know. The knowns is sort of limited in scope. So whether it’s by inference or deduction, you create models and scenarios and then you weigh the probabilities of those outcomes as you’re looking at asset classes, individual investment opportunities.
Kevin: Well, let’s look at AI. Right now, no one’s ever experienced artificial intelligence. This is a new phenomenon. Internet at least was a communications tool. We had had those from going back to telegraph or what have you. But in this particular case, nobody really knows what decisions are going to be made and how it’s going to influence us.
David: Yeah. I think we can expect AI to change the way we process data, to change how we make decisions, even how we learn. We can’t yet calculate a return on investment for companies investing in computational capacity. We can count the improvement to GDP from record-breaking capex spending on data centers, but we won’t know if we’ve built too much or too little until a much later date. And so when I think about infrastructure investment, this is where historical analogs can be helpful, where, with that unbound imagination, with the view that revolution is afoot, we can allocate capital initially on a responsible basis and, as time goes on, on a more reckless basis—
Kevin: It takes momentum.
David: —without regard to what the return on investment will be. And I think where we’re stuck today, we don’t know how to factor in, we know how to calculate, the improvements in productivity or the cost or benefit to workers affected by adoption of this infrastructure.
We can look forward to a changed landscape. I think that’s fair to say, but we can’t determine who will benefit from it or who will pay dearly for it. Again, I come back to infrastructure building in the 1800s. We overbuilt rails. We built tens of thousands of miles when only a few thousand were needed. And ultimately that was infrastructure that we used. It was vital to the expansion of US demographics moving west. It was vital to economic growth as we brought natural resources back to big cities on the East Coast.
Kevin: But it took many, many years for that to be proven out, and a lot of lost dollars in the meantime. So let me ask you, we have FOMO, fear of missing out.
David: I think it’s important to note that in that cycle and in almost every infrastructure investment cycle, the initial investors are handsomely rewarded as long as they get out before there is that question of scale and adoption meeting the actual supply demand balance.
Kevin: Again, that takes models.
David: Like the original investors in rails lost their shirts, and JP Morgan and other industrialists were able to come in and buy that infrastructure for pennies on the dollar.
Kevin: Right. Value investing, that goes back to value.
David: The thesis was correct. This was going to be a revolutionary change. The adoption cycle took longer and in fact it went beyond what those companies could sustain. They didn’t have enough money coming in to support their debt. They didn’t have enough money to satisfy revenue, to satisfy dividend expectations and growth expectations which had been so amped and so elevated. Frankly, disappointment was going to be easy.
Kevin: And that’s an example of the value trap that you’re talking about. You have to be able to stay long enough.
David: Well, to be fair, a value trap is more a question of something that is cheap and is never going to be expensive.
Kevin: I got you.
David: It could be, the Model T comes out, and the value trap would be looking backwards at the manufacturing company that makes buggy whips, and you say to yourself, “This is absolutely compelling. I can buy this company for a fraction of what it should be relative to the revenues that it’s generated in the past.” Well, it’s irrelevant.
Kevin: Because you’re not going to need them anymore.
David: That’s the value trap. It’s cheap and it’s going to stay cheap and probably go broke.
Kevin: Okay. But going back to AI, I sense that there’s a FOMO right now with these IPOs that are coming out. The fear of missing out is a big deal, but when does it get replaced with the fear of loss? FOL. And that can be a very quick reversal.
David: Yeah. History suggests that in any technological arms race, that the allocators of capital fear being left behind and missing the first adopter advantage, the leadership role, leader advantage more than they do the cost of misallocating capital. And so again, this is that awkward phase of lacking a fully baked understanding of supply and demand for the product or the infrastructure in question. So today we have the largest hyperscalers taking hundreds of billions in free cash flow, and spending it all, spending it all on growth and development.
Kevin: Didn’t you say Google’s going to spend more than what they’re taking in?
David: Yeah. This year’s capital commitments now exceed current free cash flow, or operating cash flow, by these companies going all in on AI. And their financing investment and future anticipated growth now tapping the debt markets, which I think is a critical indicator of where we’re at. Equity is not sufficient. Debt now is part of the financing capital stack. And the problem with that is you’ve got these companies basically making a leveraged bet on growth. Anytime you add leverage to an equation, you’re also starting the clock. It has to pay for itself and soon because you have to—
Kevin: Because you’re paying interest.
David: —maintain the debt payments.
Kevin: Exactly.
David: Right. So I think that brings in a layer of fragility with the interest meter now attached to the AI play. Yeah, 150 billion in debt issuance year to date is a part of the CapEx spend. Google is an example. They plan to spend 175 to 185 billion on AI. Their operating cash flow is 165 billion. So they’re going to spend more than their operating cash flow. They’ll basically take free cash flow for 2026 to basically zero. And last year’s CapEx boom, which was the largest we’d ever seen, is going to be dwarfed by 75 to 100% year over year if you look at what they’re planning to spend in 2026.
Kevin: Well, and the thing is, okay, so we need momentum to continue for them to be able to meet those CapEx demands. But something else, Dave, we have limited infrastructure. It takes commodities and it takes things to do these things. Where are they going to get them?
David: Yeah. Every once in a while, whether it’s Wired magazine or Tech Insider, they’ve got some good commentary on the latest and greatest innovations and changes in technology. A Tech Insider article, I think, captures the crux. It said that the $700 billion question, that’s quite literally, $700 billion question facing the technology industry in 2026 is not whether AI will be transformative. That debate’s largely settled. The question is whether the pace and scale of infrastructure investment are calibrated correctly, or whether the industry is building ahead of demand in ways that will create years of overcapacity and compressed margins before the full economic potential of AI is realized. The answer will define the technology industry’s financial trajectory for the rest of the decade.
And that, I think, is again where you can look at the past as prologue. We had the same event happen with investment in the internet and in the ability to move data using fiber, to the point where Enron went from no longer putting a focus as much on natural gas trading. They were trading dark fiber. They were trading the ability to move the volumes of data.
And lo and behold, with WorldCom’s failure, there was this realization that actually they had overbuilt. And with a few small changes in the technology, how data is packaged and how it is moved, you actually don’t need as much capacity as you originally thought. So the overbuilding tendency with infrastructure is very real. In fact, that’s been the case in every infrastructure build in world history.
Kevin: So this weekend I went to mow the lawn. I had limited time and my gas mower was burning more oil than gas. Okay, so the whole neighborhood was blue with smoke. And so I went inside, I told my wife, I said, “I’m going to go get an electric mower.” And I did, and I charged the battery and it worked great, but it needed the battery. So the mower is sitting there right now without the battery, that’s how I’m going to store it, but I need the battery to make it work. Isn’t AI the same? Where’s the electricity going to come from? We have limited space.
David: Yeah. The added question or concern relates to the mismatch between electricity demand required for the AI build out and the supply constraints of our existing grid. Today’s investors are feverish in their enthusiasm for the AI revolution. Tomorrow, consumers of this particular tech, particularly enterprise-level adopters, they’re going to have a bill to pay—both the token costs weighed against the productivity gains, as well as just households bearing larger energy bills, which are a natural expression of electricity scarcity.
Kevin: And if we can even do it with bills, let’s face it, even if it’s more expensive, you still have to build. It takes commodities to do the things that we’re talking about with artificial intelligence.
David: Yeah. AI is just one expression of an increased pressure point on the electric grid. 30% of automobiles produced last year were electric vehicles, globally. And obviously, a higher percentage of those cars being driven in places like China, and a larger percentage produced in places like China.
Kevin: How about mowers? Mowers are starting to get replaced by electric. I saw that this weekend.
David: There you go. So we look through the lens of commodity demand, which is exponentially higher than current supply. So whether it’s natural gas or nuclear, renewable energy, whether it’s industrial commodities like copper or aluminum, the questions of pace and scale of AI capacity, or the electrification themes, which are very popular, and motivated by environmental concerns, the expansion is checked not just by demand for computational power, which may be more or less than expected, but by the physical commodities, their availability, and their cost.
Kevin: This sounds to me— Okay, you were talking about value investing versus momentum investing. The momentum right now is over on the bet on the AI, and everybody’s there. That’s where the herd is. The value sounds to me like, buy the commodities right now, which are still underpriced compared to where they’re going if these needs are going to be met.
David: Yeah. For us, a commodities bet is a pick-and-shovels play on AI. It’s also a bet on commodity repricing in the context of an energy shock and ongoing war and fiscal and monetary policy largesse. There’s actually many supports, but if you wanted to throw in AI as one more component, okay, for the sake of argument, let’s say it succeeds and they’ve got supply and demand in balance in terms of computational capacities. And then how are you going to feed the beast? What’s that energy coming from?
Kevin: I love the pick-and-shovel reference because, think about it, if you were— During the California Gold Rush, a lot of guys went out there and came back with no gold, but all of them had to buy picks and shovels. So, you sell the pick and shovel.
In fact, do you remember when we were in New York? When was this? 2009, 2010. And it rained. It was a filming expedition and it rained for like three days straight. In New York, when it rains, the people who have purchased the umbrellas to sell can sell them at any price. Any price.
David: You got to have it.
Kevin: So rather than trying to predict the weather, just be ready with the umbrella.
David: I think value investing in this context ties to underinvested assets. Not just individual companies that might, in Buffett’s view, be selling cheap. But underinvested assets which benefit from supply inelasticity, and that really does define many of your commodities today. It includes energy, it includes industrial commodities, precious metals. Many of these things we’re going to be discussing in our June 17th webinar, and anybody who wants to register can go to the show notes and register for that. But June 17th, our advisory team is going to be doing a—
Kevin: Click on the link on the show notes for June 17th.
David: But industrial commodities, it also includes precious metals. Where sources of demand are varied, our preference is—within all of those commodities exposures or hard assets—very much in energy and precious metals. If you set aside the AI-driven demand for more predictable supply constraints, I think that’s where we’re looking at the supply side and seeing a very bullish setup. With the demand, maybe it’s AI, maybe it is in response to restocking arms, maybe it is continuing to deal with supply issues through the Strait of Hormuz. Maybe it is just a repricing of these assets in light of fiscal and monetary largesse. There’s many inputs, but for us, the supply side is very compelling.
So investor preference for the short-term gains, you see that expressed today in technology, in semiconductors, in the AI-related trades. It continues to provide, for us, this space of overlooked and underappreciated opportunities, specifically in hard assets.
Kevin: So, that is pick-and-shovel. So when someone’s talking about your management team, Dave, I usually just say, “Hey, here’s simplicity for you. If you’re walking around in a dark room, you’re going to trip over the type of stocks. It’s a real thing. It’s a hard asset. So gold, sometimes real estate, sometimes infrastructure, natural resources, copper, oil, gas, that type of thing. Those are real things that are needed to power these imaginative ideas.
David: Yeah. There’s a Goldman Sachs report that was released March 24th of this year titled “The HALO Effect: Heavy Assets, Low Obsolescence in the AI Era.”
Kevin: Well, that sounds like what you’ve been talking about all along.
David: Yeah. Just to quote, “After more than a decade of underinvestment, Goldman Sachs research analysts believe that higher real yields, geopolitical fragmentation, and supply chain rewiring have shifted equity leadership back toward tangible productive assets.” They introduced the HALO framework—that’s heavy assets, low obsolescence—to identify companies that are less exposed to technological obsolescence.
Kevin: So you’ve got a new acronym at this point, right? HALO, H-A-L-O.
David: New acronym.
Kevin: But really, it’s a new acronym for just an old theory that you’ve had all along.
David: Yeah. Goldman and others, they’re concluding here in 2026 what has been in our minds for some time, while hard assets—or heavy assets, as Goldman likes to call them—fresh on the minds of investors concerned by the implications of AI. We arrived at the same conclusion for a different set of reasons. AI is just one more buttress to our argument. Hard assets are capital intensive. Hard assets have low obsolescence.
Kevin: You’re going to use them for something.
David: Hard assets rest in the middle of a scarcity bullseye, and hard assets provide resilience and are of strategic value. We’ve seen that with the Department of Defense getting very interested and very active in making sure that they have adequate supplies of the materials that they need to be able to maintain our defense infrastructure. Hard assets, I think, also provide diversification. And they’re on a path of diversification that investors we think will move towards from crowded tech, what you could describe as capital-light trades, to the more capital-heavy and, frankly, what are uncrowded—
Kevin: So it’s possible that the herd, at some point, will move from the paper over into the real.
David: Yep. We’ve highlighted the Bloomberg Commodity Index versus the S&P 500. If you look at that chart, you can see a picture of historical, at least recent historical, equity index outperformance compared to commodities. And you also see in that picture the comparison of those two things—Bloomberg Commodities Index and the S&P—commodity neglect. What you also see in that chart is the turn, the reversal, with commodities beginning to gain the upper hand and beginning to outperform on a relative basis.
Kevin: So, I was talking to a client this morning before we came in here, and they’re almost 100% precious metals. They have been for many years. They started buying from me when they read your dad’s newsletter. And he asked me a question today. He goes,” Let me just ask you a question, Kevin, because you’ve known both of them for a long time. Is David as good as his dad?”
And I said, “When it comes to moving over to stocks, he’s about 10 times better than his dad because his dad would never own a stock. It was just always gold.” But there is a point where you can own stocks in these various hard assets. This is not a knock on Don, which by the way, your dad’s going to have his birthday tomorrow. Make sure you give him a call. But it’s not a knock on stocks. What it is, it’s a diversification. Because at this point, this couple, he’s retiring. He needs income from his assets. His gold will not provide income. So, they’re going to sell some of the gold and they’re going to move over to the wealth management platform, which is the right thing to do with the percentage that they’re doing.
So just to refresh everyone’s memory, you can own something that is a real, hard asset in the form of a stock at times, and it can do some things for you.
David: Yeah. It provides operational leverage to that particular asset.
Kevin: Right.
David: I think that the contrast— Better, I don’t know. Pragmatism probably defines my interest in things other than just precious metals. Idealism or a very strict set of rules definitely defines my dad. He’s 86 tomorrow, and he’s just finishing school in counseling because he and my mom want better skills to be able to meet the needs of kids.
Kevin: I love that.
David: He’s 86, my mom’s 79. And they’re-
Kevin: They live in an orphanage, and they’re learning still.
David: They’re gearing up for the second half of their life.
Kevin: I love it.
David: There’s an idealism which I don’t necessarily identify with. I don’t know that when I’m 86, I’m going to be going to a counseling school so that I can meet the needs of orphans. I think maybe I am, by personality, more pragmatic. When I think about my dad, he will never own silver. Well, maybe this is his version of pragmatism. How much of it can you carry? If you’ve ever unloaded 100 ounce bars of silver, there’s only so many of those you could put in a backpack and walk away with, let alone run with.
Kevin: The Spanish conquistadors learned that when they were running away from Montezuma. They drowned as they were crossing the river running away.
David: Yeah. So, he does have expressions of pragmatism. Gold’s easier to carry. But when we talk about the hard assets—or the heavy assets, as Goldman describes them—these are capital-intensive businesses that have been on the move for several years, but it’s gone largely unnoticed. It’s been obscured from view by the capital-light companies.
And those capital-light companies have outperformed, with their value tied to abstractions like intellectual property or brands. You could think of Nike or Coca-Cola as classic brands. Or perhaps they’re selling software: software as a service, data flow, companies like Microsoft and Adobe and Salesforce. Great companies. But in the age of AI, this is one of the reasons why Goldman is saying, “Do we want to own companies that could be obsolete?” We don’t know. Maybe we want to own heavy assets.
So I think the other expression of this abstraction, leveraged networks, Airbnb, Uber. Using a platform to be able to draw in millions of users, hundreds of millions of users, billions of users. They have had their day in the sun. The point is that heavy assets, I think, are on the verge of having their day in the sun.
Kevin: So, let’s go back to the pick-and-shovel stuff because the electricity that’s being used right now for the AI that’s being used is being produced by electric companies and nuclear reactors in place. These things have been built years ago. What would it cost to build that infrastructure now after the cost of inflation and the commodity rise that we’ve seen?
David: Again, the disadvantages to scalability, which is what you get with those leveraged networks and with selling software, where the initial investments are in the R&D upfront, and then your margins are really healthy thereafter. This is where you’ve got to flip the script a little bit. Think of them as almost perceived fallen angels. We’re interested in them because they are hard to reproduce. They have operational complexity. You’re dealing with resource scarcity. You’re dealing with very high sustaining capital requirements.
Kevin: It takes a long time to build them.
David: They’re energy and labor-intensive. You’ve got tons of regulatory constraints. You’ve got massive permitting requirements, long project timelines. All of which, to someone who’s used to an asset-light portfolio, that’s a problem, and that’s actually where we see an advantage. These are qualities that provide moats, and they also provide some cyclical advantages that we would be looking for in a period of rising inflation and rising interest rates. So, to your question, take a copper mine as an example. Built 25 years ago for $2 billion. If you replicated that today, you’re talking about a $15 to $25 billion investment, not the domain of a startup. And again, this is not new world stuff, it’s old world.
There’s an irony in that because the new world still depends on the old world, and that’s where we see something of a sweet revenge. If you want to build out the AI, guess what you’ve got to tap? Aluminum, copper, concrete, steel. All this stuff comes into very high demand. And then of course, the more basic if you’re going to maintain it. If you’re going to use it, where’s the energy coming from? Natural gas, where’s it coming from?
Kevin: And invest in old world commodities.
David: Yeah. So over time, replacement is prohibitively expensive. Permitting becomes harder. Environmental limitations, they increase. Skilled labor, we’re talking about very blue collar stuff, that’s harder and harder to find, and the asset-heavy nature of the company’s reprice upwards during inflationary regimes.
So this is the stuff that most asset managers hate. They don’t like the cyclical nature. They want high margin all the time.
And we happen to love it. And frankly, what we do is not easy for hard asset portfolios in one, not the easiest to manage, but we also have very little competition in that space.
Kevin: So you were talking about inflationary regimes, and I’m thinking back to that copper mine you’re talking about being built decades ago. Okay.
Well, decades ago we had something called globalization going on. Right now we’re seeing the world deglobalize and start to fight for their own. I mean, they’re not only fighting wars, but they’re actually just trying to compete with each other on their own individual basis, much more than when that copper mine was built that you were referring to.
David: Yeah. I think the deglobalization process is something that underscores the importance of real things—
Kevin: Right.
David: —and companies that are attached to real things, as opposed to companies that do very well in a hyper-networked world.
Kevin: Look at how China hoards commodities.
David: Yeah. If you look at commodity cycles from 1795 to the present, you can see peaks in the cycles corresponding with periods of conflict intensification. And so that’s war, it’s competition for scarce resources needed to backstop national security initiatives.
Kevin: And the price of commodities goes up at that time, obviously.
David: [unclear] commodity cycles from troughs to peaks.
Kevin: Right.
David: So we are far from a period of peace and tranquility. In fact, this sort of deglobalization, it’s a splintering of the rules-based system that we’ve had in place, if you wanted to argue, since the end of World War II, and—
Kevin: Bretton Woods. Yeah.
David: So quite the opposite. We’re in a new age of self-interested competition and conflict.
Our view is that geopolitical conflict is today, in the markets, mispriced. It’s underappreciated. It’s even ignored.
Kevin: Underpriced. Yeah.
David: Our view is that the fiscal and monetary policies necessary to navigate and maintain a degree of stability, particularly within the financial markets, those are force multipliers for commodity pricing to much higher levels in the years ahead.
Our view is that national security in a deglobalizing world creates an added impetus for control of supply chains—
Kevin: Right.
David: —and for basic materials—actually everything from basic materials to finished manufactured goods, and those less efficient supply chains as a result of deglobalization translate to added inflation for not only the basic goods, but also the finished goods.
So it’s our view that the consumer globally, not just in the US, is already at a budgetary exhaustion point.
Kevin: Right. People are expressing that as one of their main issues, even during the midterms.
David: Yeah. Can they accommodate any further inflationary pricing?
And you’re right. I mean, you see it in the polls. Conference Board’s Consumer Confidence Survey reflects it well. Consumers are buying fewer items. They’re delaying purchases of expensive items. They’re buying more things that are needed versus wanted.
And you also see it reflected in the University of Michigan Consumer Sentiment Index. We’re at the lowest levels registered since 1975. Consumer sentiment is lower today than levels that we saw during the Global Financial Crisis or during COVID.
Kevin: Really?
David: Yep.
Kevin: Even lower than COVID?
David: Yep.
Kevin: Wow.
David: So the inflationary trends driven by energy pricing, by supply chain disruptions, by monetary and fiscal policies, they’ve created a profits inflation for corporations, and you’re seeing that reflected in great earnings.
Kevin: Right.
David: But profits inflations are not uncommon during periods of broader inflation.
Kevin: You talked about K-shaped economics, where the upper end just gets higher and higher and the lower end, they run out of money. It’s that K shape.
But I would guess that you could count that with corporations as well, right? The earnings are high right now—
David: Yep.
Kevin: —but the people are going broke.
David: Right. So US corporate profits as a percentage of GDP have never been higher.
On the one hand, it’s something to celebrate. On the other hand, it’s something that tells you where you’re at on a cycle.
Kevin: Right.
David: It never been higher, or haven’t been as high since. What are the time frames that we’re talking about? What hasn’t been higher? Corporate profits as a percentage of GDP, you could look back at 1929 as a period which was well below this level, but had been the peak to that point.
You could look at 2021, 2022, corporate profits never been higher, but we’ve now exceeded those levels.
Kevin: Exceeded all of them.
David: But 2021 was the end of the bull market in everything. 2022 was the beginning of, I think, a long-term top in financial assets.
Again, so, in our view, we’re at an inflection point. This increase in corporate profits, it also occurred during the 1970s here in the US before we went into a recession. It occurred in Germany preceding the hyperinflationary period of the 1920s.
The value investor is someone who takes note of trends—
Kevin: Right.
David: —and momentum and cycles, and is very interested in the price that they pay for an asset.
Kevin: I would guess that the value investor is the type of investor that listens to the Commentary, Dave. It’s a person who says, “All right, historically, what’s going on?”
You talk about the library of books, Napier, Russell Napier, over in Scotland, has a library called, what is it? The Library of Mistakes.
David: Yep. Yeah.
Kevin: Because if you don’t go back and look at the mistakes, you don’t understand the trends.
David: Yeah. And I mean, that is his book, The Anatomy of the Bear, something of a cult classic, is one of the books that I’ve got the guys who are coming in to do equity analysis to read.
It actually has little to do with equity analysis in terms of looking at earnings-per-share growth or price-to-book or different ways of valuing an individual company, but it does provide a very important context for where you’re at in the cycle.
Kevin: He read every Wall Street Journal from 1896 through 1929, and then afterwards through the Depression to write that book. It was a study in history, literally, reading every Wall Street Journal.
David: Yeah. I think the value investor is inclined towards the uncrowded trade. Speculating on the cyclical nature of assets, you want to find something that is in the trough, has been neglected, and then maintain patience enough to benefit from mean reversion off of low levels—
Kevin: Right.
David: —mean reversion off low levels to higher levels.
Kevin: But it’s not cocktail party bragging rights. It’s lonely. Value investing is lonely.
David: It is. Our view is that the top 10 AI companies, which today comprise 40% of the S&P’s stock market capitalization—which, by the way, is consistent with the concentration levels of three of the last four super bubbles.
That’s why we’ve been talking about breadth. That’s why when you see a narrowing of breadth, less participation amongst a broad group of stocks and it’s just in a few, that concentration risk is important to keep in mind. It suggests to us that we’re precariously placed on the other end of the spectrum at a high likely to mean-revert lower.
Kevin: Okay.
David: So there’s places where there are opportunities. There’s also places where there’s much more risk. And the only way that it wins is if you see exponential growth in enthusiasm, which is already hard to wrap your arms around.
Kevin: Well, and strangely enough, as well as gold has done, it’s still somewhat ignored in the main. Yeah, you talked about how few large investors have gold at all at this point.
David: Yeah. I talked with a good friend and one of our investors in the last couple of days, who is interested in income in this phase in life, and has had a very healthy gold and silver position for many years, and it’s grown.
It didn’t start as large a percentage of mean assets as it is today, but because it’s gone up considerably over the last 15 to 20 years, he now would like to diversify.
But still the question is, are we at the end of a bull market? Where are we at in this cycle?
And our view is that the demand cycle for precious metals is still early amongst generalist investors. We’re out of the contrarian phase. We’re in a healthy middle phase where there is general adoption, which is becoming a thing, and certainly was—
Kevin: But still well into— Well, still there’s quite a bit of bull market to go.
David: Yeah. I mean, you’ve got 74% of family offices that have no exposure to gold.
Kevin: Right.
David: If you look at the average allocation to gold relative to global financial assets, you’re talking about less than 3% which is allocated to gold. It’s not over-owned.
And so the question of who would choose to buy it at these prices, I wonder if it’s made the cocktail party circuit. I wonder if gold, silver, gold mining stocks, I wonder if that’s what’s being discussed as the place to be.
Kevin: I’m going to guess it’s still AI.
David: I think you’re right. So investor preference for semiconductors, for technology, for AI, that continues to far exceed capital flows into other asset classes, obviously, but includes precious metals.
In our view, metals are no longer in the bargain phase, but they remain in a structural bull market that could drive prices much higher. So for us, sort of a renewed uptrend would be confirmed by a move above 4,600, 4,650.
And in silver, you’ve already caught stride and aren’t slowing down. You pass the $90 mark and you are already in sort of a catapult phase.
Kevin: Which means buy now—
David: Yep.
Kevin: —because that is probably going to happen.
So going back to value investing, where do we find it?
David: Yeah. Our biases are best represented by our books.
Kevin: Yeah.
David: If there’s a lesson to be learned from Buffett and Munger, it is that cheap is best. But if you can find reasonably priced assets, those are worth considering based on the quality of the company or on the quality of the thesis. You want—I dare say, you need—to own hard assets in the years ahead.
Kevin: HALO. HALO.
David: Heavy assets.
Kevin: Right. Heavy assets.
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You’ve been listening to the McAlvany Weekly Commentary, and I’m Kevin Orrick along with David McAlvany. You can find us at mcalvany.com and you can call us at 800-525-9556.
This has been the McAlvany Weekly Commentary. The views expressed should not be considered to be a solicitation or a recommendation for your investment portfolio. You should consult a professional financial adviser to assess your suitability for risk and investment. Join us again next week for a new edition of the McAlvany Weekly Commentary.
