Silver Wars Appear To Just Be Getting Started

Silver, Strategic Metals, and US Economic Policy: A Detailed Summary of Chris Marcus’s Interview with Michael McNair

Key Concepts:

• Strategic Metals: Metals deemed crucial for national security and economic stability, with silver being highlighted as particularly important to the US.
• Reverse Salient: A bottleneck in a complex system (like a supply chain) that limits overall progress, often originating from a weakness in a foundational component.
• Capital Controls: Government-imposed restrictions on the flow of capital in and out of a country.
• Price Floors: Government- or industry-set minimum prices for goods or services.
• Re-Industrialization Trade: Investment focused on bringing manufacturing back to the US and strengthening domestic production.
• Stablecoins & Payment Rails: Digital currencies designed to maintain a stable value, potentially used to facilitate capital flow control.
• OBBA (Office of Strategic Capital): A capital engine within the Department of War providing lending authority.
• DPA (Defense Production Act): Legislation allowing the US government to prioritize production of critical resources.
• EDF (Energy Dominance Finance Program): A DOE program providing debt financing for energy projects.

I. Silver’s Strategic Importance and Market Dynamics

The conversation centers on the increasing strategic importance of silver, with Michael McNair asserting the US is likely more concerned about silver leaving the country than gold. This concern stems from silver’s critical role in various industries and its potential vulnerability to export controls. The recent surge in silver prices (from under $50 to over $120, then a correction to $63.90, and currently around $99 with a $12 premium in China) is attributed to a combination of factors: its designation as a critical mineral (August 2023 confirmation following a draft list in August 2023), announced strategic stockpiles (US and China), and significant government investment (hundreds of billions of dollars in the US alone).

McNair acknowledges the market experienced a “froth” and overextension, leading to the price correction, but maintains that underlying structural tightness issues remain unresolved. He highlights the potential for reflexive effects if export controls are implemented, incentivizing other countries to follow suit. The China’s actions of adding friction to the market for exporting silver helped cause the runup.

II. Government Intervention and Industrial Policy

A significant portion of the discussion focuses on the extensive government intervention in the critical minerals market. McNair details a comprehensive report outlining hundreds of billions of dollars in lending and grant authority across various federal agencies, including the Department of Energy (DOE), Department of War, Export-Import Bank (EXIM), and International Development Finance Corporation (IDFC).

Key initiatives include:

• OBBA: Providing over $100 billion in lending authority to the Office of Strategic Capital within the Department of War.
• Defense Production Act (DPA): Used to support critical mineral production.
• IDFC Reauthorization: Expanding its portfolio cap from $60 billion to $205 billion.
• DOE Programs: Including the Energy Dominance Finance Program (EDF) with $40 billion, and various grant programs totaling $134 million (Battery Materials Processing and Manufacturing Grants - $500 million, Office of Advanced Materials and Manufacturing Technology - $50 million).
• EXIM’s Project Vault: A $12 billion public-private partnership to establish a domestic strategic reserve for critical minerals.

McNair emphasizes the administration is setting price floors at each stage of processing, not just at the final product level, using the rare earth industry as an example. This involves direct investments, offtake agreements (guaranteed purchases at a set price), stock piling, and tariffs on those selling below the floor.

III. The “Reverse Salient” and China’s Role

McNair introduces the concept of the “reverse salient” – a bottleneck in a complex system that limits overall progress. He argues that the 2020-2022 period demonstrated this vulnerability in the US economy, triggered by a global energy crisis and China’s response of rationing power to specific industries (like magnesium and steel) rather than allowing market signals to allocate resources. This created cascading supply chain disruptions, exemplified by a shortage of trust plates (essential for home building) due to a worldwide steel shortage caused by Chinese power rationing.

He draws a parallel to the Soviet economy studied by Jonas Cornai, where shortages in foundational components could cripple the entire system. McNair stresses that the US has offshored critical parts of its supply chain, creating a dangerous vulnerability. He argues that China’s willingness to subsidize capital-intensive producers is a key factor in its dominance, and the US must respond with similar support to avoid being left behind.

IV. Stablecoins, Capital Controls, and the Future of the Dollar

McNair delves into the administration’s focus on stablecoins, arguing it’s not primarily about cryptocurrency but about establishing the infrastructure for potential capital controls. He explains that stablecoins, by design, offer zero interest, discouraging hoarding of dollar assets by foreigners. This addresses a core issue: the persistent foreign bid for US financial assets that has prevented the dollar from adjusting naturally to trade imbalances.

He posits that the administration aims to incentivize foreigners to buy US goods and services rather than financial assets, addressing debt, wealth inequality, and industrial hollowing out. He believes the US is likely to implement capital controls after the midterms, once the necessary payment rails are in place.

V. Investment Strategies in a Changing Landscape

Regarding investment strategies, McNair advises focusing on areas where the West is short and needs to build capacity, particularly at the bottom of the supply chain. He suggests that re-industrialization trades (like those represented by ETFs RSHO and AIRR) are showing strong leadership, with stocks that have already risen continuing to perform well even during market downturns. He emphasizes the importance of understanding the underlying structural drivers and aligning investments with one’s knowledge base. He suggests looking for opportunities to “sell the shovels” – investing in the companies that enable the rebuilding of supply chains rather than directly speculating on commodity prices.

VI. Notable Quotes:

• “I think the US would may is is like significantly more, you know, worried about silver leaving the United States than they are gold.” – Michael McNair
• “There’s a little bit of an issue in terms of if you are building capacity um and you’re having to rebuild supply chains that that does have an effect of kind of you know limiting your profits.” – Michael McNair
• “The point is that um you know, this wasn't unique. There was all these these issues at the bottom of the supply chain that was controlled in China that you know because of power rationing it created this cascading effect that was a reverse salient.” – Michael McNair
• “The foreigners get zero yield so no hoarding incentive and then domestic rates stay wherever the fed needs them for you know inflation and employment.” – Michael McNair

Conclusion:

The interview paints a picture of a US government actively intervening to secure its supply chains for critical minerals, particularly silver. This intervention involves massive financial commitments, strategic stockpiling, and a willingness to utilize tools like price floors and potential capital controls. The underlying concern is a deep-seated vulnerability stemming from decades of offshoring and reliance on potentially adversarial nations. The discussion suggests a significant shift in economic policy, moving towards a more protectionist and interventionist approach aimed at re-industrializing the US and reducing its dependence on foreign sources of critical materials. Investors are advised to focus on companies involved in building domestic capacity and benefiting from this re-industrialization trend.