Kitco News in Focus with Jeremy Saffron.
SPEAKER_03Welcome back. I'm Jeremy Saffron. President Trump is in Beijing today, meeting with China's Xi Jinping. Financial markets are focused on the business executives in the room and the potential for a trade deal. But there's another story playing out at the same time here. That story about military capacity, about industrial capacity, and the cost of war. Meanwhile, commercial shipping through the Strait of Hormuz remains restricted, and the International Energy Agency says global oil inventories are falling by about 4 million barrels a day. And we got this BLS data out today, too. U.S. producer prices uh rose 6% year over year in April. So today we're going to be asking how these military and economic pressures intersect and obviously what that means for the market. Joining us now is Helm uh Hel Kepner. He's uh retired Marine Intelligence Officer, CEO of Global Risk Intelligence and Planning, and also host of the Strat Podcast. Uh Hel, welcome back to Kitco News. Good to see you.
SPEAKER_00Thanks, Jeremy.
SPEAKER_03Listen, we got a lot to get into today. I mean, it's an interesting kind of roadmap, just prepping for this. I mean, before we get into Beijing and Iran and the numbers, let's just step back for us a moment. I mean, when you look at the map today, President Trump in China, Iran is obviously still unresolved, the Hormuz is restricted, Russia under pressure in Taiwan in the middle of this summit. And that new information about China expanding missile capacity. I mean, what is the risk investors are least prepared for here?
SPEAKER_00Well, there's a lot of risk out there. And one of the things investors need to be looking at is the uh basically the strategic risk around the world. And uh, you know, one of the things, for example, uh my firm, we just spent some time talking to a very broad business-based group, uh looking at critical infrastructure, supply chain issues globally, and one of the things we really focused on was looking at these maritime choke points. Now, one that jumps right out of obviously is the Strait of Hormuz and what's happening there. I don't think I need to say more. But of course, just behind that is the Bob El Mendeb, you know, going into the Red Sea, which leads up to the Suez Canal. That's one that the Houthi rebels with their anti-ship attacks had basically clogged up some time back, and now the concern is they're going to clog it up again. But then if what you're just referring to, uh talking about China and Taiwan, the Strait of Taiwan, uh, it's not, you know, does the world end if the if the China was to block that strait? No. But I would point out that almost 50%, almost half of all container ship traffic in the world uh on ships goes through the Taiwan Strait. So it gives you an idea that some of these things that we look at, you know, that we'd say, well, that's a black swan or something like that. I often say a black swan is simply the swan you weren't looking for, weren't looking at. And I think that people need to kind of pull back a little bit and look at some of the geopolitical issues going on, uh, particularly when they result in conflict that can interrupt supply chains, vital supply chains, and access to resources.
SPEAKER_03Yeah, yeah, well said. I mean, it's been fascinating just to kind of watch how fast this is all moving. Uh, you know, I know this is hypothetical, but I mean, you know, Hal, if if you were briefing a corporate board this morning, I mean, what would be at the top of the threat board for you? Is it Hormuz? Is it Taiwan? Is it China's missile buildup? Is it Russia-Ukraine or U.S. munition stockpiles?
SPEAKER_00Well, actually, I would probably start with the straight of Hormuz, because that's right in everybody's face. I mean, that's the one where you've you've clogged it off. Now, what I will say is uh what's being reported, and this gets into information, this gets into intelligence, uh, what you see on, for example, Windward, which all the news outlets show the Windward map, and that shows no little blips of ships going through there or very few blips of ships going through there. That's very deceptive because one of the things with commercial shipping is when they're in an area of an enhanced risk, they actually tell those uh those masters of the ship, the captains, they say, or in the shipping companies, look, you need to make a call on whether you're going to uh turn on your AIS or turn it off. Because if you turn it on, that means bad guys out there, whether it's a nation state like Iran or pirates or whomever, may use your your your track to actually target you. And so a lot of the shipping that's going through there is not being reported. I from what I've seen, the shipping going through there is much higher, and I think the prices reflect that. I would expect the price of oil to be much higher than it is. Uh so my first thing I'd focus is a straight up uh uh you know straight up more moves. My next one, simply because it is so uncertain, is I'd talk about the Balbo Medeb, I'd talk about the issues with Suez Canal, I'd definitely be talking about what would happen to global supply chains if both of those things are blocked at the same time completely. And then the third one I'd talk about is uh looking over to China. I'd definitely look at the missile thing, but I'd also be talking about the the other missile thing, which is all the missiles that the U.S. is putting in there, all the missiles that are being put in by other countries, what Japan is doing, which is absolutely amazing uh in terms of uh raising its defense posture across the board. And I'd be pointing out you know, what's the likelihood of that and what that would do to disrupt supply chains.
SPEAKER_03Yeah, you know, it's funny. I'm looking at the markets and they're and they're not doing terribly bad today with all that's going on. And not terribly well, but I mean the markets counter-argument is kind of simple here. Trump and she, you know, both need stability. Iran needs revenue, China needs oil, the U.S. wants lower energy prices, nobody benefits from uncontrolled escalation. But, you know, there's a lot of uncertainty. So why isn't that the base case?
SPEAKER_00Well, you know, the the a lot of uncertainty, and I think a lot of uncertainty is which way is China going to go on this? You know, the the original thinking on China was that, oh, China backs Iran, the U.S. is in a war with Iran, so therefore China will simply blindly back Iran across the board. And China gets a lot of oil. 90% of the oil that Iran exports goes to China. 70% of uh of the oil that China uses actually uh is imported. That's a huge amount of oil. It kind of almost reminds me of Japan at the you know back in the late 30s in terms of its uh situation there. And then about half of that imported oil goes to Australia for Moose. So the thinking was, you know, Japan back Iran, but China is also seeing what happens with this supply chain disruption across the board, what happens to its position with other countries uh around the world. And I think China's actually doing kind of a strategic relook at what's going on there and also recognizing what would happen if they were to do something militarily with Taiwan, what that could do to them economically. You know, that uh I I'm not the first person to say the the economic situation in China is is probably more precarious than most realize. Yeah, they are sitting on a tremendous amount of debt, they got a huge real estate problem. The uh that Belt and Road Initiative is uh I you know some have referred to it as the trillion-dollar debt bomb. They've got these uh massive loads of debt with all these countries that probably will never be able to pay that back. And if they were to all default at once, the second, third order effects that would have on the Chinese economy would be pretty catastrophic and to the CCP, to the regime itself. So there's there's a lot of reasons why China will really want to lean forward, trying to come to some sort of agreement with the U.S. and probably do something to address this issue out of the Strait of Hormo Hormous.
SPEAKER_03Yeah, yeah. You know what? Let's stay on that leverage in Beijing kind of topic. I mean, because those meetings that are taking place, President Trump obviously brings the U.S. dollar and the tech sector and a major, you know, it looks like many major CEO delegates at this point. I mean, Xi Jinping brings rare earth dominance, deep industrial capacity, and it seems like a growing military. I mean, from an intelligence standpoint, uh how do you assess the leverage each side brings to the table today?
SPEAKER_00Well, certainly, uh uh, you know, Chinese, uh China's developing a lot of military capabilities. They're building a lot of stuff, they're building carriers, uh, one of the few countries in the world that are actually very aggressive building carriers, but building a lot of stuff. They want to have a big blue water navy. They're not quite there yet, but they want to have a blue water navy. Um, and uh so they're doing a lot of things in that area. Uh the big issue, though, is rare earths, and that's something where the U.S. is completely dependent. That's where all those uh high-tech CEOs are sitting there. That's where all the defense manufacturers are really looking at this problem. Now, the interesting thing with rare earths are first off, they're not actually as rare as the name would imply. They're actually everywhere. But the but the thing that China did very strategically starting back in the 90s was that they not only uh isolated, they very aggressively knocked out other places where rare earths are being mined and certainly knocked out everywhere where they're being processed. So they have a tremendous capacity in processing rare earths, in refining them. Um, they have a lot of rare earths, but they're not like some you know global repository for rare earths. They just have a temporary advantage in this area because they put so much focus on this. Some of them would say that some of the practices that they did in this area were uh were really kind of underhanded in forcing other companies out of business around the world, but that's shift. That has all changed, that's going another direction, and and I think China recognizes that their leverage of rare earths is going to diminish over time.
SPEAKER_03Yeah. You know, markets are obviously, we talked about this, kind of treating this like a like a trade summit, right? Boeing, agriculture, Nvidia, rare earths, chips. Is is that the wrong lens here? Is this really about who controls the inputs of power? Oil, chips, missiles, rare earths shipping lanes.
SPEAKER_00Jeremy, it's interesting you put it that way because that is that is so true. You know, everyone we've often focused at the finished product, you know, chips. Uh, you know, what does Taiwan have? They produce a lot of chips, all right? Uh that's semiconductors. That's their powerhouse for that, all right. Uh obviously China's trying to catch up in that area, and they've made some big strides in in the improvement of the quality of the chips that they produce. Um, but with that said, at the end of the day, it really gets down to resources. You know, we're talking about oil, rare earths, and obviously different types of metals uh beyond rare earths, and it gets down to resources. And that's one where China has an advantage in certain things, a real disadvantage when it comes to oil. Uh hence that uh rather uh distended, uh, I would say crazy claim, that nine line nine-dash line or eleven-dash line claim where they basically claim the entire South China Sea as territorial water of China, which is absolutely ridiculous under all international law, unclause, uh maritime, whatever. It's it's just and and we really get into it, it's like, why do you claim that? Well, they have a little thing they point to, but but when you really get into the discussion, a lot of times it's like, well, it's called the South China Sea, and we're China, so therefore, and you go, that is that is crazy talk, and it and it doesn't work, but it does show you a certain desperation that China has in terms of resources, and that's where it's a little unnerving because it reminds me a little bit of Japan's situation back in the 30s and going into World War II.
SPEAKER_03Yeah, yeah. I mean, you you talked about it there briefly. Uh, I mean, if China is obviously China is Iran's biggest oil customer, but if if Trump presses Xi on Iranian oil, is this now a direct part of U.S.-China competition?
SPEAKER_00I I think it will be part of the competition, but I do think it's also an area where we could probably find agreement. Yeah. Uh, what I kind of see with the Trump White House is they're looking beyond the current regime. And definitely, if you talk to about Israel, they definitely have been trying to look beyond the current regime for some time, trying to make that actually happen as soon as possible. And they're looking at Iran in terms of resources, what does it bring, what can it, what could potentially, what potentially it could do uh regionally and globally in that regard. And and in that regard, I think uh the U.S. can turn to China and say, hey, look, we could work together to safeguard some of these vital resources, this supply chain of things like oil, and then you get into other things, not you know, indirectly and directly, uh fertilizer, liquefied natural gas, another huge thing that comes out of the Gulf that they need. And then another thing which doesn't get a lot of attention is helium. And that gets into semiconductor uh fabrication, which is that has become over the years the gas of choice in in the fabs in these big fabrication units, uh, knocking out other types of gas. But it's one of those things that they they produce. It comes from uh LNG production. Uh it's uh it's kind of a byproduct of it, if you will, uh, that they can capture and they've pre- and they got tremendous economies of scale in doing that. But that's another thing that's been cut off, and that's an indirect effect of the Strait of Hormuz, is it's really cut off the source of helium needed in China and needed in places like Taiwan.
SPEAKER_03Yeah, yeah, interesting. Uh I want to keep looking at the kind of industrial data because there was this new report. Bloomberg reported that there's 81 companies in China's missile supply chain that really saw their revenues increase. They hit 189 billion won last year, up about 20%. Now, that manufacturing surge happened obviously while Xi Jinping was removing top generals in the People's Liberation Army rocket force. Um, as a former intelligence officer, how do you interpret a company purging senior military leadership while accelerating missile production?
SPEAKER_00Well, it is Kevin, it does look a little strange. You know, of course, they were removed, ostensibly, they were removed because they said they were involved in in uh co corruption, which implies that they were uh somehow rigging contracts and stuff, and that usually implies that you have a very uh inefficient supply chain for certain things like missiles and other types of things that the military uh procures. So, but the other thing I I think really the big thing is the surge in demand, uh particularly Chinese government demand uh for these uh for missiles. And I think that's really where you're seeing uh that that happening. And and China is very much focused on the you know the entire region, very much focused on what it has to do with Taiwan, but also looking at what happens with the U.S., which is pretty much assured that the U.S. will weigh in to defend, help defend Taiwan. And it is going to be a war involving a tremendous amount of missiles and a tremendous amount of drones, uh both airborne and on the sea. And they're preparing for that. And I think that is part of the reason you're seeing that stock price go up because nobody is seeing, certainly in the near term, that there's going to be a decrease in demand for missiles and things associated with that type of warfare.
SPEAKER_03You know, this is an interesting conversation because if China is stockpiling missiles while the U.S. is expending munitions in the Middle East, I mean, does that factor into deterrence around Taiwan? I mean, is is the U.S. still relying on higher-end platforms while China's kind of focused on volume and stockpiles and the ability to outlast?
SPEAKER_00Before February 28th, uh there was already a lot of discussion uh in Washington, D.C. Rumors coming out of the Pentagon, un you know, unnamed officials in the Pentagon or whatever, talking about the potential hit this is going to have on our critical stockpiles. You know, things like Patriot missiles, tomahawk missiles, and a variety of other ordinance that we've been expending at a rather prodigious rate in the uh war with Iran. And uh we're way down on where we want to be. Uh other other combatant commanders, the COCOM commanders, you know, this is CENTCOM, U.S. Central Command. And then you go out to Indo-PayCom, Indo-Pacific Command uh in Hawaii, uh, and they're looking at it saying, look, we're really running down our stockpiles. Now, look, they're they're they're military, they're they're in the chain of command. They can only say so much publicly, but privately they're very, very concerned that we've run that run down our stockpiles tremendously. The counterweight on that is what I kind of alluded to earlier, though, is China's kind of looking at this sort of strategic relook. They're looking at what has happened in the Persian Gulf, in the Strait of Hormuz, and realizing that this amphibious, if they do some sort of amphibious operation against Taiwan, it won't be easy. And I would point out that Taiwan, just geographically speaking, is a very difficult amphibious operation. The U.S. looked at doing that in World War II. We said, nope. One side of the island is just steep cliffs. You really, you know, it's it's just, it's, you're not going to get a forced beachhead established. The other side of the island is is heavily populated. Uh, a lot of people there, a lot of defense forces there now with uh Taiwanese defense forces. And uh, and and I will say this as a marine amphibious operations are probably one of the most difficult or the most difficult uh operation to pull off. And uh so they they're they're starting to recognize the challenges that they would they would they're probably probably recognizing it more. A little bit of that self-confidence may have been eroded as they're looking at what's happening in the Gulf, and they're saying, hmm, we need to look at our own plans a little bit closer.
SPEAKER_03Yeah, that's an interesting one. I mean, the administration has indicated that Taiwan arm sales may be discussed directly with Xi in China. Critics call this dangerous. I mean, supporters call it a negotiation. What are the strategic risks of putting Taiwan's defense directly into the conversation in Beijing?
SPEAKER_00I I don't I hope we don't do anything that would upset that. Uh actually, the the for the U.S., the best thing in the world is for Taiwan to spend as much money as possible, obviously buying weapons from the U.S. Um and uh and and arming itself. Uh, you know, whatever happens, the the U.S. is not like 911. We're not gonna suddenly appear 10 minutes after they get hit. It takes a while for us to move forces into the area. It's gonna take a while to build up forces so that we can do stuff. That's why we're looking at that first chain, second chain, island chain um uh requirement there in terms of how we're doing that. We're looking at using uh, you know, basically using islands that are in the South China Sea, almost like fixed aircraft carriers or or facilities to launch drones and missiles, uh, because of some of the challenges there logistically of moving stuff around. So um that's one of those things I don't I I think it'd be a bad precedent if we negotiate uh arm sales to Taiwan with the PRC. And obviously the PRC's goal is yeah, sell them less arms so that when we invade, it's easier. Okay. Uh every country of the world is gonna look at that and go, do we want to buy anything from the U.S. now? You know, are they gonna go in and negotiate away our national defense with uh some adversary for some, you know, what they would see as trans, you know, transient gain or something like that? Uh I think it would be a very bad precedent if we did that.
SPEAKER_03Yeah, I mean, uh, you know, every U.S. president has had to manage Taiwan carefully. Is this actually a break from president or or just a more public version of bargaining that it's always kind of happened privately?
SPEAKER_00I think it's always kind of happened privately. One thing, though, is Taiwan in the 90s, you know, after the end of the Cold War, the Soviet Union fell, and uh, you know, China was opening up to business, you know, certainly starting in the 80s, but really opening up to business in the 90s and the O's. Taiwan kind of looked at this and they said, oh, this is great. Um, it looks like uh, you know, China, the PRC, is embracing capitalism, they're embracing all these principles that we believe in uh economically speaking. Sure, they still have the Communist Party, but they're not the threat that they were before because they're not as ideologically entrenched as they were, and then things changed. All right. Really, what changed was Xi came to power and consolidated power, and that's where things really, really changed and became much more ideological. And unfortunately, for Taiwan, they had let their guard down. They had not been investing in their defenses like they should have. They had they had invested in a lot of you know very, very high-end, you know, uh high-tech sort of things, uh, where actually the the the grudging admission is that they need to probably spend less money on F-16s and more money on things like you know missiles, tactical missiles that could be used to stop landing craft and armored vehicles and things that will stop infantry and all sorts of stuff like that, and stop ships out at sea. And uh so they they invested poorly and they underinvested across the board, and now they're catching up rapidly.
SPEAKER_03Yeah, it's wild. And of course, you know, this all as we talked about in the intro, uh, Iran still going on. And Congress kind of questioned defense officials yesterday. In fact, I think Hagzeth was in front of Congress. Uh, President Trump has said that Iran's military capabilities have been largely dismantled, but according to reported U.S. intelligence, now we're seeing Iran may still retain about 70% of its missile and drone capacity. How do you explain the difference between those assessments?
SPEAKER_00Well, uh the difference is this uh is the ability of uh outside of uh drones and missiles and and what they have, can they really export that in any significant way? In other words, can they can they do anything? Well, their military. Can't really do much because their military has no air support. Their air force is pretty much gone. All right. They're significant. Their main, their Navy, the Artesh side of the Navy, the uh the actual military, not the Revolution Guard Corps, but that the with the with the larger combatant ships, that's all gone as well. So that that really has been shut down to a large degree. Now, as far as that retention of drones and and missiles, a lot of that missile stuff was in these vast, what they sometimes called underground missile cities or towns, these huge underground complexes where they stored all these missiles where they could not be attacked. Yeah, they could be attacked, but what we did was we took out missile launchers and we basically took out the the uh the uh entrances for these vast underground facilities. So yeah, they're down there. They just can't get to them and they can't get them out to deploy them. Now, given enough time, they can dig them out and they can, you know, some of the some of the uh launchers they believe are just simply buried. They're not actually destroyed. So they might be able to put that back in operation, but it takes time to do that. So whereas a lot of stuff, the the thought was look, we can't really get in there and destroy those missiles underground. Same thing with the drones, unless we put boots on the ground and they literally go underground and do what the Israelis have done before, which is actually blow stuff up the old-fashioned way. Um, we can't really do that, but we can cork these things up in such a way that they can't use them very well, and that's what we did. And so they retain a lot, but it's a lot that they can't use right away. So that's kind of where that that that number is a little bit misleading.
SPEAKER_03See, this is good because I was going to ask you, Hal. I mean, from a from a military standpoint, what matters more? Is it is it the the number of missiles Iran still has or whether Iran can still command and coordinate and launch them effectively?
SPEAKER_00Both matter a lot, all right? But if you can't put the missiles where they want them to where they want to put them, then that makes a big, then that's you know, then you have a lot of missiles that are useless. You can't really do much. All you can do is you know rain down missiles all of World War II, you know, with V1s and V2s, and it really doesn't have any effect. It's psychologically debilitating, but it doesn't really hit the target very well. And and that's one of the things when we went in aggressively, and the Israelis, obviously, in a joint uh you know combined operation, is debilitating their command-control communications across the board. That's why you saw that slow response. You know, when when we did that big thing, that decapitation strike that took out the Supreme Leader and about 49 of his top officials, uh, you know, military and civilian around him, uh, among other things, there was a lot going on behind the scenes, but it really cut off command, control, and communications. That's why you saw that very slow response. Right. Uh in fact, you you you would expect a barrage of missiles and drones would have been flying across the Gulf, and you didn't see it for a while. And you go, somebody planned very well because uh the uh those units were standing out there going, uh, what are we supposed to do? We we're uh we're very hierarchical, you know, we wait for commands, and here we are having to make decisions on our own, which is not something they're very comfortable with. And uh, and so it took a while for them to uh to respond to that. They did eventually, but it took a while.
SPEAKER_03And to your point, I mean sporadically hitting uh other neighboring countries. And and you know, that brings me, Congress also pressed the Pentagon yesterday on on commercial shipping through the Strait of Hormuz, just to get to back to that in a second, because I mean if the if the U.S. is saying it controls the Hormuz, why is the shipping still restricted for the West? And I asked this because according to breaking reports just this morning, a a Chinese uh super tanker carrying about two million barrels of Iraqi crude just successfully crossed the strait. So, I mean, if if China can still get to its oil while the rest of the world deals with the blockade, what does the U.S. control of this checkpoint actually mean?
SPEAKER_00There's actually a lot more shipping going in and out of the strait than than most realize. And actually, if you look at some of the stuff, uh it's not clear that the Iranians have really uh mined the strait to any great extent. One of the things with the mines, for example, with the smaller boats, those gunboats, you know, going out and pulling out, uh, you know, to set a significant mine where you drop it to the bottom and it's chained to an anchor on the bottom or whatever it is, you know, these these larger mines, that takes a larger craft to do that. You can do it with a small gunboat, but you can't do a lot of it with small gunboats because they can't carry a lot. So a lot of times they'll carry out these floating mines. Well, if you launch the floating mines, um, that means they float anywhere, which means that they will go in there and they'll go into uh lanes that the Iranians want to use uh as much. In fact, they will actually go more into the lanes the Iranians want to use because if you look at the the way the currents work within the uh Persian Gulf, a lot of those floating mines would tend to drift over to the Iranian side of the Gulf and just kind of hang out there. So that would cause them a lot of problems. So there's not as much mining, and I think commercial shipping's picking up on that because everything I've seen, sure, they're not doing they're not turning their AIS on, but the shipping is actually coming through, and it it is far larger than most people think. It is probably uh one day I think they said there was uh two ships that made it through. Uh, I think it was probably 25 times that many ships that made it through that day. So there's a lot more going on, and I think the price of gas and oil reflects that. If there was, if it really was completely corked up, like everybody says, you would see $150, $175 a barrel for Brett Crude. You just don't see that. And there's a reason why.
SPEAKER_03Yeah. I mean, even with the PPI coming out, CPI, all those different data points, you can kind of see it getting a little bit more expensive, but but I think it also comes down to to debt. I mean, according to the Pentagon testimony, the Iran war is now closer to about $29 billion. Now, lawmakers also question the administration's plan to fund $350 billion of a $1.5 trillion defense request through reconciliation. I mean, how does that domestic funding fight over drones and munitions and missile defense and readiness affect America's ability to project long-term deterrence in the Pacific?
SPEAKER_00Yeah, I think everybody's got a chance to see some of the stuff that happens in Washington, D.C. all the time. I'll tell you, when you start getting those numbers, it gets some of the discussions are really some of the assumptions in the discussions get a little bit out there. But I will say one thing I just want to say. War is expensive, period. All right. And and a lot of times uh political leaders they go, well, look at the military, they can do all this and everything else. And it's like, yes, but war is expensive. If we learn nothing from the wars in Afghanistan and Iraq, it is the cost of war. Uh, and and so when they say $29 billion for a war that's gone on, what, two months?
SPEAKER_03Yeah.
SPEAKER_00And it's a war with Iran, I kind of nod my head. I said, well, that's actually not an unreasonable amount considering what what's been done and the cost of the weapons. You know, one thing that we're we're we're trying to catch up on, it's taking a while. You know, dealing with all these drones, you know, if you're taking out a uh $35,000 Shahid drone with a $2 million or $4 million missile, well, that is not a I'm gonna get into ROI. That is not a good return on investment. That is where we need to really invest in some of these less costly drone defense systems, which we're sl we're doing. It's just the problem is we're so far behind. And that's what this budget's really about. It is a recognition. It's looking at Ukraine and things and saying, we're just way behind where we need to be in the next for the next war.
SPEAKER_03Yeah, and and I mean to your point, modern war is is very expensive, and replacement capacity may be the real issue. What is the bigger constraint right now you think? It's is it money? Is it is it munitions, is it ships, is it interceptors, industrial capacity, or could it be political patience at this point?
SPEAKER_00Yes, they're all the above. Absolutely, yeah. Yeah, uh at the end of the day, it's all money. Uh, I worked the war on drugs back in the 90s, and we go to these very high-level meetings, and we talk about all these lofty goals of shutting down the cartels and doing all these other things. And then, and as soon as that was all done, and get into uh the budget issues, and we talk about it, and then sure enough, everyone there would be always be somebody in the room that would say, Well, you know, it's not about the money. And then everybody would bite their lips and try to suppress a laugh because they realize this is about counter-drug money. And and it was at the time we used to say drug money corrupts and counter-drug money corrupts absolutely, which is another way to say that the the amount of money that is being spent is absolutely you know the core issue here. And uh, so when you talk about weapons and everything else, at the end of the day, it's got to get paid for somehow. And that gets into that gets into everything you just talked about. That gets into can we produce it? Do we have, you know, do we have the economies of scale to produce it cost effectively? Do we have the capacity to do this stuff? You know, some ships, we're buying ships from other countries now. We can't produce them. That was a very short-sided thing in the 90s where we shut down shipyards. So that's a big problem that we have, and then of course, political patience.
SPEAKER_03Yeah, you know, you obviously that you just mentioned it there. The U.S. still has enormous financial and industrial capacity. Our concerns, as we watch the markets, you know, they're a bit jittery, but not too bad here. But are concerns about depleted stockpiles overstated in in your, or is the market kind of too complacent about how long it takes to rebuild them?
SPEAKER_00Well, I don't think the market really understands what this means across the board. I don't think the market really understands what could happen. Uh, and and certainly uh I would hope that the fragility of some of the global supply chains is something that the market is trying to take, you know, basically assess or reassess uh more closely. Uh when you look at how things are moving around the world, you know, we have this uh you know with globalization. You know, I'm I'm a I'm a Thunderbird grad, all right, uh way back when, which is uh, you know, it's an international business school, management school. And we were, you know, we were always focused on globalization, globalization, globalization. Uh a big chunk of that deals with uh looking for where we produce it and stuff like that, and then a lot of that's all tied to commercial shipping. Now we're recognizing in a way that we haven't probably recognized since World War II, some of these fragile shipping lanes around the world and what could happen when major players like China, uh like other countries, decide that they want to clog up those shipping lanes. And these shipping lanes are pretty small, and it doesn't take much to cause some huge problems.
SPEAKER_03Yeah, interesting, fascinating. Um, just quickly on China, because we didn't talk about it. And before coming to air, you and I were chatting a little bit about how interesting it was to see uh Nvidia's Jensen Wang sitting on the tarmac in Alaska waiting to board Air Force One, kind of alone and with his backpack. Obviously, he's part of Trump's delegation along with major CEOs from Tesla. He's got Apple, I think Boeing, BlackRock, and others. Now, markets are clearly watching chip access, business deals, but AI chips are not just commercial technology anymore. They're in the matter for logistics, surveillance, targeting, cyper, you know, you know all the rest. So weapons development. Where is the line between market access and and strengthening a rival military industrial base?
SPEAKER_00Uh it is becoming very, very blurred. And AI has become an integral part of uh of weapons, all weapons solutions. Uh, we're starting to see more and more AI. It's just the capabilities that it brings. Uh you know, that's just it's it's uh you know, the the the capability and the capacity is growing exponentially, and it and it it's I could say it's creeping into everything, but it's not creeping, it's leaping into everything that we do, uh, particularly as we're looking at drones, loitering munitions, all sorts of things like that. And we say, well, this could be done with AI, and and it's already being done. There's a huge thing. I just read an article this morning talking about uh what some of the loitering munitions stuff that the Ukrainians are using, and the Ukrainians are are basically by necessity incorporating this very, very quickly, and they're talking about whole units that basically launch these AI, AI-enabled loitering munitions to sit out there and look for bad guys. But literally, those munitions are virtually autonomous. I mean, we're kind of getting to that whole Terminator movie context where you suddenly have all these uh robotic systems that uh that can go out there and identify targets and do stuff. And of course, the Great Fear is well, what what might they do? And uh, but that's happening very quickly. And so when we talk about commercial AI, the military application is just such a small line across. I think we have to be very careful what we're doing with China in that regard, and it's not gonna be an easy solution. I'm not gonna I'm not gonna say there's an easy idea out there. I don't have it. I think it's gonna be something that's gonna be very complicated, very nuanced, and very difficult discussion.
SPEAKER_03Yeah, this is interesting. I can kind of transition this naturally now over to our KICO metals kind of advanced. I mean, looking at physical metals, obviously we know modern warfare depends on, you know, that advanced electronics or sensors or satellites, radar drones, interceptors. That means silver and other critical metals are part of the defense supply chain. I mean, some estimates suggest individual missile systems can contain significant amounts, kilos and kilos of silver. Uh here's my question. I mean, given given the pace of munitions use, I mean, uh, how significant is the defense industry's absorption of physical silver and these critical metals? Or is the broader market kind of just pricing the demand correctly here?
SPEAKER_00Well, I mean, the broader market always figures out a way to price the demand. Uh, I'm not worried about that. But, you know, a lot of things, for example, uh silver, a lot of things that came out of Russia were cut off uh four years ago uh for the most part. So that was a huge hit, particularly nickel, as my recollection. That was a big one. But other also some uh rare metals that were coming out of there as well. One of the things that you're seeing with the U.S. is um, you know, we we see the stuff we're blowing up drug boats, all right, in the Eastern Pacific and the Caribbean. We certainly saw that spectacular raid that we did in Venezuela. We see this uh rather sharp rhetoric with some not implied threats, very well-stated threats against Cuba. And then you see stuff where, you know, we're actually, you know, according to articles yesterday, that the CIA is very active in Mexico working against the cartels, and and then we have this whole coalition we're working with, with uh what, 17 different South American, Central American countries, working on a lot of stuff. That's all aimed at the narco-terrorist cartels. All right. Now, pull back a layer. We're looking at precious metals throughout that entire area. If you look at what China's been doing down there, particularly I did a lot of consulting in the area of lithium, looking at the Altiplano region, certainly looking very closely at Bolivia and uh other places down there where we, you know, Chile, Argentina, where we get lithium. And then uh, of course, Bolivia is famous for being a silver source of silver going back centuries. Um, a lot of this is to regionalize our access to some of these precious metals in a more concerted way. And then you look in the U.S., where we're opening up uh a lot of these preserved areas like national parklands and stuff like that, and saying, hey, can we go in there and start mining that stuff near and dear to me? As a young man, you know, as a as my my dad was a gold miner. Yeah, I spent part of my misspent youth was climbing around in gold mines in National Forest in Oregon, that where we had claims. And so uh we're looking at all this to bring in that precious metal stuff, a Western hemispheric thing, and then looking for closer sources in other places around the world, for example, Greenland.
SPEAKER_03Yeah, no, I mean this is interesting. This is interesting, and but you brought up Venezuela there, and I I have to bring it out. I have a note here because you brought up a point uh point a couple of months ago. You said, you know, that drawn-out conflict could ripple into the Western hemisphere. You specifically mentioned Cuba even today. And just yesterday, according to the Pentagon testimony, Russian spy ships and foreign intelligence activity make Cuba a national security threat. I gotta ask you, I mean, given given the ongoing operations globally, how does the U.S. military balance this emerging risk close to home?
SPEAKER_00Well, I would say that you know, we're a lot of there's a lot of hyperbole around Cuba, right? They have always been a national security risk down there. Um I mean, if I see a Russian spy ship down there, you're like, okay, it's Tuesday. It's not something that gets me that excited. But uh, but yes, they've been doing a lot of stuff down there. Um, but the difference is this when Venezuela uh fell into our sphere, so to speak, uh when we took de facto control over where they can send oil and what they're doing, that put Cuba in a horrific economic situation. They had been on life support before, and basically that life support was Venezuela sending them discount oil and keeping them going. Now that's no longer there. And their economy is is basically disintegrating as we talk. Uh they're in, they're they had no ability. They've been hit by hurricane after hurricane, except each time the hurricanes come in, they wipe out the grid system. But the the ability of the government to rebuild it has been more and more delayed, disrupted, and incapable across the board. So I think we're kind of setting the seeds for what happens if you know Cuba fails completely as an economic model. You know, what happens when? And that'll be a shift because if that if that happens, you know, Venezuela and Cuba were the two, if you will, outposts for this, you know, this uh China-Russia thing uh in the Western Hemisphere. You know, one could say, well, what about Nicaragua? Yeah, okay, Daniel Ortega and all that stuff over there, not as much, but certainly these two countries were their were the linchpin for influence in this region. And with them under the U.S. sphere, that does dramatically change things. I don't think we I I would hope we are not planning on putting boots on the ground in Cuba. That's that is a that's a nightmare scenario if we were to do that, because it's so big and it would take so many troops uh to do that. But but bringing into our orb, certainly turning into like a Venezuela, I I think that's actually very achievable. I think it could happen.
SPEAKER_03Yeah, no, it's fascinating to watch. And and I mean, Hal, just on a personal note, I mean, you've spent decades looking at intelligent uh maritime risk and strategic infrastructure. Have you ever seen this many pressure points hit at the same time? Hormuz, the Red Sea, Taiwan, China's missile buildup, I mean Russia, Cuba, debt.
SPEAKER_00I find myself using that Chinese, that ancient Chinese phrase, may you live in interesting times, which of course is a curse. Uh that's a way of saying that a lot of stuff's going on. We live in very interesting times. Yeah. And and I think part of this though, uh, you know, we say, oh, this is so much is happening right now. You know, it's been kind of happening. And uh, you know, back in uh you know, back in the early 90s, the the thinking was, oh, they got the Cold War's over, you know, there's no more superpower uh thing, there's gonna be just global, you know, globalization, business, the economy is gonna end to a large extent, that did happen in many places around the world. Um, in fits and starts, it wasn't all smooth, but it did happen across the board. But we go, it's the end of big power you know, confrontation and stuff. And now what we're seeing is, well, you know, and this really is, I think what we're seeing is the end of that post-World War II model that took years to put in place, but we're seeing that model start to break down. And it's and it's logical because you're seeing powers emerging, like China, which is much more powerful economically in every other way today than it was at the end of World War II. Uh, and and so we're seeing that. The other side, too, is Russia. Uh, Russia is is collapsing. The Soviet Union collapsed. Russia's having a tough time. Their demographics are horrific. And uh, and so I I see Russia is probably gonna continue to break up and collapse over time and become a much, much more insignificant state, even though they have a lot of nuclear weapons. There it's gonna become a much more insignificant state over time.
SPEAKER_03That's interesting. Uh well, of course, we're gonna watch what happens with this high-stakes uh little gamble happening with President Xi and Trump and and uh maybe tie this back to Russia. We'll have you on to talk about that. Our time's going too darn fast as it does. Hey, I mean, you had a point there. Every era feels uniquely dangerous in the moment. Now, with all that's been kind of happening, bring this back to the market for us, Hal. I mean, to wrap it up, six months from now, I mean, what is one data point investors will wish they had paid closer attention to today?
SPEAKER_00Uh, six months from now, the the Strait of Hormones will be open. One way or the other, it's gonna be open. And the oil will be flowing. And one thing they need to anticipate is we're going to have an abundance of oil. Matter of fact, we may have uh there's there's a big talk about, you know, we had a bit of a glut of oil uh before this thing took place, but I think we're gonna have a lot of oil out there. I'm anticipating oil prices are gonna drop dramatically. Uh, everyone's wrapping up production uh all around the world. Uh, I think that's gonna happen. If you're in the pipeline business, oh, it's gonna be a good time because I have a feeling that the Saudi is going to build another east west pipeline when this is all done. So there'll be some good business there. Um, but I I see that. Um I do see a diversification. Everyone's realized that having all your eggs in one basket, you know, counting on the Strait of Hormouths to stay open forever, not a great idea. And I do see people diversifying stuff, and I see a lot of opportunities coming from that. And really is it's assessing where are these opportunities and places, you know, to really look for diversification in terms of uh energy, where they source it from, in terms of oil, natural gas. But I also this may sound very strange. I also think other forms of energy like wind and solar may get a boost out of this as people as different countries go, you know, we got to be less dependent on anything coming in from overseas. We need to be more reliant, and we need to look at these renewable sources of energy. Interestingly, I think it was yesterday I saw that China just put out the largest floating uh uh you know wind generation uh platform uh in the world. And you go, that's interesting. China's doing that. Huh. And that just tells you kind of these little things happening behind the scenes. Uh and nuclear. I think nuclear is gonna be, I think there could be a renewed interest. There already is, but uh, a surge of interest in uh in nuclear. And I think uh Bill Gates project, I think, is gonna do very well uh over time.
SPEAKER_03Yeah, fascinating. All right, Hal Kepfer, CEO of Global Risk Intelligence and Planning. Thanks for the time today. Also, uh fascinating podcast over there at Strat. Having fun, huh?
SPEAKER_00All right, thanks, Jeremy. All right, look forward to the next one. Thanks.
SPEAKER_03Thanks, Al. Appreciate it. All right, and thank you for watching Kitco News. Now, if you want to stay ahead of the markets and understand the forces driving your investments, hit the subscribe button, like this video, and leave your thoughts in the comments below. I'm Jeremy Saffron. We'll see you next time.
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