Investing For A High Price Future | James Davolos on Inflation, Pricing Power, and West Texas

Episode Summary

Executive Summary: James DeVolo argues the post-2020 economy has entered a structurally different regime: higher deficits, supply constraints, and policy incentives favor somewhat higher inflation and interest rates than the 2010s. He explains Horizon Kinetics’ INFL strategy as a portfolio of capital-light, real-asset-linked businesses that can compound through inflationary and rate-sensitive cycles while avoiding capital-intensive commodity risks. The conversation also explores Texas Pacific Land Trust, Land Bridge, and exchange businesses as beneficiaries of scarce assets, data-center buildouts, and rising nominal activity.

Main Topics: Structural inflation regime shift (Priority: 5/5): DeVolo says inflation is not returning to the ultra-low 2010s regime because fiscal spending, underinvestment in critical sectors, and policy incentives now support higher nominal growth and price levels. How INFL is positioned (Priority: 5/5): He frames the ETF not as a pure inflation bet but as a portfolio of capital-light companies with durable compounding economics that tend to perform in inflationary or nominal-growth environments. Why royalty and asset-light models outperform (Priority: 5/5): The discussion contrasts royalty companies and surface/land holders with capital-intensive miners and operators, emphasizing lower reinvestment needs, stronger free cash flow, and resilience through cycles. Texas Pacific Land Trust and Land Bridge (Priority: 4/5): DeVolo explains how TPL’s surface and mineral ownership, plus Land Bridge’s West Texas acreage, can capture value from oil, water, power, and data-center development, especially as AI infrastructure expands. Exchanges as inflation beneficiaries (Priority: 4/5): He argues that exchanges benefit from higher nominal GDP, volatility, derivatives activity, and transaction volume while remaining capital-light toll booths on market flow. Rates, central banks, and policy constraints (Priority: 4/5): DeVolo believes central banks prefer positive inflation and are reluctant to allow a true recession or deflationary debt squeeze, implying rates likely stay above the zero-rate era. Portfolio construction and concentration (Priority: 3/5): He explains why INFL uses diversification and position limits, while Horizon Kinetics also runs more concentrated vehicles and is launching a private royalty fund.

Key Arguments: Inflation likely has a higher floor than the pre-2020 era because deficits, underinvestment, and policy incentives favor nominal growth. Governments and central banks implicitly prefer moderate inflation because it helps reduce the real burden of debt and interest expense. Capital-light businesses are superior in this regime because they can compound without constantly reinvesting large amounts of capital. Resource producers often suffer from rising labor, energy, and capex costs even when commodity prices rise. Royalty structures outperform operators because they collect revenue without bearing most of the operating and reinvestment burden. TPL and Land Bridge gain value from optionality in land, water, gas, power, and data-center infrastructure. Exchange businesses thrive on higher volume and volatility, and their toll-booth economics make them attractive in nominal-growth environments. Banks generally benefit from a normal upward-sloping yield curve, while grocers are price takers and not true inflation beneficiaries. The Fed and other central banks appear unwilling to tolerate a deep recession or systemic failure, making outright deflation less likely. High valuations alone do not automatically justify selling exceptional compounding assets if the long-term runway remains large.

Data Points: INFL launch date: January 2021 - The fund launched just before the 2021-2022 inflation surge. CPI at launch: Below 1% - Used to show the fund began when inflation was still subdued. Deficit spending before 2020: 3%–4% of GDP - He says this was already structurally high before the pandemic. U.S. interest expense: Approaching $1 trillion per year - Cited as a reason governments may want higher inflation and lower real debt burdens. U.S. deficit spending: About $2 trillion per year - Presented as a major support for economic activity and nominal growth. Fund performance: ~15%–16% annualized over nearly four years - Approximate performance cited for INFL. 2024 equity market condition: Inflation fell more sharply - Used to note the fund did better in a calmer inflation environment than during the inflation spike. TPL original royalty check: $2 million–$3 million - The early royalty payment on Goldstrike is described as one of Franco-Nevada’s legendary investments. Franco-Nevada cumulative cash flow from original royalty: ~$1.2 billion - Value generated from the Goldstrike royalty over time. TPL land base: ~1 million acres - Described as a vast West Texas land and mineral package. Land Bridge initial acreage: ~75,000 acres - The original ranch acquisition that anchored the company. Land Bridge expanded acreage: ~220,000 acres - After adding two more ranches, DK Boyd and the Speed Ranch. Data center campus land requirement: ~1,000 acres - He says a hyperscale campus generally needs this much land to begin. Land Bridge IPO valuation: About 12x trailing cash flow - At an IPO price of $17, based on the discussion. Target growth for Land Bridge: 15%–20% for five years - Management and Horizon Kinetics’ growth expectation. INFL position limits: 5% at cost, 7.5% at market - The ETF’s concentration controls. INFL portfolio size: 44 stocks - Used to explain diversification within the strategy. CME rates franchise challenge: Phoenix/P8 launch by BGC/Howard Lutnick - A new competitor to CME’s dominant rates and treasuries business. CME FCM license: Granted recently - He says this created backlash because it could put CME in competition with clients. Current overnight rate: 4.75% top of the Fed range - Referenced in the closing discussion on where rates may go. Suggested long-term overnight rate: ~3% - DeVolo’s rough guess for a normalized policy rate. Suggested 10-year rate: ~4.5% - He imagines a positively sloped curve with higher long-end yields.

Pivotal Quotes: "We think that it's just a very different macro regime." — James DeVolo: His central thesis on why the pre-2020 low-rate, low-inflation backdrop is unlikely to return. "The dirty secret is that global central banks want inflation." — James DeVolo: Explaining why policymakers may tolerate moderate inflation to ease debt burdens and support nominal growth. "It's not an inflation fund. It's a real asset fund that is oriented around compounding businesses that happen to do better in these environments." — James DeVolo: Clarifying how INFL should be understood by investors.

Implications: Listeners should expect a world of higher nominal growth, higher rates, and persistent demand for scarce, capital-light assets. The winners may be royalties, exchanges, and land-linked infrastructure rather than commodity producers or long-duration cash-flow stories.