SKEPTIC’S GUIDE TO INVESTING

China Has Magnets, Your Portfolio Has Anxiety

• Steve Davenport, Clement Miller

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If the world’s most powerful magnets can move turbines and EVs, what might happen when their supply chain starts to seize up? We take you inside the rare earths story—why these elements are abundant in the ground yet scarce in your portfolio—and connect the dots to AI infrastructure, defense systems, and the global energy transition.

We break down China’s processing dominance and the environmental trade-offs that shaped it, then look at how non-Chinese supply could scale through U.S.–Australia–Canada partnerships. From neodymium magnets in motors to lithium and copper in batteries and grids, we map the materials stack that underpins data centers, wind farms, and advanced manufacturing. Along the way, we examine export controls on gallium and germanium, the espionage pressure around ASML and chip tools, and how supply shocks can reverberate through server buildouts and AI cost curves.

On the market side, we contrast hardware suppliers and data center ecosystem winners with software names facing valuation pressure if deployment slows. We also consider the rise of leaner AI models like DeepSeek, which could reward software efficiency over brute-force compute. Taiwan’s central role in leading-edge chips, the push to expand fabrication abroad, and U.S. constraints around water, labor, and subsidies add more layers to the risk map. Our bottom line: stay invested, but right-size positions, add selective hedges, and keep dry powder for volatility in a frothy fourth quarter.

If this helped sharpen your view on rare earths and AI risk, follow the show, share it with a friend, and leave a quick review—what’s the smartest de-risking move you’re making right now?

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Disclaimer - These podcasts are not intended as investment advice. Individuals please consult your own investment, tax and legal advisors. They provide these insights for educational purposes only.

Steve Davenport:

Hello everyone, this is Steve Davenport, and I'm here with Clem Miller. And Skeptic's Guide to Investing is going into the crust of the earth and looking at rare earth metals and how do rare earths affect the economy, trade relationships with China, and just in general, what are rare earths and how are they and why are they important? So, Clem, if I was to summarize why rare earths matter, what do you think is the most important thing about rare earths and how they affect our economy?

Clem Miller:

So the most important thing about the more common, so first of all, rare earths are a series of elements, right? Uh they're quite common, actually quite common in the earth's crust. It's just that, you know, everybody talks about China's near monopoly on rare earths, and the reason why China has a near monopoly is actually because uh they've been willing to process rare earths uh and take the environmental damage from that. It took it costs a lot uh uh environmentally, in terms of environmental damage to process rare earths. And China is less concerned about the environment, or traditionally has been less concerned about the environment, and that's why you have a lot of the rare earths processing uh capacity in China and not in uh in other parts of the world. So I just wanted to mention that point. Um, but you ask about essentially where is the demand uh for rare earths? You know, what what is it about rare earths that makes it in demand? And some of the more common rare earths are those that are used in these uh super magnets. So you might be um familiar uh with these toys where you've got these like super magnetic balls that connect to each other. Uh that's called neodymian. Well, neodymium is uh is uh is one of the more common rare earths. And and the reason why these super powerful magnets are useful uh is because they can be used in various kinds of engines, various kinds of motor applications. So, you know, many of you uh who have had you know sort of elementary physics or whatnot will know that you use magnets in in motors. You know, magnets are a key. Now you can you know you can have iron bars that are magnetized, or you can also have you can also help that along by actually magnetizing things that are already magnetized, uh, such as the this neodymium. And so neodymium and other rare earth metals have a lot of applications in things like wind turbines, uh in um in batteries, in uh AI to some degree, uh so in defense applications. And you know, if you throw that in with lithium, which is not considered a rare earth, you got this sort of uh kind of critical uh you know minerals kind of uh uh designation, right? Which is uh originally it was a US Bureau of Mines kind of definition or DOE definition of things that are important for the energy transition and and uh AI and whatnot. And uh and so that's rare earths plus plus lithium, maybe a few other. Sometimes people throw copper into that mix as well, uh, because obviously copper is used for uh uh electric and electronic applications. So that that's why it's important. There's a lot of demand from the renewable energy sector, from the AI sector, and rare earths and the defense sector, and rare earths are are important. And you know, for the environmental reasons I mentioned, uh China uh you know was willing to accept environmental damage in order to become a large processor. But other than that, there are a lot of rare earths around. And when you look at countries that, you know, the other countries outside of China that have large deposits of other kinds of minerals, like Canada and Australia or the western part of the U.S., uh there are rare earths in those areas. It's just they haven't been developed as much. And so, you know, there's now an effort to try to um expand development of those. And so the U.S., you know, uh today under Trump, back under Biden, uh, there's been an effort to try to create sort of mineral security partnerships uh among countries, so U.S. and Australia,, US and to try to develop these non-Chinese rare earth deposits. And in fact, we just saw we just saw, I don't know if you saw this, Steve. We just saw a um uh Trump meet with the Australian Prime Minister. Uh and and among other things, uh one of the more serious things they talked about was uh a rare earths agreement. And and I also saw coming across my uh my LinkedIn that uh my old employer from many years ago, the Export Import Bank, , just allocated some letters of interest to which could potentially fund US exports uh to Australian mining companies for the purpose of building rare earths. So I don't know what those export those US exports would be. I don't know, Caterpillar tractors or John Deere equipment or whatnot to try to support the mining developments uh that are already there.

Steve Davenport:

Yeah, I find it frustrating that Trump and this efforts with Canada. I mean, Canada has great natural resources that we should be looking to figure out how we get more of, not how to alienate them as a partner, because obviously it's a lot easier and more and a safer supplier to have Canada producing these than China. So I like what we're doing with Australia. I think we should be doing more with Canada. And whenever we add Greenland as a state, the 52nd state, that that also I think now, offers some opportunities. So I I find that the we you you get a lot more with sugar than you do with vinegar. So I I think it's a mistake for us not to be pursuing rare earths with Canada and letting China know that we're not gonna be beholden to them for this natural resource that we need. I agree with, you, I think people who say, let's just drill here, don't understand the environmental damage it causes or the amount of energy it uses. So if we're gonna have a lot of energy demand from crypto mining and we're gonna have a lot of energy demand from AI, then we're gonna add energy demand from rare earth production, yeah. I think it's better to spread these things up and to have multiple suppliers in Canada and Australia that seem like ideal uh partners in this exercise. Why haven't we why haven't we done this sooner? I guess that's my question. It's not like suddenly we realize the rare earths are mostly from China, right?

Clem Miller:

I think we've known about that for years and years. It's just that it's just that it's just that China is beginning to flex its muscles in various ways. They just like just a few years ago, they actually, in response to US export controls on semiconductor exports to China, they put export controls on the export of gallium and germanium uh to the U.S. And I don't know that you would consider gallium and germanium rare earths, but they're as what are call what are referred to as doping materials, quote unquote, for semiconductor chips. So they're used to kind of slow down the signal? Yeah, I guess so. I'm not sure what a doping material means in a semiconductor context, but that's what gallium and germanium are in the and China was uh was restricting those uh those exports as uh as a I got a question before you and if you get this question right, I'm gonna give you a star and maybe I'm gonna send you something in the mail, okay? Yeah, that sounds like uh that sounds like you saying there's no way Clem can know this question the answer to this question.

Steve Davenport:

I'm just I'm giving you an opportunity, your brain is rested after 30 days sacki and sushi, and you've you know your body a high content in Mercury right now, but your brain is very capable. What country has the most Chinese spies located in its border?

Clem Miller:

What country has the most Chinese spies in terms of number of spies? Yeah, there's a number of spies. Well, I'm gonna say the US.

Steve Davenport:

Wrong. The Netherlands. Because the Netherlands of ASML? ASML China, since the US has cut off the sending of ASML equipment for certain leveled chips, uh China is trying to figure out on their own how to, you know. So I I think that when we all think about this technology race and we think of it as uh kind of a nice thing to follow on the weekend when we're reading Barons, it's really robot, real people trying to get ahead. And China is not fooling around. China wants to have the AI race in their favor. I think they've done a great job on solar, and they're probably the leading producer right now of equipment and and and solar technology, and I think they want to be the same in AI. Um, DeepSeek is coming out with a new version or a new rev of their um software sometime in December, which is another reason why I kind of believe that it's a good time to take some chips off the table, because the first time Deep Seek came out, everybody was shocked and didn't know much about it. Well, now everybody's been warned and they've gone back and they've made it better. And the question is again, is the US overspending on a lot of this development if China can develop Deep Seek and get production or capabilities similar to ChatGPT with you know one-fifth of the investment? Uh, I think that we have a competitor. And if we don't wake up and look at that competitor and then figure out how we can create alliances and other things to do to make up for that competitor, we're gonna um fall behind. And I think that the rare earths and what's going on with them, I believe are gonna be the um gating item that slows down AI. And if it does slow down AI, the the multiples of those companies based on deployment on more and more servers and more and more uses, um, will have to be limited. And if something like Deep Seat comes along and does it for a lot less, do people try to you know take more of a software approach instead of a technology approach to making the best AI? I I think it could transform what's going to happen in this space. And so, you know, when I look at what's going on with an OKLO, you know, up 625%, I say those names and those numbers don't justify when when you think about a real return on investment coming in, maybe three years, but closer to five years for quantum and other things. Uh, I I believe that we're you know we're in a point where there's gonna be a correction and a lot of people are gonna get shaken out. And these things, like the internet in 2000, and like you know, some of the things we've done in 2008 after the correction, people are not gonna be able to stay in as they see the declines happen in this AI space. So better to do something now, two percent off of the top, than something later when Deep Seek you know takes some people's lunch money.

Clem Miller:

I think so. Are you worried about China being the leader in AI? Am I worried about that? Uh yes, and I think we should all be worried about that.

Steve Davenport:

Um but I think you think they could leverage rare earths and and and punish the US to give them more access to chips, unless they hold AI over Trump's head and say, hey, without more access to chips, we're not gonna give you any rare earths.

Clem Miller:

Well, I think it was very interesting, you know, from from a Trumpian perspective, you know, tariffs are you know your all-purpose go-to cudgel for anything, right? And it was very interesting that uh you had this sort of departure from that uh when they announced you know some months ago, much to my shock, actually, uh, that if uh if NVIDIA and AMD maybe it was, uh gave 10% of their revenue uh stream from China to the US government, that they the US government would allow exports of these chips. I thought that was I don't know if that was sheer stupidity, which is possible, or whether there was some kind of underlying strategy to that. Um I just I just don't know. But um, you know, I I agree with your fundamental premise that that China wants to be the number one player in AI, and that they will you know do a lot to try to achieve that, including potentially do things vis-a-vis Taiwan, um, which is why it's very important, not just from Taiwan's semiconductor's perspective, but from the perspective of the rest of the world, that Taiwan semiconductor continue to build out its fab capacity in Arizona, in Japan, in Germany.

Steve Davenport:

Yeah, I mean, I ever everybody talks about that, but it's really just a drop in the bucket compared to Taiwan's impact on semiconductors worldwide.

Clem Miller:

I mean, some some ridiculous number, like 80% of uh the everything less than five nano, it comes from but it but it but it it comes it's made by Taiwan semiconductor, but a large an increasing percentage of Taiwan semiconductors sales are actually now manufactured outside of Taiwan. It's an increasing percentage.

Steve Davenport:

I mean, I've also heard from people who visited some of the new facilities in Arizona that they're having trouble finding labor force to staff. So we we can have the building, but if you don't have the people with the experience, guess what? It's gonna be hard for us to make Arizona chip capital of the world. Right.

Clem Miller:

I I think that's it. It's also a little surprising to me that that Arizona was chosen because they don't have the clean water or they don't have as much clean water, and clean water is a necessity for chip production.

Steve Davenport:

Yeah, I I just I think the political decisions about who gets subsidies and who gets um, I mean, we've talked about that is it's very hard to see how the government can make a decision about um what's the optimal capital when you should probably just let the people figure it out and let the businesses locate where they think is the right location because they they probably know. But I guess I'd like to kind of wrap on this rare earth and get to the point, which is is rare earth metals a reason for us to be concerned about the AI rally? Uh yes. And so does do you see it as a potential catalyst to some downside in AI?

Clem Miller:

Yes. I mean, I I would um I would say that if you're if if you're highly invested in in AI directly or indirectly, you know, you should pull some of that down and uh and put it into uh you know really just sort of build up cash.

Steve Davenport:

I'm not saying you should be in more cyclical sectors, but uh I wouldn't I'm just saying that I think everybody's expecting this US China summit uh that on the on the side of the you know Korean conference or the meetings between Trump and G, I I feel could be a turning point in not a good way. I agree.

Clem Miller:

I agree. I mean, look at what look at what happened with uh look at what's happening with this uh so-called Hungary, you know, Budapest uh Putin Trump summit on again, off again, on again, off again. I mean, you know, the just the the failure to interpret things, you know, how Witkoff failed to understand uh what the uh desires of the different sides were in the Russia-Ukraine concept context. I I just think that you know, we're dealing with an administration that is um has shown some competency issues, and I don't know, and and you've got foreign powers that have um a level of distrust uh towards the US uh on account of the current administration. And so I think that throws a uh throws a wrench into things too. So I I think you know the chances of successful, meaningful uh summits that lead to to you know anything other than kind of um showy results as opposed to substantive results. Performative results, let's put it that way, I think are you know small, right? I think we're I don't think we're dealing with a um with a an economic diplomacy that is uh anything beyond just performative. You know, I'll give you I'll give you an example, right? Not to throw shade on my uh prior organization that I was affiliated with, uh, but the Exim Bank, right, when they issued these uh letters of interest, what you know, they they're presenting them as if they're real uh real deals, right? Um but a letter of interest, I mean there are no exporters identified yet, as far as I know, right? They're just oh yeah, we're we're willing to uh to provide some financing uh potentially for uh US exports to these rare earths plants. So it looks like a signing, it looks like a deal, but it's not really a deal.

Steve Davenport:

Yeah, I mean, I I hate to say this because I don't have a crystal ball, but my implicate my implications of this meeting with Trump, I believe that if this rare earth you know gets to be worse situation and China withholds rare earths, I think we could see a 20% decline in the market. If we were to see, um, as I've talked about in the past, China do anything to blockade or to try to control Taiwan, I think we could see a 40% decline. Yeah. And both I think both incidences are not imminent, but they certainly are on the radar, and they should be on the radar for most of the time.

Clem Miller:

I wouldn't, I wouldn't necessarily uh agree with you on the exact on those percentages, right? I think it might be less. But but it is it is kind of interesting, and it is kind of interesting that if you look at the last few months of performance in the technology sector, the broad, you know, broader technology sector, you know, you've got some of the Mag 7 that have performed a lot less well than the hardware manufacturers like uh you know, like Broadcom and Arista and and uh you know Taiwan Semi and some others, right? Those companies have been doing quite well, whereas uh you know, you've got Microsoft and Amazon and and so on not not doing as well, right? So now granted, those are you know users of AI, they're the cloud companies, so they're part of the space, and maybe they're the canary and the coal mine, really. Um but I don't know. I mean, the hardware manufacturers have been doing well, so or the network, networking companies, the those who supply the uh like comfort systems, uh that supply equipment into the uh into the data centers. Those companies have been doing quite well. So it's kind of a mix. And I would say don't look at it as a as a single theme, uh, but rather you know, you got to be picky and choosy about which companies you're investing in.

Steve Davenport:

Yeah, I mean, I I just look at the market and say it's got a narrower. The the idea that it was going to broaden out and affect more things and uh and have a general rally. If you take away the AI names, and I know that there's a lot of them that have partials, like Google and Microsoft, they all have a component, but the market has no gains if you take away AI. And so we're up 15% on the whole market, but it's driven by 20 or 30 percent of the market, maybe 40% of the market that has 100% of the gains. The other 60%, not so much, and that's why the weakness in jobs, and that's why some of the other questions about this economy are still out there, and that's why I think the Fed lowered rates. I think the lower rates again, and I think they're lower rates again in in December. So those two lowers, but I think what we're seeing is it's not going it's not translating out into the seven and ten years. It's translating on the front of the curve, but it's not translating out to the far end of the curve where the US real estate market really needs it to be. So I think as we start to see uh a pullback here, whether it's rare earth or whether it's Taiwan, I think people need to be safe. And um, you know, it's getting it's getting dangerous out there, folks. And I hope you you realize and and just try to keep learning, as we are about rare earths and everything else that comes up on a daily basis that we've uh not heard a lot about. I think the moves in Australia and Canada are good. I think that some of the other suppliers are very unstable countries of rare earths. So we hope, you know, maybe we'll uh do some research and come up with a name that we think would be a safe name for people to invest in who want to own some rare earth exposure. Maybe that's you know, the the way to get this is not always through software. And as Clem's saying, hardware is doing a little better. And we've noticed that circa capital that yeah, it's it's software has been the weaker part of the uh technology space.

Clem Miller:

Right. There aren't there aren't many um there aren't many rare earth companies that you can uh that you can buy on the stock market. Um unless you're like investing um I was thinking of a larger mineral company like a real that might have rare earth components in it. Yeah, but uh as a small part of it, you know, they're more like copper and probably gonna get bigger, right? But there are there are some companies uh that focus on lithium. And uh uh for example albemarl, sqm, uh focus on lithium. And so again, lithium is not a rare earth, but it's you know it's important to the uh to the uh EV and batteries and whatnot. So okay.

Steve Davenport:

Well everybody, I think I think this has been a great discussion. And uh I mean, do you have anything else to add, Clint?

Clem Miller:

I would just say, you know, you use the term dangerous time in the market or whatever it was you said, dangerous. And I would say I agree that it's uh I wouldn't necessarily say dangerous, but I would say highly uncertain uh time in the market where you know you've got uh especially uh you know it's you've seen a lot of uh a lot of increase in the market lately. It seems to have plateaued. There seems to be a lot of volatility from day to day. Um, you know, the VIX is up, the volatility index or the fear index. Um, so I don't know if you want to call it dangerous, call it uncertain, but I think it's a frothy fourth. Right. I yeah, frothy fourth quarter. I would say, you know, if if you want to define froth as uh including both downside and upside, right? Um I I I I would I would say that despite the high uncertainty and the volatility, I mean Steve, I think you would agree with me that you you do need to stay in the stock market. Um maybe not 100%, uh, maybe not even 80% or 70%, but you gotta stay, you gotta stay invested.

Steve Davenport:

Correct. I'm not saying to get to get out. All I'm saying is think about taking profits to keep yourself in line and balance. Think about uh hedging a part of the market that you think could be more at risk, and think about, you know, I mean, if you need help, seek an advisor. Um, I work at Circa Capital and we try to help clients with derivatives and also with active management strategies. I think there are people out there who can help you to get to where you want to be in this market where you have exposure, but you also have some downside protection. And I think that as we move forward, putting on and taking off protection will be, you know, as taxes go up, I see the need for more protection uh as we go forward because I don't think people will be selling as much when and if we see an increase in tax rates, which I think given our large deficits is highly likely. So I I just want people to be aware that these risks are out there and um there are ways to mitigate them if you need help. Any uh so anyway, that's that's it for today. If you uh please like us, share us with your friends, and uh we'll look forward to coming coming at you in another two weeks with uh more episodes and more ideas to try to improve your investment IQ. Thanks everyone and have a great day. Thanks, Steve.

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Clem Miller, CFA

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Steve Davenport, CFA

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