AdamsNotes

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Expert: Louis-Vincent Gave

Date Recorded: 7.26.22
YT Link: https://youtu.be/YiM1fYZq0T8
PART1: Inflation Here To Stay As Globalization Dies?

We’re in an “ursa minor” (-20%) bear market right now. The danger is we’ll enter an “ursus magnus” one (-40%) as the major world economies slide further into recession.

  • Time
    for defense right now. That requires a different portfolio allocation than the standard 60/40
  • Recession risk by region:
    • Europe definitely in one. Things there look dire. Europe is in a full-blown energy crisis.
    • China looks to be in recession, too. Though China’s slowdown is mostly government-driven, which can be more easily reduced as things are opened back up.
    • US is a wild card. There’s likely still enough stimulus ‘pig going through the python’ to keep the economy propped up for a good while. Maybe it has a short & shallow recession, but it’s not going to fall off a cliff.

The energy-driven slowdown in Europe is likely to be inflationary. Will further disrupt global supply chains as less energy to produce goods (Eurozone economy now deeply integrated, so production shortages in one country will cascade across the others). Euro likely to continue to weaken vs USD (exacerbating inflation within the Eurozone)

Europe is fighting a 2-front war: climate change + Russia. That’s one front too many and both are exacerbating its energy crisis. Until policy shifts to sustainably addressing its energy woes, Louis doesn’t recommend deploying investment capital in Europe.

The Era of Globalization is now reversing. This is a massively important development. Geopolitical risk matters much more in this new era. For example: Industry is being weaponized now in a way it has rarely been before:

  • US weaponized semi-conductors vs China under the Trump admin
  • The West weaponized the financial industry against Russia after it invaded Ukraine
  • Now, Russia has weaponized energy fuels against the West

Ongoing supply chain shortages and inflationary price pressures are likely to continue in this environment

Globalization was profoundly disinflationary. Now that “it’s over”, secular inflation is likely to gain the upper hand. Those investors who don’t realize this and position as they have in the past are likely to be at risk.

China’s goal is not “global domination”; it’s “global independence”. Banning them from semiconductors has only fed its desire to be self-sufficient. 

  • Its biggest weakness today is its dependence on US dollars to get what it wants. It has a strong incentive to de-dollarize. 
  • With the boycott of Russia, the West has given China a tremendous gift. Russia is now motivated to sell resources cheaply to China in exchange for renminbi. This is also giving China more bargaining power to demand that other countries settle trade in its currency, too.
  • If they succeed in de-dollarizing, this will have HUGE implications for the opportunities available to investors in Asia (=will create a lot of new opportunities for big returns). Louis thinks China’s odds of winning are getting a lot better.
  • Louis thinks the big trend here will be the lowering of China bond yields (Chinese bond yields are now below US Treasury yields!). A similar playbook played out in Germany 35 years ago. Betting on rising bond prices in China and/or the Asian countries that benefit from trade with it should be a big tailwind to bet on.

PART 2:
[To come tomorrow, once video is released]

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