While most eyes are focused on what the Federal Reserve will do next, many of the most important developments shaping events here in 2023 are happening outside of the US.
Russia’s invasion of Ukraine upended the geo-political chessboard, as well as world trade and the energy & financial markets — and it continues raging on, over a year after its outbreak.
China, too, is making waves that all nations feel as it reopens its economy after years of COVID lockdown while its relations with the West continue to strain over Taiwan.
What large & long lasting implications will these global developments have?
To better understand the situation from a non-US perspective, we’re fortunate to welcome back to the program Louis Gave, Founding Partner and CEO at Gavekal.
Louis-Vincent Gave 0:00
The big macro trend of the next 10 years is that this global south is integrating ever faster for all the talk about D globalization, what we’re really talking about is the splitting of the world into these two blocks. But within each block you’re seeing accelerating integration, you know, more trade from Africa to Asia, more trade from Latin America to Asia. More fine from China in the Middle East, more trade from China and most more and more financial flows more investments from the Middle East into China. And all this is happening at at at an accelerated pace. And it’s going to increasingly happen in currencies other than the US dollar.
Adam Taggart 0:43
Welcome to wealthy on welfare and founder Adam Taggart. While most eyes are focused on what the Federal Reserve will do next, many of the most important development shaping events here in 2023 are happening outside the US. Russia’s invasion of Ukraine up into the geopolitical chessboard, as well as world trade in the energy and financial markets. And yet it continues raging on over a year after its outbreak. China too, is making waves that all nations will feel as it reopens its economy after years of COVID lockdown, while its relationship with the West continue to become more strained over Taiwan, what large and long lasting implications will these global developments have? To better understand the situation from a non US perspective, we’re fortunate to welcome back to the program Louis golf founding partner and CEO at golf call, Louis. It’s a pleasure to have you back on thanks so much for taking the time to join us today.
Louis-Vincent Gave 1:40
It’s my pleasure. Thanks. Thanks a bunch for having me.
Adam Taggart 1:44
Oh, great. Great. Well, I’ve been really looking forward to this, Louis, we have, you know, a surprising number of international viewers here at Wealthy on. And a very fair question I get asked pretty often is, hey, can we get some perspective outside of just the US? So with that said, I am going to ask you some questions, Pat, for us to kick things off, then we’ll get into the rest of the world. Real quick, though, let’s start with a question. I like to ask all my guests at the beginning. What’s your current assessment of the global economy and financial markets?
Louis-Vincent Gave 2:15
There’ll be an hour right there. I’m, you know how long winded I get you. But like my assessment is, to be honest, that things are extremely, extremely challenging right now, both on the structural front and the cyclical front. On the structural front, I think we have to acknowledge that there’s dramatic shifts undergoing on a number of key variables. The first one you alluded to already, is the fact that we live in a world of rising geopolitical tensions. And, you know, for now, it seems like we’re, you have a new Cold War unfolding itself. And we have to hope, of course, it remains a sort of new Cold War with sort of proxy battles such as Ukraine. But however you cut it, whether it’s a hot war or a Cold War, the sort of 30 years of era of peace, dividend of globalization, etc, is probably behind us. And that’s, you know, that’s probably inflationary. My friend, Luke Grohmann, likes to say that if, if truth is the first casualty of war, the second casualty is bonds. wars, wars, wars are fundamentally inflationary. You know, it’s, they’re, they’re, they’re bad business for fixed income investors. So that’s, you know, that’s that’s the first problem. A second very important shift is, you know, most Western and even some of the large emerging markets such as China’s, South Korea and others, are going through a very important demographic shift. I mean, we’re aging workforce are shrinking everywhere. And you see the consequences of it right? Wherever you are in the world, whether China, France, Germany, Britain, us everywhere, every entrepreneur has the same story they can’t find workers. Again, I think that’s the dearth of workers is an A new inflationary development that we haven’t had to deal with for 30 years, you know, for 30 years, I lived in a world where China alone was adding 20 million workers to the global workforce year in year out, keep workers, the cheaper workers just on unleashing them onto the global economy. And that’s, that’s over. So that’s, you know, a second big shift. We’re going through an energy transition. I think there’s big question marks over, you know, the global monetary system and whether the US dollar remains the, you know, the undisputed reserve currency of the world as it has for the past 70 years, partly because, you know, as we move into this new era of geopolitical strife, currencies are being weaponized. And so if you’re, if you’re in a country that is not so are friendly with the US right now? Whether the country in the Middle East or China or elsewhere, how comfortable are you? Keeping your assets and US and US dollars. And then so that’s for the structural elements, then if you look at the cyclical part of things, of course, you have a fed that is tightening aggressively now. But against that you have, you know, still very loose fiscal policies in the US, you still have municipalities, state governments, and even a federal government, that’s basically spending money as if it’s going out of style. So you get very sort of, I think, very mixed signals from on one hand, still very easy fiscal policies, big budget deficits everywhere. And on the other, you know, tighter monetary policy. If you look at internationally, I think the picture is less confusing. You know, the big thing internationally, you mentioned it, is China reopening. I think six months ago, most people were expecting China to have zero growth this year, or maybe one maybe 2%, at most. And here we are, I think we’re gonna have 6% GDP growth this year. And I know they’ve given themselves a 5% targets. But that’s just so that they can outperform. I think we’re gonna end up with 6% Chinese GDP growth, and you know, how many people have taken that into, you know, have adjusted their portfolios to the reality of a China that’s growing by 6%, I would argue, still very few because this is a brand new development. And so, you know, you have the world’s largest economy, ie the US where the central bank wants to clearly slow things down. And the second largest economy in the world, ie China, where policymakers clearly want things to re accelerate. So, you know, lots of cross currents here, and not obvious. And again, you know, all of that is fairly unprecedented. If you look at the last big rounds of Chinese stimulus in 2008. And in 2015, both times the US was also stimulating both times, the US also wanted things to get going, you know, post 2008 crisis. And so it’s the first time where you really have the two, you know, by far behemoths in the global economy going at cross purposes. And they’re going across purposes on every front, you know, they’re, they’re, they’re, they seem to be clashing on everything, not just monetary and fiscal policies these days. So, you know, to deploy capital in this environment is let’s not kid ourselves. It’s extremely challenging. And I think you have to do it with a lot of modesty, you have to do it, acknowledging that you’re not going to have all the answers, because there are just too many questions. You know, when there’s just one or two important questions. It’s a pretty simple decision tree. You ask your question, you go, yes, no. And then you look for the signs. When you have 6789 important questions. And each time you have yes, no, yes, no, yes, no, you end up with 64 different possible scenarios. It’s much more complicated.
Adam Taggart 8:01
All right. As we near the end of this discussion, I want to get into Okay, given that challenge, how are you thinking of capital allocation in this type of environment, but beforehand, we got a lot of wood to chop, because you just gave me an awful lot of topics that I want to dig into if you want virtually all of those. Let’s, um, let’s start if we can, with Fed policy. And I probably will revisit some of the structural things you talked about. But but but right now, you kind of most eyes are to the Fed, even on the day that, you know, the week that we’re talking here, Louis, we had the Fed, just speak yesterday, I believe. And, you know, Powell came out and was continued to be, you know, super hawkish to say, look, I’m going to keep hiking, Fed officials have come out and sort of continued to raise the trial balloon of hey, we may have to go above 5%, you know, maybe six percents the right new number. Higher for longer definitely seems to be the policy of the moment. I got a number of questions for you on this. But But real quick, as I was preparing for this interview, I saw that you were quoted in an article titled The Greenspan put era is over and not a millisecond too soon. Now that wasn’t quoting you. But But But the article had a quote from you in there. So I thought I’d ask you. Do you do is that title accurate? Um, is that?
Louis-Vincent Gave 9:31
Yeah, I think it is. I think it is over or at least, it’s been repriced, at a much lower price. You know, I still think if I also think perhaps the green, the green spend put today isn’t really on equity markets as much as it is on bond markets. Okay. That and I think this is what you saw in 2000. To be honest, when the COVID crisis hit, initially, equities sold off and the Fed did nothing. And it was when the US Treasuries sold off that the Fed stepped in and stepped in into a big, big way. Because fundamentally, and you saw the same thing, by the way, in England and Britain, sorry, this summer with the guilts, you know, the, the equity market was doing poorly and the Bank of England was like, Yeah, whatever, don’t care. And then it was tapped. The Bank of England was tapped on the shoulder and told, Well, look, if gilts yields stay at 5%, by the end of today, all the pension funds are bust. Systems dead, yes, especially some is dead. So we have to, we’re going to, to the Bank of England did a complete 180. They went from saying that we’re going to do que te to once again, we embracing quantitative easing, and going out and buying bonds at the long end. So and this comes down to a simple truth that, you know, most people think central banks have two mandates a mandate on inflation and a mandate on employment. The reality is that central banks have three mandates, they have a mandate, of course, inflation, of course, employments, but their most important mandate is they need to keep the government’s funded. They need the bond markets to stay functional. And if bond markets get dysfunctional, central banks have to step step in, because if they don’t, governments don’t get funded. And if governments don’t get funded, then they don’t get paid at the end of the month. And so I think there is still a central bank put, it might not be on equities, and it’s on government bonds. And I think there’s a good chance that we’ll get exercised sometime this year, with everything that’s on unfolding in the world. Now, having settled, as you know, on this discussion on the Fed, it is interesting that it is the core concern, the, you know, what everybody’s talking about all day long is the Fed, when when there’s perhaps much more important things going on, you know, this, these sort of new geopolitical tensions, this deglobalization, the Chinese reopening, for me, all of these are more important than whether interest rates go up 25 or 50 basis points. To me that that matters a whole lot more for the long term return profiles of the investments that I may wish to make. I think the reason everybody wants to focus on the Fed is twofold is first, we have an entire generation of investors, that has been brought up, excuse me for the net for the picture, but basically sucking on the tip of the Fed. Right. They’ve we’ve, we’ve just learned to live to be given things by the US central bank. And so when they when they take it away, we will start crying like big babies. But there’s a whole lot more going on right now then, than that. So that’s number one. And I think the other reason, and frankly, everybody focused on the Fed is that it’s something that’s pretty easy to measure. It’s like, okay, are they going to do 25? Or are they going to do 50? And you can spend all day discussing it, and then in a month, or in three weeks or in two weeks, you know, and you know, so it’s something to put on, put into your model. Right? It’s, it’s that old story of when Eisenhower was planning D Day, he asked the weather forecasters and he asked them in April, he said, you know, give me a weather forecast for early June, you know, what day is going to be better for lending. And the guy said, Well, there’s no way we can know, two months, two months in advance what the weather will be like, in early June in France, and he said, it doesn’t matter. I just need a forecast for, for my for, you know, doesn’t matter if it’s right or wrong, I just need to forecast for my model. And the same is true for the Fed, I think for a lot of people’s, you know how they conceptualize financial markets. So it’s easy, you know, am I gonna get 20 5am I gonna get 50 It gives you in essence, the the illusion of certainty. Something you can plug into the model, which you can’t do when you talk about Chinese us tensions. Right, which, which you can’t do when you talk about the rising tensions in the labor markets because of the lack of workers. These are hard things to plug into a model as opposed to a 25 or 50 basis points increase. So by talking about a 25 or 50 basis point increase all day, we can sort of avoid this other stuff, right? It’s harder to Harder, harder to consent to conceptualize harder to mobilize, but that ends up being much more important.
Adam Taggart 14:28
Okay, I want to get to those topics in just a moment. The thing I’m most interested in kind of getting your thoughts on around the Fed topic is. You know, one fed action influences a lot of the rest of the world like a lot of other central banks follow the Feds lead. And in right now it is.
Louis-Vincent Gave 14:53
I’m not sure that’s true anymore. I’m sorry to interrupt you, but it may not be obviously no no China China’s not That’s the second biggest economy in the world. But look, the when inflation first started to appear a couple years ago, most emerging markets said, Hold on, I’ve seen this movie before. And this, I don’t want to repeat, thank you very much. I don’t want a sequel. And so before the Fed even did anything, Brazil had already hiked 1000 basis points, Chile had already hiked to 800 basis points. And this comes down to the old story, you, you don’t make your father’s mistakes, you make your grandfather’s mistake. Remember, a year ago, a lot of Fed directors were still talking about how they wanted inflation higher for longer. You know, a year ago, they were actually still this time last year, they were still doing QE, you know, inflation was already at 6%. And they were still buying US Treasuries, right. So mortgage backed securities and mortgage backed securities. So you know, the, the idea that, you know, foreign central banks follow the Fed, in this cycle, emerging markets tightened much before the Fed. China’s always has been doing its own thing, but then China has always done its own thing. It’s a big enough economy. Plus, it’s got capital controls, so it can afford to sort of, you know, dance to the tune of its own drums. Japan is also clearly doing its own thing. And so you’re the Bank of England has now fallen off the cart. You know, they fell off the cart in September when they said, Okay, well, basically, we have to go back to QE. And I think the ability of the Bank of England to tighten is now extremely constrained. So you’re really left with the ECB? Which Yeah, yes, sort of sort of following the Fed in a haphazard way. But that’s around. That’s about it.
Adam Taggart 16:45
Okay, great, great. Great distinguishing, and that’s gonna get into our x us discussion here in just a minute. But what interests me about this topic, which I want to get your thoughts on is, we have the couple of things we have slowing growth. Right. One of the questions I’m going to ask you in a minute is, how much of a reprieve may China’s reopening give us on that, you know, sort of in relation to a possible global recession. But the Fed is increasingly finding itself in a bind here, right, where it’s now dealing with the inflation monster, which it didn’t have to deal with for the past bunch of decades, right? It’s raised interest rates really dramatically to combat that monster. But the monster is not dead yet, by any stretch. The higher it raises these rates, the more strain it puts on or overleveraged economy, and it makes it harder and harder for the government to fund itself. As you were saying, right? You the debt service costs become more and more burdensome as time goes on. So it’s kind of like what how does this resolve Do you think? Right, it? Because it sounds like you’re thinking that, you know, something may force the Fed, as you said earlier, to get to go back to easing because it’s got to rescue something like the bond market. But then inflation, you know, potentially comes back to life?
Louis-Vincent Gave 18:12
Look, I think where my my belief for a while has been that we’ve moved into a structural inflation environment. And this for a number of reasons, partly because of the knuckleheaded energy policies we followed for the past decade or so. Partly because of the rise of geopolitical tensions. And against this, you know, monetary policy is, you know, what can monetary policy do about rising energy costs? What can monetary policy do about the fact that the US wants to produce less than China, and therefore, it needs to move production back to much heavier, much more expensive destinations? You know, it’s
Adam Taggart 18:56
nothing except maybe make it worse? Yeah,
Louis-Vincent Gave 18:58
exactly. By making capital spending more expensive and therefore, harder to achieve. So, look, I think we are in this inflationary environment. The one thing tighter monetary policy can do is at some point, break the pat on the back of the unconstrained fiscal spending we’ve seen in the US and in most other Western nations. So the age the age of zero interest rates, obviously led to I think, promoted bad behavior, excess financial speculation, etc, amongst private market participants. But it also meant that governments of course, never had to account for stupid spending, you know, 0% interest rates, promotes really bad behavior from governments. And so I think the eventually, this is what will break. So this brings me to your question on, you know, what does China’s reopening mean for us? I guess it all depends on who the US is. You You know, China, because different countries will benefit disproportionately from China’s reopening. You know, I think China’s growth is gonna be very strong this year. And when China does well, usually Japan does well, South Korea does well, emerging markets do well, Europe manages to to benefit from from rising Chinese growth. Historically, the US a lot less for a simple reason is that the US economy is first and foremost about the US consumer, you know, exports are really a fairly marginal factor into the overall US GDP growth. At the best of times, but let’s not also kid ourselves that, you know, the whole D globalization, let’s reduce dependency on China knife cuts both ways, you know, as the US, you know, bless China, China also wants to do less business with the US, it’s, you know, it’s not not that surprising, since, and I think we talked about this last time we chatted, but since President Trump destroyed Huawei in 2018, every Chinese CEO has spent the past five years trying to de dollarized, their own supply chain, nobody wants, nobody wants to be hawkweed. Nobody wants to be told from one day to the next, you can’t buy that essential piece of machinery or that essential, intermediate good that you used to buy in the US, you can’t buy it anymore, and therefore your business implodes. And so as China rebounds, I think what we’re going to find is that you’re going to see very strong Japanese exports into China, you’ll find very strong European exports into China, and you’re going to find very weak US exports into China, because the, the, again, the every CEO has spent the past five years D americanizing their, their supply chain. Now, which brings me back to okay, if you’re the US, the big and the big growth story in 2023 2024, will be the China story. And, and you’re not going to really participate in it, then then what are you left with? Well, you’re left with an economy that will likely disappoint, and that will likely disappoint at a time when other economies are actually most likely, outperforming expectations. And so that I think that that will be, you know, weaker US dollar, they’ll put with a weaker US dollar, I’ll put the Treasury market under, under under further pressure. And that brings you to the real quandary, which is, you know, the real purpose of tighter monetary policies, is to put fiscal spending back into its box, to basically bring fiscal discipline to the various branches of the US government, whether it be at the municipal level, the state levels at the federal level. And frankly, we’re not there yet, right? Things haven’t broken. On this front, you haven’t had any politician really stand up and say Enough with the spending, as you saw with, say, Margaret Thatcher in the 1980s, in Britain, as you saw, frankly, with, you know, Bill Clinton, when he came to power and, and along with Newt Gingrich brought budget deficits into the US back into equilibrium. Instead, you know, you’ve gone from 3 trillion debt in 2000 to 31 trillion debt today in the United States, so much so that, this year, that serve as the debt servicing costs of the United States are moving from $800 billion a year to $1.3 trillion in a year, yeah, $500 billion increase, now $500 billion increase, you know, that’s a bite. Now, here’s the bad news, it’s going to be if things interest rates stay the same, it’s going to be an another additional 500 billion next year, because of the way the debt rolls over, because so much of American debt is at the short end. So, you know, I think, you know, everybody’s saying, while looking around saying, Oh, the Fed hiking is gonna break something, they’re gonna break the real estate market, or they’re gonna break the consumer, or they’re going to break the foreigners because the dollar is gonna go up too much, etc. Look, what the Fed needs, what needs to happen is for the Fed to break us government spending, and I think that’s in invariably that’s, that’s what will happen, and it’ll happen. First, you’ll see a meltdown in US municipal bonds and state government bonds and in and in federal bonds themselves.
Adam Taggart 24:36
Alright, so you’re looking for trouble in the bond market? Absolutely. In let’s let’s just pull in that string for one second, about getting to the fiscal spending under control here, because you’re right, you know, I can say this as Americans, you know, we just have no, no backbone or appetite on Capitol Hill right now for belt tightening for austerity. And and the voters aren’t aren’t asking for it. In fact, they’re asking for the exact opposite, right? Like, hey, can we start those stimulus checks back up again? Guys?
Louis-Vincent Gave 25:09
They were nice. They were nice. I’ll have some more please. Yeah, exactly.
Adam Taggart 25:12
So if we ended up getting trouble in these markets, how do you how do you see us getting to the realization that we’ve caused this, and we need to, you know, get our spending under control, versus just going back to doing what we like to do, which is just okay, you know, bailouts of everybody. But I
Louis-Vincent Gave 25:30
think the trouble is already there. To be honest, if you look, you know, everybody looks at the shape of the US yield curve, and says, All you know, you got a big inverted yield curve never had been inverted this much or not, since, whatever, 30 years, 40 years. And, therefore, we got a huge recession coming, etc. Like, how many times have you heard this in the past few months? Yeah. Now, if, if if I had a martini every time, I’d heard that I’d probably be drunk more than drunk, I’d be dead by now.
Adam Taggart 25:59
And I’ve probably said it myself several times.
Louis-Vincent Gave 26:03
But here’s the interesting thing is why is the two year selling off as it is, and not the 10 year? And I think it has a lot to do with the term structure of debt, you look at the term structure of debt, and basically all of the US debt is zero to three years, like almost all of it. There is there’s been no issuance at the long end whatsoever. Now, you know, that the demand for debt is at the long end. It’s, you know, your insurance companies, your pension funds, they need long dead long dated debt, and the government isn’t providing it to them, because all the government is doing is issuing short term debt. So yields at the short end, go through the roof yields at the long end don’t because of the lack of supply. And
Adam Taggart 26:50
I’m sorry, can you just clarify for folks why you think there’s a lack of supply there? You know, what, why the
Louis-Vincent Gave 26:56
government? The government hasn’t issued 10 years, they’ve just been issuing one year, they’ve been issuing one year, two years.
Adam Taggart 27:04
What’s the government’s rationale for that? Do? You know?
Louis-Vincent Gave 27:06
I don’t know. You should ask them. I think it’s a huge mistake. I think it’s a huge mistake. I think they did it. In the Trump years. They did it because it was cheaper debt this way. And they thought interest rates would probably stay low forever. Yeah, I think they’ve been I think they’ve been surprised by how quickly things things have turned around. But if they they should have done what the Austrians did three years ago, which is Oh, you like the 0%? Interest rate paper? Here have 100 years? 100? Year? Yeah. Here’s 100 year, the Italians did 50 years, the Brits did 50 years. It’s like, Oh, you like this paper have have it? I think that 100 year, Austrian bonus trading in like 26 cents on the dollar now. It’s, they’ve crushed it, you know, well done the Austrian treasury, you know, if I was an Austrian taxpayer, I would, you know, give these guys a medal. It’s like well done. The US government did exactly the opposite. The US government massively during the years of 0%, interest rates shorten the duration of their debts to save a few basis points. But it’s a few basis points that are going to end up costing it a lot, I think, over the coming years, because now that interest rates are, are lower for for longer, sorry, are higher for longer rolling over that debt, as we’re saying you move from 800 billion a year to 1.3 trillion a year. While most European countries don’t really have that to rollover, so their cost of funding that the the interesting thing is, if you look at the past, really, four or five, six years, every US consumer basically extended the time of the term of their death as much as possible. I believe. Everybody locked in 30 year mortgages at 3%. Everybody, everybody in America did that. So much so that 99% of mortgages today in the US are below the current mortgage rate. You know, everybody? Well, well below No, no, it’s so every Lockton everybody did it except the US government. The US government went exactly in the opposite direction, and said, Yeah, I’m going to issue all my debt at the short end, basically, rolling paper. And today, everybody runs around saying, Oh, the big problem is going to come in with the US consumer. Well, no, no, they were smart. They locked in 3%. And they’re sitting pretty. The problem is going to come with the idiots who didn’t roll over their debt. Who went who didn’t lock in long term interest rates and went for the rolling debt. They’re the guys who are going to be squealing
Adam Taggart 29:42
Wow. All right. So in to get back to my question. Is your logic then okay, US has got a ton of short term debt that because interest rates are going up. That is going to balloon the debt service cost which is going to eat more and more of just the veil. more money to spend stuff on. And that is what’s going to force the, you know, the rationalizing on fiscal spending
Louis-Vincent Gave 30:09
at some point. Absolutely. And it’s, you know, the US will will have to tighten its belt and they’ll have to decide, okay, what what do we give up on
Adam Taggart 30:19
it that started around, wrap it in your answer, I’ve asked this related question recently to folks. And an answer that’s come up is, hey, expect taxes to go up, or new taxes to be put out there, like a VAT tax?
Louis-Vincent Gave 30:29
Yeah, you can expect new taxes, whether that makes new revenue is, I think up in the air, you feel like at the US, you know, you’ve had all sorts of tax rates, since World War Two, you’ve had marginal tax rates as up as 70%. And, and you know, as low as 20%. And everything in between. and, and if you look at tax receipts as a percentage of GDP, it’s always been between 20 and 22% of GDP, the US tax intake every year is 20 to 22% of GDP, regardless of the tax rate. So you know, knowing this, you know, the, the logical thing would be for the US government to say, Okay, let’s just do a 22% flat tax and be done with it. You know, take 22%. And, you know, that’s what we take anyway, rather than, like, come up with a 7000 page textbook, because that’s what it is now.
Adam Taggart 31:24
And you’re asking me for logic, logical thinking of the guys that just ended up for sure. Call their debt short term debt? Yeah.
Louis-Vincent Gave 31:30
But actually, actually, you know, you have, I tend to believe that the reason you have a 7000 page tax code is that just like in France, we have a 4000 page labor code, is that there’s enough in there that if the government wants to come after you, they’ll always be something they can come after you with? And, you know, if you have a flat tax, then, you know, the, you can’t, after all, Al Capone was done for tax evasion. Right. Setting up setting up the precedent that has been since then used many a time to to get people to just plead guilty. So leaving, leaving that aside, if you look at you know, your the broader question, you know, can we raise more money through taxes? Maybe, maybe not. The reality is, US tax receipts this year will be worth 4.84 point 9 trillion, you’re going to spend 1.3 trillion 1.21 point 3 trillion on interest expense, you’re going to spend 2.6 trillion on Social Security, Medicare and Medicaid. So that brings you to about 3.9 Out of the 4.8. So that leaves you 900 billion for everything else. Now, if you want to continue giving 100 billion a year to Ukraine, that leaves you with 800 billion and 800 billion to fund the roads. The Army oh, by the way, the army itself cost 900 billion, right? So, so now you have no money, you can’t pay anybody, you have no money. So, you know, then you’re gonna have to decide what what gets cut.
Adam Taggart 33:10
And thenthere’s entitlement spending. And this was something that Luke Roman, who you mentioned earlier, has been warning about for a long time ever since short term rates started their move, right? Yeah.
Louis-Vincent Gave 33:18
So I think all this to say that it’s a long winded answer. But the ability of the Fed to keep on raising interest rates when so much of the US debt is at the short term, to me is limited. So I think invariably, where we’re going to end up is, we’re going to end up in a situation in the coming six months where it looks like inflation is rolling over. And the Fed will be able to declare victory and say, Okay, we did our job well done. Well done US inflation is back to 4%, which is where they wanted it all along. Anyway, they don’t want to come out and say it. But, you know, if you go back to what they were saying 18 months ago, that’s basically what they were implying. They want higher inflation to basically eat away at the value of total government debt. That’s the only way you come out of this, this current predicament so you don’t get inflation to 4% declare victory. And And there’ll be that and once that becomes clear to the market. I think the US dollar rolls over hard. Or there’s another alternative is that inflation never comes down or comes back strongly. And again, the Feds ability to do much about it is constrained by this by the all this debt spending and the debt levels in and that’s your stock so I you know, I think the Fed maybe has another 50 Maybe 75 basis points in it at most and beyond that if you go much higher you start getting into debt crisis territory.
Adam Taggart 34:48
Okay, so got it got a couple of number of questions outside the US but but let me do lightning round with you to roll out the finish up for us here. Is the Fed going to probability the federal be successful in pausing rates at some point soon and holding them there through the rest of this year in the next year?
Louis-Vincent Gave 35:09
Yeah, I think that’s high. I think they’ll they’ll do again, I think they do another 5075. And, and if they haven’t cracked the bond markets, if that doesn’t crack the bond market, then they’ll pause and stay there. If it cracks the bond market, then they’ll roll over.
Adam Taggart 35:21
And that’s kind of what I’m asking is, do you think they’ll be able to hold it there? Or do you expect the bond market or break
Louis-Vincent Gave 35:29
in the bond market? I think for the bond market to break, we need oil at 150 bucks first, I think it will be energy that ends up most people look to the Fed, most people look to interest rates to break the back of the current, you know, current asset prices of equities of bonds of economic growth in general, I don’t think it’ll be done through interest rates, I think the break will come from energy. So as long as energy doesn’t go to 150 bucks, then yeah, the Fed can maintain interest rates where they are and things will stay on an even keel. August 250 bucks, you get your bond market meltdown, your you get your equity market meltdown, and the Fed is then in a real pickle. The reality is the the uncertainty is not the Fed, the uncertainty is energy. That that will determine everything. And that’s why I’ve been saying for the past few years, forget bonds as a portfolio diversification, your true portfolio diversification is energy. And there’s many different ways you can play energy. But you need to have a lot of energy in your portfolio, because if and when the markets really break down, it will be triggered by energy.
Adam Taggart 36:38
All right, hold that until we get to the capital allocation part of the discussion. And we’ll we’ll dive deeply into that because folks are going to be really interested in that. And I want to give a quick note that, on that exact topic of the importance of energy, wealthy on his upcoming conference, which is in a little over a week and a half, we have Bloomberg, they’re speaking exactly on this topic. And I just recorded that discussion with Bloomberg. It’s a great discussion. So if you’re interested in energy, in addition to hearing what Louis is going to tell us in a few minutes, go to the conference. In fact, a quick plug for it, go to wealthy on.com/conference. You can register for it there. Alright. So Louis, getting back to our rapid fire here. So it sounds like what I’m saying hearing you say is, look, especially if oil goes 250 and the bond market breaks down. That’s really bad. But even if the Fed holds rates for the rest of the year here, it seems like you know, that’s going to really continue to depress economic activity here in the States. And I’m not sure it is. I’m not sure it is. Because that’s the question I want to get to the question when you get to is what do you think of the recession odds in the US this year? Maybe? Not so high?
Louis-Vincent Gave 37:45
Yeah, I don’t think they’re as high as most people fear fear them to be, look, I think we have a very tight labor market. I think wages at the low end are going up. I think social security payments at the low end are going through the roof, I think the cost of living adjustment was up what 8.7% This year or something that’s an extra $165 per month per per Social Security recipient. And that’s money that gets spent, you know, the so all the people who, you know, work in McDonald’s, Walmart, who are getting social transfers, they’re getting more nominal dollars and never have that wages are going up. Their labor market is still tight and real wages are going down. But yes, and but that money is getting spent, that you know, all of that money is getting spent. And you know, most businesses think, in nominal terms more than more than real terms. So, you know, you’re still seeing rising sales at businesses you’re still seeing so and that’s the reality of inflation is your first sort of 567 percent kind of feels nice, actually, if you’re running a business, if you’re a wage earner, especially at the low end, perhaps not in the middle class, but at the low end, it doesn’t feel that bad. And so no, I don’t buy the recession story at it. Well, I don’t lose much sleep over it. Because look, my point my take is, it’s a bit like what happens if you throw a recession and nobody loses their job, which is where we are right? For all the talk about isn is below 50 inverted yield curves, which I don’t believe is a valuable signal on this inverted yield curve story, since it’s the one that gets bandied about the most, the UK, Australia have spent a better part of the past three decades with inverted yield curves. And that didn’t mean they had recessions. And if you look through the 1950s 60s and 70s. The inverted yield curve was a horrible indicator never told you anything. I think there’s there’s, for me, the main message on the inverted yield curve is just the messed up supply dynamic of and the term structure of US debt. You know, it’s just there’s there’s not enough supply the long end and to my To the short end, that’s it.
Adam Taggart 40:01
Okay. Well, your answer makes my next question even more interesting. So it sounds like you’re not that worried about the US going into recession anytime soon.
Louis-Vincent Gave 40:13
Now, I want to be clear, I’m not super excited about US growth. You know, I’m not, I’m not yet.
Adam Taggart 40:18
Louis-Vincent Gave 40:19
I’m not. I’m not like, I just think the whole US is going into a recession, etc. I think it’s a red herring. And if I look at the market, you know, the worst performing sectors this year are healthcare utilities and staples, like exactly what you would buy if the US was going into a recession. Right, exactly what you would buy with an inverted us yield curve. And yet the sectors are being complete dogs, and they would have been dogs with fleas now for a while. So, you know, when you look at the equity markets, that the message from them, isn’t that you know, you’re you’re facing this, this big recession doesn’t mean you can’t have a small recession. But I think that that whole discussion is a bit of a red herring, to be honest, relative to some of the bigger issues that are that are unfolding right now.
Adam Taggart 41:07
Okay, and I’m desperately trying to get to them. Sorry. No, no, no, no, no. So So you we talked at the very beginning about China’s reopening here, right. And so the question I have with it is, as you talked about the company, the countries you think will do well for it, you will do well from its reopening. But in terms of the global economy, how big of a deal do you think you’re going to this is going to be is it going to be kind of like a sugar rush? Right? Where, you know, this gets unleashed, and everybody feels good for a couple of quarters, but then it kind of just trickles away? Or is this something that’s going to have much more long lasting impact?
Louis-Vincent Gave 41:44
I’m going to cop out on this one, I’m going to guess I’m gonna say it’s too early to tell. I think what you’re seeing right now, you know, enough called this in a number of conference conferences I’ve given etc. I’ve called as the sheep of a debris that was looking for the Fed pivot. But instead we got the sheep of it. And it wasn’t so much the pivot about COVID policy, as once China decided to reopen, the Chinese government also got rid of the red lines on real estate lending, they’d recapitalized the local authorities to get capital spending again. And for a very simple reason is the Chinese government now needs it needs to build goodwill again, you know, with their three years of crazy COVID policies, they’ve managed to piss off most of the population. And so now
Adam Taggart 42:30
you’re talking about their domestic population? Partners? Yeah, yeah.
Louis-Vincent Gave 42:35
No domestic population, the trade partner is actually one that affected to be honest. You know, if, if you were you know, if you’re Apple, you could still produce in China. If you are Tesla, your factory was still working. So no, they’ve pissed off their local population. And that, to me, is the very important shift happening in China today is that, you know, for my whole career in China, there was always huge buy in from local population, visa vie, the Chinese Communist Party, you know, the belief was, we used to be here, and now we’re here and we’re heading here. These guys are doing a great job that the best technocrats around. And after three years of COVID policy, all of a sudden that belief has been shattered.
Adam Taggart 43:12
These bastards have been my jailers the past Yeah,
Louis-Vincent Gave 43:15
exactly. It’s been it’s, you know, and, and by the way, I think, pretty much any right thinking person anywhere in the world, looking at their own policymakers should be thinking, I used to think you guys were smart, but after what you pulled over COVID I think you guys are dimwits. Everybody has the right to think that perhaps except the Swedes, since the Swedes were the only ones to do not follow the stupid lock downs and mask mandates and, you know, vaccine mandates and whatever else. So the Swedes, like the Swedes should be proud of their governments, everybody else should be really embarrassed. But China amongst them, you know, China for sure. You know, they they kept this thing going for too long, except perhaps with the with the exception that they didn’t do the vaccine mandates. But they kept this thing for too long. And so now they need to change the story they need, they need to feel good feeling. And so that goosing it up, they’re you know, they’re goosing up the economy. And that’s why I tend to think that this is going to be more than a sugar rush. Well, depends on how long you call a sugar rush. But I think this is a story for the next 12 to 18 months. Now, whether beyond that it builds its own momentum, or to your point, it just creates like this huge momentum for 12 to 18 months and crashes on the other side. I think it’s a bit early to tell. But I think the next 12 to 18 months in China going to be strong.
Adam Taggart 44:33
Okay, I am no China expert, you know, worlds more than I do. I do talk to folks who say, hey, for the narrative that we we had over the past decade of hey, at some point, we’re all going to be working for a Chinese overlords. They are maybe increasingly skeptical of that just saying look like China’s got a lot of internal problems of its own and certainly, you know, what’s been going on with the real estate market is great Exam. For that, how well positioned is China from here?
Louis-Vincent Gave 45:05
Look, the funny thing about China is it does trigger these passionate feelings amongst people where people will either explain to you that China’s this horrible House of Cards, that it’s all about to implode, and it’s, you know, it’s all going to collapse. Or, alternatively, indeed, that if you don’t learn Chinese, you’ll never get another job. There’s there’s sort of nothing in between, which always struck me as, as somewhat odd. And yeah, you know, to your point, China has some real challenges. You know, we mentioned the demographic one. There’s, there’s a policy one today, where, you know, China did have the big comparative advantage of having massive buy in from the population, policymakers having massive buying from the population. I think they’ve lost some of that in the past three years. You know, the real estate situation right now? No, it doesn’t prevent me from sleeping, for a very simple reason is China is the one country in the world where mortgage rates have just gone down 150 basis points. You know, what other country in the world has seen mortgage rates go down? 150 basis points in the past 12 months? The answer? Yeah, the answer the reality right now in China is, you know, for three years, people did nothing but go to work, and go home, you know, no, going to the restaurant, no, buying yourself a new car, no going on holiday work, go home. And so they’ve saved up a lot of money. You know, household deposits have never been this high. And now you come out of confinement and you realize, hold on, for my same mortgage payments, I can buy an apartment that’s 30% Bigger. Am I going to do that, perhaps, or perhaps Oh, I can buy a Mercedes for the same price, the same monthly payment as a Toyota, maybe I should upgrade my car. Or maybe I go on a foreign holiday. I don’t know how the Chinese are going to spend their money. Obviously, it’ll be individual decisions by everybody. Or maybe they’ll do what the US did, and embrace financial speculation into all sorts of crazy stuffs whether whether cryptocurrencies or SPACs, or, you know, peloton, or whatever else the US did, when you when Americans had a lot of cash in their pockets. But today, Chinese have a lot of cash in their pockets. And historically speaking, they have had this tendency to deploy it in real estate. You know, it’s, that’s, that’s what they’ve historically done. And so with mortgage rates at record lows record cash in their pockets, I don’t see this as a sort of backdrop where I all of a sudden have to worry that real estate is going to crack. Quite the contrary, I think it seems the odds are decently high that real estate prices rebound.
Adam Taggart 47:48
Okay. I can ask you so many more questions. But I’m going to try to keep this going. Because I do want to get your capital allocation at the end here. But I want to tackle some of these big, you know, structural issues you mentioned. So staying on China for a second, but pulling America into it. So let’s talk about the increasing strain in the sino US relations in I guess, maybe the Taiwan Flashpoint? How concerned are you about the direction that’s heading? You know, there’s there’s definitely headlines out there that say, war is brewing, you know, war storm clouds, some people are on the social media channels saying it’s imminent? Is that something that you worry about?
Louis-Vincent Gave 48:33
Like whenever you see headlines about wars, it’s it’s never a great news. And it definitely means if nothing else, that the willingness and ability to invest for the long term is compromised. Right? The those clouds so so of course, it has to be a concern. Now, do I think China is about to invade Taiwan? I don’t. I think people completely underestimate the just the simple logistical and military challenges of such an operation. You know, while it’s easy for Russia to send tanks through cornfields, and wheat fields into Ukraine, time once it’s more than 100 miles off the Chinese coast. It’s, it’s a chain of mountain 12,000 that go up to 12,000 feet that fall into the sea. There’s basically three beaches that are big enough to do an infamous landing on so it’s very, it’s a natural fortress, so much so that in World War Two, you know, when the US started to, to roll up the various islands and thinking, Okay, we need to build to gain assets from which we can fly sorties into Japan. Initially, they looked at Taiwan, and the US military itself decided Taiwan is impregnable. We, we can’t take Taiwan and that’s when the US decided to take Okinawa. Instead, they bypassed Taiwan, and went went straight to Okinawa because they figured that invading Okinawa was logistic equally easier than invading, invading Taiwan. So, you know, simply put China as an untested Navy and untested Air Force, an untested army hasn’t fought in the war since the late 70s. When it got its its ass kicked by the Vietnamese. You know, the odds of China trying to pull this off, for me is slim to none. The regime realizes full well that if they pull this off, and it fails, that basically it could be the same thing as Argentina trying to invade the Balkans, it’d be the end of the regime. So it’s, you know, why why take that risk. The the only reason you take that risk is if one of two red lines have been crossed. And those red lines have always been no new independence for Todd Tomlin doesn’t declare independence, and no foreign troops should be stationed in Taiwan. And here, this is where, of course, the US has been rattling the cage, because the US recently announced that they were sending 200 Marines to Taiwan clear, you know, crossing a clear red line for for China making a bad situation worse. Now, where I think this all ends up is actually a year from now, you have an election in Taiwan. And the Taiwanese themselves have very little appetite to be the next Ukraine on surprisingly, you know, who wants to who wants to be the next Ukraine. Now, historically, Taiwan has been very divided as a country, like most countries politically, you’ve had the Democratic Party on the one hand, that is, you know, fairly pro independence. And the Kuomintang chenko checks or party, which is much more pro China or more pro China ties, much like do business with China, etc. Now, in nobody talked about in the Western media, but six months ago, you had municipal elections in Taiwan, where, to everybody’s surprise, the Democratic Party basically lost every major city, the combing tone, ran away with it. The message for me that came out of the polls was pretty clear, is we don’t want to be a geopolitical football. Thank you very much. And, and I think in a year’s time, what you’re going to see is the coaming, tone, get elected. And, and once that happens, once US politicians come out and say, Hey, I’m going to visit Taiwan this month, the Kuomintang will say, Please don’t just stay home, please don’t, you know, just we don’t need you stay home. And when they’ll say we’ll send it to the Marines over, they’ll say, actually, we don’t want them. And, and, you know, I think once the Wilmington gets elected in a year’s time, China will be a whole lot more relaxed about the situation. And the ability of the US to rattle China’s cage, by using Taiwan will be greatly diminished.
Adam Taggart 52:48
Okay. In some ways, maybe we can hope for that. Because that does
Louis-Vincent Gave 52:52
know for sure. Not in some ways for sure. Yeah. Like who wants who wants a nuclear war between, you know, look, look at it this way. If I wasn’t American taxpayer, which thankfully, I am not, because I’m not American. And I’d look at the past 20 years, and the US decided to fight a war in Iraq, which was a disaster. And the US decided to fight a war in Afghanistan, which was also a disaster, both of these wars ended up with embarrassing defeats, massive loss of blood, massive loss of treasure. And I would say a loss of prestige for the United States on the global scale. To turn around and say, you know, what, the following these two experiences, let’s fight a proxy war against Ukraine, and perhaps a full on war with China strikes me as, as just absolute might be just mind blowing madness. And it’s also, I think, nothing that the American people themselves wants, you know, like, who in America wants a war with China? You know, who wants to send their kids or even themselves die in the South China Sea? Nobody, so it’s not going to happen.
Adam Taggart 53:58
Okay. Hopefully it does not. If what you think happens happens? Do you see a fIying and increased, you know, Olive Branch, and hey, let’s figure out better ways to work together? Or Nope. Okay. So, in your answer to that, if you see China, you know, Ally is continuing to ally even further with Russia, and you know, some of the other sort of BRICS countries and creating its own sort of block. And I’ll tack on to that. Is there a danger? If not have a hot war with China of a true Cold War? Sort of like we had with the Soviets?
Louis-Vincent Gave 54:37
Yeah, no, look, I think the world is increasingly splitting between a western world that is, you know, decently united, and perhaps as most united as it’s been in long time. And you know, for lack of a better word, and it’s, you know, Western world that of course, includes countries like Australia and New Zealand that are not at all in the West, but they’re just, you know, culture wasn’t culture and, and, and a global cells that includes countries like China or even Mexico that aren’t in the south at all. Now, the big macro trend of the next 10 years is that this global south is integrating ever faster for all the talk about D globalization, what we’re really talking about is the splitting of the world into these two blocks. But within each block, you’re seeing accelerating integration, you know, more trade, from Africa to Asia, more trade from Latin America to Asia, more fine from China to the Middle East, more trade from China and most more financial flows, more investments from the Middle East into China. And all this is happening at at at an accelerated pace. And it’s going to increasingly happen in currencies other than the US dollars, it might happen in Indian rupee might happen in renminbi, it might happen in Brazil and we eyes it’s going to happen in in other currencies, you know, all this trade. And no, no. So. And, to be honest, I think something has been broken between China and the United States. I don’t think it’s coming back. You can’t put Humpty Dumpty back together again. You know, the, I think in America, they feel like China’s being very provocative, but the China feels the same way about the United States, you know, sending troops to Taiwan, banning sales of semiconductors, you know, the view is there, you know, if you’re Chinese that the US is trying to to contain our growth and, and prevent us from from achieving our economic destiny. So, yeah, I don’t think we move away from that feeling on either side. So the one concern I would have when it comes to asset allocation is that if you look at this unifying Western world, increasingly, that unifying western world is becoming increasingly less attractive as a destination for capital from emerging markets. And here, you know, you and I have talked about this in the past, but the decision to seize the Russian assets was a watershed decision where all of a sudden, if you’re standing, if you’re Chinese, if you’re Saudi, if you’re behind, if you’re Qatari, you look at how Russian assets were seized, and you think it’s the Russians today could be me tomorrow. So I don’t want to deploy assets in the western world anymore. Given these rising geopolitical tensions, I’m not certain of the safety of these assets. And the reason it matters is what we were discussing earlier, is most Western countries, the US but also Britain, also France, are running massive twin deficits. You know, we have you had the current account deficits and the budget deficits of France and Britain, the US, you’re talking 678 10% of GDP. And historically, the way that circle squared itself was, we sold overvalued London real estates to Saudis, we sold overvalued US Treasuries to the Chinese, we sold overvalued Vancouver real estate to the Chinese. So we bought goods from the Chinese, and they took their dollars and bought overvalued Vancouver real estate. And that’s how everything washed itself out. But if now the Chinese no longer want to do that, or even worse, we don’t want to sell it to them in the first place. Then all these trade surpluses that China accumulates, now China sells $50 billion worth of goods to the US every month. Well, if that money can’t come back into US Treasuries, it’s got to go somewhere else. And that somewhere else is going to be Singapore real estate is going to be Dubai real estate. It’s going to be Brazilian bonds. It’s going to be Indonesian bonds. And all these other things that it goes into, are going to rewrite massively. And I think this rewriting is started. You know, one of the amazing stories that nobody talks about if 2022 was the enormous outperformance of emerging markets, bonds, and and also a number of emerging market equity markets, India, Indonesia, Brazil, Mexico, they were all up for the year, in an environment where global equities were down 20% where the US Dollar was up, or China was doing badly, where basically, every macro trend was a negative one for emerging markets, they outperformed. And for me, the explanation is very simple. We now live in a world where emerging markets that for 25 years, we’re always being redeployed into develop markets, go savings, those emerging markets, savings are not going to stay in emerging markets. And so the rewriting of emerging market assets has started. And it’s the big trend of the next 10 years.
Adam Taggart 59:33
That is really interesting. And that is a sea change. That’s a great transition to the market outlook because I actually have a chart that goes along with the statement you just made real quick before I asked that question, make that transition. Is there any I mean, we didn’t even really talk about Russia per se or the Ukraine war that much. Is there anything on the global structural front that you want to talk about, before we wrap that part of the discussion up to make sure I’m not leaving some massive elephant out of this discussion.
Louis-Vincent Gave 1:00:08
No, like, obviously, the Russia war is the elephant in the room. But I’m not gonna pretend that I’m a Russia expert, because I’m absolutely not. I didn’t expect Russia to invade Ukraine, that I made a huge fumble there. Didn’t expect it was very much taken aback when it happened. You know, I spend most of my time looking at Asia. So, you know, I’m, yeah, I, you know, who knows what happens there? I’m hopeful just for humanitarian reason that this war comes to a close very, very soon. But yeah, I have no no particular insights that that that it does.
Adam Taggart 1:00:47
Okay, well, let’s get to the transition, then. So you created a table here of the 10, top largest companies by market by market cap for each of the past like five decades. I’m going to put it up here. And I’m going to read this from the article I pulled this from, you can see how things have shifted with each decade. By the end of the 70s, six of the world’s largest 10 companies were oil companies. By the end of the next day, decade, just one of them was by the end of the 80s, eight of the world’s largest tech companies were Japanese. By the end of the following decade, just two of them were at the turn of the century, seven of the world’s largest 10 companies were tech related. By the end of the following decade, just two were at the end of the 90s we get to come up with a better name for that. Seven of the world’s largest companies were natural resource companies by the end of the following decade, not one was 2022 seems to have marked a turning point the COVID rallies in tech with a final spike in an amazing bull market. These are all huge companies that make the foundation on which portfolios are built. But how many of 2020 ones I guess this is when the article was written? How many 2020 ones top 10 Will there be in 10 years time? I’d love for you to opine on that in any way you like but I recall from the article, two of your key takeaways were. Our interview with Louis will continue over in part two, which will be released on this channel tomorrow as soon as we’re finished editing it. To be notified when it comes out. Subscribe to this channel if you haven’t already by clicking on the subscribe button below, as well as that little bell icon right next to it. And be sure to hit the like button to while you’re down there. And don’t forget that Wealthion is online conferences now just a week away. Lock in our last chance to save price discount before it expires at midnight this Sunday by registering for it at wealthion.com/conference. And finally, if the challenging market outlook that Louis is detailed in this interview has you feeling a little nervous about the prospects for your wealth? Then consider scheduling a free no strings attached portfolio review by a financial advisor who can help manage your wealth keeping in mind the trends, risks and opportunities that Louise mentioned here. Just go to wealthion.com and we’ll help set one up for you. Okay, I’ll see you next over in part two of our interview with Louis Gave.
Transcribed by https://otter.ai