Is the U.S. economy as strong as it looks, or are we being misled by flawed data? In this hard-hitting interview, Gavekal co-founder and CEO Louis-Vincent Gave joins James Connor to unpack the growing disconnect between economic headlines and financial reality. They explore why job numbers keep getting revised, why inflation feels worse than reported, and how the Federal Reserve’s credibility is being questioned, even from within. Louis also shares why he believes the U.S. dollar is entering a long-term decline, and why the narrative around China’s economic weakness is both overstated and misunderstood.
Key insights include:
- Why the U.S. dollar is losing its safe-haven status
- What falling U.S. confidence means for markets
- Why China’s stock market may be the biggest bull run nobody believes in
- Why China’s energy strategy is leaving the West behind
- Why a surge in energy prices could wreck portfolios overnight
- And how a weak dollar + capital flight is creating huge tailwinds for emerging markets, commodities, and value stocks
Don’t miss this macro masterclass from one of the most respected global strategists in the world.
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Louis-Vincent Gave 0:00
We now live in a weak US dollar world. That means that you need to own different types of assets than the one that you’ve owned for the past 15 years. The fact that the US dollar is now positively correlated to global risk is a super important development, because it means that US assets suddenly become a lot less attractive. China produces more than twice the amount of electricity every single day than than the US produces. China today consumes more beef than than the US consumes. China consumes more cars than than the US consumers stone so on and so forth. The economy is absolutely not in shambles. The
James Connor 0:43
Louis, thank you very much for joining us today. How are things in Vancouver?
Louis-Vincent Gave 0:47
Is it great? It’s sunny, beautiful day, not even hot. This is the good time of year to be in BC. I
James Connor 0:52
got to tell you, it’s one of my favorite places in the world. The only thing I do not like about British Columbia is the politics.
Louis-Vincent Gave 0:59
It’s yeah, but you know, on a sunny day like today, you can, you can push those aside and and, by the way, BC almost went blue. So at the last provincial elections, and at the last in the last federal election, there were a lot of seats that used to be NDP seats that that turned to blue, so I don’t know. Maybe BC is shifting.
James Connor 1:25
Time will tell. So we have a lot to discuss in a short period of time, so let’s get at it. And I want to begin our conversation with the US. And we’ve had a tsunami of economic data in the last couple of weeks. We recently saw the jobs numbers for July, they came in lower than expected, at 73,000 jobs versus expectations of 110,000 jobs. The big surprise though, were revisions for the month of May and June. May numbers were revised from 144,000 down to 19,000 the June numbers were revised from 147,000 down to 14. I always laugh when I see these revisions, like, I don’t know who the hell is making these numbers up? It’s like they don’t know how to do basic math or use a spreadsheet. But what are your thoughts on these jobs numbers that we saw in how do they fit into the overall economy?
Louis-Vincent Gave 2:16
Look? I think, I think many, many different things. First, first again. Thanks for Thanks for having me. It’s, it’s a real pleasure to be here. Now. I think, you know, my starting point when I look at an economy, is to think that there’s really two main things that that grease the wheels of commerce, that allow things to keep things going, etc, that the first is the cost of capital, and the second is the cost of energy. And when capital is cheap and plentiful, and energy is cheap and plentiful, usually an economy should do well, right? I mean, these are, like, your two basic ingredients to sort of move things along. If they don’t, if the economy does not do well, it’s typically because of uncertainty. You know, I think entrepreneurs are, by nature, sort of almost bipolar paranoids. On the one hand, they get very, very excited, and on the other it’s like, oh my god, you know things are going to turn terrible, etc. So the main thing entrepreneurs crave is certainty. Is predictability is, you know, they want to know what the rules of the game are, and then they can decide, okay, I’m going to invest. I’m not going to invest, and I can get on with it. So when you look at the US today, and you look at these poor job numbers, you can think, okay, is it because of high cost of capital? No. Is it because of high cost of energy? No. Is it because of on so uncertainty. And I think here the answer has to be yes. You know, imagine you’re running a construction business. Maybe you’re a home builder. All of a sudden you’re told that everything at the Home Depot is going to cost 30% more, 50% more, 70% more. Maybe it won’t be there. Oh no, maybe it’s only 20% more, and it changes every week. Your natural reaction is going to be, you know what? I’m going to put on wholesome projects here, and I’ll see where it goes. So I think that’s the first possible read to the job numbers. Is to say, look, as the level of uncertainty in the US has increased, you know, unsurprisingly, one of the first variable of adjustments becomes jobs. So that’s, that’s number one. Now, if you wanted to take a less negative approach to it, you would just say, Oh, well, it’s, it’s because of all you know, the crackdown on illegal immigration, the deportation. So you end up with with fewer workers, but, and maybe that is the explanation, but either way, you end up in the same place, which is that economic growth is number of workers plus productivity of workers. And if you’re going to end up. An environment with fewer workers, either because you’ve cracked down on immigration or because you’ve increased the uncertainty on entrepreneurs, then you have to hope that the productivity really, really goes up. If you’re going to have strong GDP growth, if the productivity doesn’t crank up, then you’re going to end up with weak growth numbers.
James Connor 5:17
The other interesting fact that came out of these numbers is that President Trump said the jobs numbers were rigged and the revisions were concocted, and because of that, he fired the Bureau of Labor Statistics Commissioner. I didn’t even know that job existed until Friday, but the last time we saw this happen was in 1932 by President Hoover. And this is something you might expect to see in a country like Argentina or Greece when they go through their economic disruptions. But what are your thoughts on this?
Louis-Vincent Gave 5:49
At all? Shooting a shooting a messenger is never a great look. You know, it’s, it’s, it’s the problem when you start shooting messengers is you send out the signal that you only want. Good news. You send out the signal that you only want yes men around you. You send out the signal that, yeah, basically you just want sycophants around you. So, so that’s the first concerning thing. Is you have to wonder the extent to which a White House that says, Don’t give us bad news, or you’ll get shot, ends up being completely sort of sort of separated from from realities out there. Now, having said that, you know, you could the counterpoint is to say, Oh, well, the economic data in the US, you know, it’s been all over the place for a long time. It’s been a joke. It’s been partisan. And if really that’s your argument, and I’m not saying that, I believe that, but if really that’s the argument, it is kind of worrying, right to you, you point out to Argentina, etc. Now, funnily enough, you know, I spend a lot of time talking about China. You know, I’ve lived there for 30 years. I usually, when we do these calls, I’m usually in Hong Kong. The that’s the argument you always get from Westerners who tell you, I don’t want to invest in China because I can’t trust the data. Can’t trust the data, like the data is made up, it’s all false, et cetera. So to have a US president turn around and say, this data is made up, you can’t trust our data, our data is false, is a huge red flag for a lot of investors who indeed deploying capital, you can never have full certainty when you deploy capital, but you can certainly go out and seek it. So to hear the top authorities in the land say, Oh, don’t trust this data. This data is just BS, sends out, I think, a pretty harrowing message for to a lot of foreign investors. At the very least,
Speaker 1 7:59
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James Connor 8:21
And I think one of the things that we need, instead of making these arbitrary comments, is you got to have an explanation of how the numbers are derived. I didn’t even know this until I started digging into it, but the BLS sends out a survey to 697,000 work sites, and that represents 147,000 different businesses across the US and across the different regions, and the response rate before the pandemic used to be 70 to 75% since the pandemic or after the fact, now it’s down to 60 to 65% so a lot of people aren’t even responding to the survey, and when they do, it’s coming in many weeks or many months later, and here we are. We’re in the depths of summer right now, so that’s another excuse why people are not responding, but this is a big issue, and you got to think somebody within this department is going to wake up and come up with a game, new game plan,
Louis-Vincent Gave 9:09
yeah. I mean, look, it’s, it’s tough, right? Because if people don’t fill out the surveys, what can you do? It’s which, incidentally, comes to another important point, and you know, source of debate that we have, just like I’m sure most, most firms have, is the whole reliabilities of surveys. You know, you there’s, there’s surveys who tend to be, you know, early, and they can be great at turning points in the cycle, etc. But so you got surveys on the one hand and you got hard data on the other. The problem with hard data is it usually comes out later. By the way, hard data can also be prone to revisions. But the truth of the matter is that, and perhaps for the very reason you just highlighted surveys in recent years, seem to have become a lot less reliable. You know, a lot a lot of investors. So do you remember going back to 2022, and 2023 a lot of people ran around saying, Oh, we’re heading into US recession. You know ism surveys are bad, like PMIs, et cetera, Empire manufacturing. A lot of the surveys pointed to a big softening, if not a recession, in the United States. And the hard data just kept on clicking, just like, you know. So all the economists out there who you know, said, Oh, look, you know, eight times out of 10 when the PMIs did this, you had a recession on the back end, etc, essentially, you know, yeah, got the calls wrong. So, no, it’s it, you know, it’s a real question, can you still trust the surveys? Maybe you can’t.
James Connor 10:46
So the other big news that came out last week was the Fed meeting, and like I said, last week was just jammed full of information, but the tone out of Powell was a very hawkish one. But the big news from this meeting, even though rates were unchanged, was that there was two dissenters. We haven’t seen that in 30 plus years, and a lot of the headlines after the fact came out, we were saying Powell’s being political, then Waller, one of the dissenters, people are saying he’s gone rogue. We also had a governor resign last week. What are your thoughts on the comments that came out of this meeting?
Louis-Vincent Gave 11:19
Look, I think it’s, it’s fascinating, right? Because a year ago, you know, the the Biden economy was terrible, I was said, was said to be terrible, and the Fed was wrong to be cutting, and now the Trump economy is supposed to be going gangbusters and firing on all cylinders, and yet the Fed is being foolish for not cutting. So there seems to be an element of you know, as Boris Johnson would say, you know, wanting having your cake and eating it too. Now, when it comes to the two dissenters, I think you know, an open question would be whether these directors would have felt as comfortable dissenting if the political pressure on the Fed to cut wasn’t so high. You know, historically, the Fed is tends to come to, indeed, very, you know, sort of meetings where everybody agrees together, right? And and everybody points in the same direction, you know, today, with the political pressure, maybe that gives openings for different fed governors to to express different opinions in a way that you wouldn’t have had before the what the two I think the reason the two dissenters matter is that we know that within the next year we’ll get another Fed chairman. You know, maybe it’ll be next month. I think I actually tend to believe that Powell will see out his term, if only because it gives Trump a perfect scapegoat. Should the economy slow down, if he replaces Powell tomorrow, then if the economy falls apart in six months time, they’ll be all on him. If the economy slows down because of all these tariffs and all this protectionism that he’s unleashed on the United States, if that happens tomorrow, then I’m sorry, I don’t know if you can hear the geese in the background, the if that happens tomorrow, then you can point the finger at Trump, at Powell. So you can put Trump can point the finger Powell and say, Oh, look, that’s all his fault. So in that respect, Powell serves a good role for Trump for the next 12 months. So I don’t think he’s going anywhere, but the reality remains that in a year’s time, we’ll have another fed governor, and that fed governor will be a big dove and will have a mandate to cut interest rates, and we now know that others on the board will be happy to go along with it. And this points to, I think, you know, the important direction today is, whether it’s tomorrow or in 12 months time, you are going to have a much more dovish fed. And this feeds into perhaps the biggest trend that’s unleashed in the market since Trump came to power, which has been the weakness in the US dollar. You know this. You know the US dollar keeps making. You know lower lower lows and higher highs on the rebounds and it’s rolled over hard. And this is at a time when US short rates are pretty much above the short rates of any major even a lot of the emerging market countries. And you know that in the next 12 months, that’s going to start to get reversed, that, you know, short rates in the US will will be coming down again. Who knows if it’s in the next three months, six months, 12 months, but, but it’s there in the not so distant future. Future. So, you know, I think as people look at their portfolios, the first thing to acknowledge is we now live in a weak us, dollar world and and so that means that, you know, you need to own different types of assets, and the one that you’ve owned for the past 15
James Connor 15:16
years. I want to have a deeper discussion on the USD, but before we do that, I want to continue on with the Fed. Do you think Powell is being political?
Louis-Vincent Gave 15:25
I don’t actually. I think Powell is a public servant. I’m sure he’s got no love lost for for for President Trump. And by the way, Powell and the other members of the FOMC committee, because, you know, he’s not the only voting member on that board. Look, the reality is the the US inflation rate, so the Fed has a 2% inflation target, right? It’s been above that 2% inflation target for what I’m, I’m gonna, I can’t, is it what, 39 or 40 months in a row now that has been above that 2% target? I’ll have to double check for you. I can double check, but it’s in that ballpark that it’s, it’s over three years that it’s been above that 2% target. So, so that’s, that’s number one. So you know, if you’re a money manager and you’re below your target, and you’re missing your target for three consecutive plus years. Usually you start questioning what you’re doing, you know? Usually you start saying, Okay, this, this is a problem. I need to fix some of the things so, you know. So number one, the the inflation rate has been above their target for over three years. So that’s number one. Number two, the unemployment rate is what 4% 4.1% which is really their second thing, if you’re the Fed, is your second mandate is employment. And then I think you have a third mandate, and your third mandate is essentially financial stability. Now today, crypto is at all time high equities are at all time highs. I think there’s plenty of signs of animal spirits running rampant. Whether you look at, you know, Bitcoin Treasury companies being listed left and right, whether you look at, you know, IPOs, such as fig that just happened going up, you know, 150% on the first day. So it’s like, you know, why? Why would they need to cut exactly, you know, it’s unemployment is not a problem. Inflation is above target. Financial conditions, by all accounts, seem pretty loose. Corporate spreads are record, tight, etc. So, so no, I don’t think he’s being political. I think he’s looking at the situation and and doing what any other Fed chairman would do.
James Connor 17:54
Okay, I’m glad you brought up inflation, because this has been a big issue with me, and I know you’ve referred to yourself as an inflation Easter in the past, and just for the benefit of the viewers, that means you believe inflation is an ongoing problem. And I read, you were talking about the number of months. I actually read it was 52 months. But either way, it’s, it’s, it is sticky, and it’s not going down. And I know I’m based in Toronto, and I’m just shocked, sorry to hear that. Yeah. And the price is like, I’m going to give you, I’m going to throw one thing at you, the property taxes in Toronto, they just went up by in January of this year, 6.9% in the last five years. They’re up 25% now, I throw that out at economists all the time and say, Well, you can include that inflation, that that’s a one time thing, but it’s up. Property taxes are up 25% in the last five years. Think about that. And then when you look at home insurance, auto insurance, it’s just one thing after another. And then, of course, food insurance, or food inflation, my God, it’s never ending. And I’m surprised. I don’t know what the official number is out of the in the US, but let’s just call it two and a half percent or 3% I’m surprised it’s not significantly higher. But what are your What are your thoughts on inflation, and what do you think the real number is?
Louis-Vincent Gave 19:17
How much time do you have the look? I think probably all your listeners, yourself, myself, we all feel like it’s higher than the two and a half 3% and then we’re being told, and yes, partly it’s because of the things you highlighted, like insurance costs. You know, my favorite data point is that in the US, if you look at medical insurance, supposedly officially, medical insurance is in nominal terms, not in real terms. In nominal terms, it’s the cheapest it’s been since 1999 it’s like the lowest in 20 plus years. Now you know how many people for. Who does that like, Who is that true for and you know, to a large extent, the same is true for auto insurance. By the way, auto insurance is about to go up a lot, because with all these tariffs, the price of secondhand cars and firsthand cars are going up. So So now you know, de facto, your car insurance is going to go up. Because if replacing your existing car is going to go up a lot, then the car insurance needs to cost more. So yeah, I really struggle with the two and a half the 3% now there’s no doubt that there’s some of our costs that have essentially gone to zero. Like telecoms is a great example. Who still pays for international phone calls when you can call on WhatsApp or FaceTime or whatever else. So some of our costs have gone to zero, but this is where it gets interesting. Is these costs that have gone to zero, they’re now at zero, so they can’t fall anymore. And meanwhile, to your point, insurance keeps going up. Local taxes keep going up. Food goes up. Now, I think the reason we’ve been on the two and a half 3% range in most of the OECD countries and haven’t broken out, is because energy costs have remained contained. And energy costs of all the inflation cost energy is, is probably the one where people have the highest sticker shock and feel, feel the the inflation on energy the most, partly because all of us drive to and from work, and we see the price of energy on the side, side of the road, like, you know, and we have to fill up our cars, whatever, once a week. And we know that, oh, last week I paid 70 bucks, and now I’m paying 90 bucks, and so that one tends to have, and I’ve got a bunch of charts on this, but the price of energy tends to have a pretty dramatic and immediate impact on wages. I like when it costs you more to get to work pretty quickly, you turn to your boss and say, Hey, Boss, can I need to get paid more because it’s costing more to come here. So because energy has been muted, I think we’ve survived with just a two and a half 3% inflation, which is why the biggest risk to financial markets today the biggest risk to people’s portfolios is that energy prices spike. And I want to be very clear, I’m not saying energy prices are going to spike, but if energy prices spike for whatever reason, you could be very quickly, an inflation rate at three and a half 4% at which point nobody’s talking rate cuts anymore, at which point the bond markets sell off, and then very quickly, equities, and especially stretched equities, equities that are either in negative cash flow, that are trading at like over 10 times sales, over 40 times earnings, all those kinds of equities start to to really sell off. Essentially, that’s we. We had a preview of this in 2022 but it was a pretty short dated four or five months, because Biden stepped, stepped in and unleashed the the strategic petroleum reserves onto the world, which allowed energy prices to come back down. Now let’s imagine that tomorrow. Let’s just go through a mental exercise. You know, do go, do go? Like to say that that to to govern is to anticipate. Let’s imagine that tomorrow, either because of what’s going on in the Middle East or what goes on in Russia, or whatever, that all goes back to 120 bucks. And then the question become, how does Trump respond to this oil 120 bucks? Does he do what Biden said, Did and say, Okay, let’s unleash the Strategic Petroleum Reserve. Or, alternatively, does He say, you know, what, if you want cheap energy, you move here to the US. I’m going to ban the export of us, natural gas. I’m going to ban the export of oil. You want, you know, cheap energy for your Petrochem plant. You want cheap energy for your manufacturing plant. Make America Great Again, American industrial Renaissance. Build it here. And I’ll guarantee that you get cheap energy in the US, and we’re not exporting our energy anymore, at which point you move to a world with different energy prices all over the place, but a much higher spike. Now I have no clue what Trump would do in such a scenario, whether he would turn around and say, Okay, let’s export more US energy, or if you would say, actually, let’s keep our energy. But I don’t think you can assume that he would do what every other president has done before, which is export more energy. It’s that assumption may be heroic. And if he says, Actually, let’s keep our energy and like this, we have cheap energy, and the rest of the world doesn’t, and too bad for the rest of the world, if that’s the path we go down, then that would be absolutely devastating for a lot, a lot of people’s portfolios.
James Connor 24:57
Yeah, I agree with you. 100% there the oil, the price. Of oil has been vacillating between 60 to $70 a barrel, but if it rips to 80 or 90 or 100 bucks for whatever reason, all bets are off. So I am paying right now. I’m paying about a buck 35 a liter, and just for the benefit of our US viewers, that’s about 375 us a gallon, which is extremely high when I talk to my friends in Buffalo or Detroit
Unknown Speaker 25:22
or wherever they move to, BC you’ll see high.
James Connor 25:26
How much is it? A liter? We’re at about 165 oh, my god, yeah. Oh, wow. Okay, so that’s a real issue. And I agree. The thing about the price of gas, we pass it every day. So everybody knows. You know, if I see the price going from 135 to 145 or 155 then right away I’m thinking, Oh, my God, things are out of control here. But you were talking about the US dollar earlier, and as measured by the dx, y, it’s down. I believe it’s down around 10% this year. Is that right? And where do you see it
Louis-Vincent Gave 25:56
going? So I think the reason this matters, it matters on many different fronts, but a lot of the weakness occurred around Liberation Day, when you know tariffs were put on everybody and their penguins. And the reason it matters is that if you are a French pension fund, a Korean insurance company, a Singaporean sovereign wealth fund, and you invested money in the US for years and years. The US Dollar was a sort of haven in the storm. It was a shelter currency so that if something bad happened and equities, let’s say, went down 15% the US dollar would typically go up 5% so if you were again, a French pension fund, and you put you bought the s, p5, 100, all of a sudden, for whatever reason, you down 15, but currency goes up five, so now you only down 10. So it’s like, it’s not so bad, by the way. Same is true for all the big Canadian pension funds, for the BCI MCs, the case, the Depo, the Ontario teachers, etc, by the US and, yeah, and it it works out okay. So what happens now this year is that as the US, as the US equity markets go down. The US dollar goes down with them. So now if you’re a Korean pension fund, not only are you when the US equities go down 10% you’re now actually down 15 because the currency goes down another five. And so the fact that the US dollar is now positively correlated to global risk, is a super important development, because it means that US assets suddenly become a lot less attractive to foreigners everywhere. So there’s a sort of reflexive element to this, where it becomes sort of self fulfilling, where US dollar goes down on a downturn, which makes it less attractive. Therefore I’m going to have less of an allocation. And then at the next downturn, it goes down even more. And I think we’ve entered this cycle, a cycle that probably doesn’t get broken unless you get, like a super hawkish fed, which seems really unlikely, or unless you get a big crisis somewhere else around the world, maybe in crisis in Europe, or crisis in China, where foreigners, where foreign investors, decide, oh my god, I knew I shouldn’t have left the US. I got to get back there. Rest of the world’s a total mess. But unless you get one of those things, we’ve now entered a new phase where the US dollar is positively correlated to risk assets, which therefore makes us assets a little less attractive.
James Connor 28:44
Yes, and I’m going through that right now. I’m long spiders, and I think the s, p is up 5% on the year, give or take, but you among US dollars at the same time, I’m down 10% so I’m going through this situation right now, where I gotta decide, do I keep my money in the US, or do I take it out and put it someplace
Speaker 2 29:06
else? You you and every Canadian pension fund?
James Connor 29:09
Yeah, yeah. So where do you see the DXY going?
Louis-Vincent Gave 29:13
Hello. Does it get so I don’t, I don’t really do the forecast game of like, absolute numbers. I try to, I think in terms of trends and and I think that the trend is down. And, you know, I don’t know how low it gets. I know it’s overvalued today, the US Dollars probably overvalued by a good 20% but, you know, I don’t want to say, oh, it’s going to go down 20% what I know is, the trend is down and the correlations have shifted, and this has massive portfolio implications. So I like to think in terms of trend. And so when I look at the world today, the trends that seem obvious and that seems set to continue, the first and most important one is. Dollar down now, dollar down typically helps emerging markets more than more than most asset classes. And sure enough, emerging markets do seem to be in a bull market. China is definitely in a bull market. And you know that that bull market makes sense. You have a government that is doing more fiscal stimulus than it ever has done in the past. Has done in the past. You have the easiest monetary policy in China that that you’ve ever seen, and China was actually the best performing major stock market last year. It’s again, doing very, very well this year, and nobody cares. So, you know, that’s that, to me, is interesting when the US dollar is structurally weak, as it was, for example, between 2004 and 2008 usually financials outperform around the world because everybody gears up, everybody expands their balance sheet. And you’re seeing that again this year. You know, for the past, actually, since 2022 financials have been pick any market, and financials have typically been the best performing sector. The US is, of course, the exception where Tech has been a better performer than financials. But everywhere else in the world, you know, financials are, are in a bull market. Latin America is in a massive bull market, which always happens when the US dollar weakens, because it gives the possibility to local central banks to ease. And you look at Latin America, you just know that over the next 18 months, every country is going to be cutting interest rates between 104 100 basis points. So that’s a huge tailwind. Typically, commodities growing higher, and you’re starting to see some of that as well. All the commodities are grinding higher, except for, really, except for for oil and energy. So, yeah, for me, for me, these are the trends. I’m sorry I like, I’d love to say, Oh, the DX y is going to 75 or whatever, but it’s not really how I work. Like I said, I like to think of trends and then latching onto them.
James Connor 32:03
Okay, before we leave the US, I didn’t ask you, what you think the Fed’s going to do at the next meeting in September. Do you think they cut?
Louis-Vincent Gave 32:11
I think they’ll cut. I think they’ll cut. The political pressures is pretty relentless. The jobs numbers just weren’t that great. I think there’s actually two CPI numbers between now and then, unless those CPI numbers massively surprise to the upside. And I’m not trying to hedge myself here. Like, I think they cut between us. I think they cut but like, I will change my mind on that if the CPI numbers, like come massive, like surprise massively on the upside, but assuming that the CPI numbers don’t surprise massively on the upside, they’re cutting.
James Connor 32:47
There’s so much happening in the world right now, especially when it comes to geopolitics, and if you need help understanding how these events will impact your financial future, consider having a discussion with a professional financial advisor. You can find out more information@wealthion.com slash free. Once again, that’s wealthion.com/free now back to the show. Okay, so let’s move on to China. Now this is the second largest economy in the world, representing 20% of GDP. You and your team spend a lot of time on the China economy. We were talking earlier about how well the stock market is done in 2024 and also in 2025 but the narrative I keep seeing and keep pairing is that the economy is in shambles. How is the Chinese economy doing?
Louis-Vincent Gave 33:35
So? China is a massive place. It’s well, just like the US, of course, but it’s actually bigger, right? It’s four time the population. So you can always find examples of of anything you want to find, just like in the US. I can show you Alabama, rural Alabama or Mississippi, and say, Oh my God, look at this place. It’s absolutely terrible. Or I can take you to Silicon Valley and say, Look, these guys own the future and everything in between. And to be honest, China is really the only place in the world where really you can do the same. You can visit some of the factories of of Hangzhou, of Guangzhou, and walk away thinking, Oh, my God, these guys are they own the future. Or you can go to parts of China that are obviously that are obviously struggling. What I find interesting about China today, to be honest, is that a year ago, when I was having conversations with people on China, the debate was always about the return of capital. People didn’t want to invest in China because they told you, look, my money is going to get frozen, like the money was in Russia, or China is going to invade Taiwan, and it’s going to be world war three. The whole place will be turned into rubble and et cetera. You could find lots of reasons, and people were essentially the debate was all about the return. All. Capital and and some, you know, some very, very smart guys, guys much smarter than me, would write pieces saying, Oh, the return of capital in China. It’s can’t invest there, too dangerous. Now fast forward to today, and every conversation I have around China with with clients, with investors, has shifted to the return on capital. Like people have like, okay, they’ve turned the page on China is going to invade Taiwan, and my money’s going to get locked up, etc. They’ve turned the page on this. They, they accept that. Okay, they that’s, that’s all. Bs, they’ve accepted that. So now it’s like, oh, let’s discuss the return on capital. It’s the question you ask, because the economy is a shambles. Is, is there returns to be had, etc. Now, the long and short is, the economy is not in shambles. You know, the China produces more than twice the amount of electricity every single day. Then, then the US produces. China today consumes more beef than than the US consumes. China consumes more cars than than the US consumes and so on, so on and so forth. The economy is absolutely not in shambles. The you know, China’s running trade surpluses over 100 billion US dollars every single month. This is not an 100 billion a month coming into your economy pays for a lot of mistakes. It papers over a lot of cracks. So it is not an economy that that is in shambles. Quite far from it. In fact, if you think of the economic processes, you know, essentially it’s the combination of five factors. You take the cost of land, the cost of capital, the cost of energy, the cost of labor and the cost of government, and I would argue that on all these five things, China today, for the first time in 20 years, or probably for the first time in history, actually, what am I saying? Has a cheaper cost of energy than pretty much anybody else on Earth, following all the investments they made in nuclear, in alternative energy, in LNG plants and coal plants, they have the cheapest cost of electricity. Now that is a huge comparative advantage that the US has had for the past 1015, years thanks to the shale revolution. That advantage is now shifting to the US. They have a somewhat cheaper cost of labor. They have a cheaper cost of capital. Now, then you come to the cost of government, and this is where things get interesting, because five years ago, you could have argued, oh, the Chinese the government, you know, they increase regulations, and like, you know, they snagged Jack Ma, and Alibaba goes down. And it’s like, because the cost of government isn’t just your taxes, it’s the cost of regulation. It’s the regulation. It’s the cost of uncertainty surrounding your government. Now, arguably, today, perhaps the cost of government is now higher in the United States than it is in China, because the level of uncertainty in the United States is is higher than it is in China. But going back to the return of capital versus the return on capital, I would just highlight this. We can debate all day whether the return on capital in China is going to be terrible or not, et cetera. Personally, I’m just glad we’re no longer debating the return off capital, which always seemed to me like a silly debate. But and the reason this matters a good buddy of mine who you might follow on Twitter, a guy called Copy always says that in emerging markets, when things go from really, really bad to just plain mediocre, you can make a lot of money. So the fact that we’ve now debating from return of capital to return on capital tells me that we’re exactly in that kind of scenario where you’re you’ve gone from really, really bad, where you’re worried about your money disappearing, to mediocre, to where you’re debating how much money you’re going to be making, if any. So maybe that’s enough, you know, maybe that’s enough to make money.
James Connor 38:55
When I think about China, I think about innovation and what they’ve done in the last 20 years, I think, is just mind blowing. And you were talking about EVs and the number of cars they produce, but in 2024 they produce 12 million EVs, versus 2.4 million in the US. So they own 70% of that market. Smartphones, they control 70 to 80% of the product production of all smartphones across the world drones. They control 80% of that market. And the one element that all of these sectors have in common is the lithium ion battery. And this is something they’ve dominated for many years now. But if you’re an EV maker and you need a lithium ion battery, you got to go through China. They’re the only ones that have this technology. And this is one of the big issues with any country in the West is that we’re, we’re so far behind the curve when it comes to the Chinese. And I don’t think, I don’t think the governments in the West realize how, how far ahead the Chinese are. And and then you touched on energy. The Chinese are currently building out one of the world’s largest nuclear reactor build outs in the history of mankind. They’re building 100 50 reactors between now and 2035 and no one’s going to be able to catch up to them.
Louis-Vincent Gave 40:06
No, look, I my go to line that I’ve used in a few podcasts is that there’s two kinds of people in the world. There’s people who visited China, and there’s not so many, because in the past five years, that was covid. And then there was the Russian invasion of Ukraine, and everybody decided China was the enemy, etc. So most people haven’t visited China in the past five years. But there’s the people who visit China and visit the factories and look at the products being made, and they come out of there thinking and saying openly, the future is being built over there. And then there’s the people who listen, who don’t go to China, who listen to the people saying the future is being built over there, who then turn around and ask those people say, you know, how much is the CPC paying you for saying this? And so there’s, there’s a sort of ideological blinkers that we’ve put on ourselves as Westerners, and I think we’ve put these ideological blinkers because China is nominally a communist country, and so we therefore assume that since it’s communist, it’s bound to fail, because it’s in the name communism fails. We all know that history has shown it, and so most so many people in the West start off their sort of take on China with essentially the preconceived notion that, of course, it is doomed to failure because, again, it’s communist. So how else could it be? And when you say, Well, hold on, that’s really not what’s happening. Instead, what’s happening is we’re being leapfrogged in industry after industry. You mentioned cars, you mentioned batteries, you mentioned nuclear power plants. But you could say the same for trains. You could say, and you know, when you say this, you have this more often than not, this pushback, which is like, Yeah, but they just, they’re just stealing our technology, which was undeniably true 20 years ago, was probably true 10 years ago, and it’s simply not true today. When you look at the humanoid robots they’re producing, nobody else is producing those. When you look indeed, at, you know, some of the self drive cars, when you look at the amp amphibious cars that that x paying and BYD are producing. And it’s like, you know, I think the Ford CEO said it best, you know, Ford CEO came to China in September and toured for a couple of weeks, and he ended up buying a Xiaomi su seven and brought it back to the US, and this is what he drives to work. And he got a two page interview at the Wall Street Journal where he said that it was now incumbent for US companies to try to produce to the same levels as the Chinese. And he didn’t say to the same prices, etc, to the same levels now, like having the Ford CEO drive to and from work in a show me car to me is mind blowing. It’s like, it’s like the Pepsi CEO saying he’s going to drink Coke. You know, it’s, but this is, this is where we are. And yes, it’s, it’s a real challenge to the west, because China has now made such investments in its energy grid, in its energy transformation businesses, in essentially becoming the world’s electricity powerhouse, that it is now dominating the world of electricity from from Everything, from the rare earths to the turbines and everything in between. And so the challenge now for us is, you know, how do we catch up? It’s China. China didn’t just wake up to this. This is the result of 30 years of massive amounts of investments. A lot of these investments were loss making, you know, going back to your point, oh, there’s, there’s no margins, etc. It’s, it was 30 years, but now it dominates electricity. And so how can we be competitive we the Western world, if we have governments that cost more money? Because let’s not kid ourselves, our welfare states are very expensive in most OECD country, the governments take 50% of your money, if not more, one way or the other. So if we have governments that are much more expensive, energy that’s much more expensive, and labor that’s much more expensive, and capital that’s much more expensive, how do we catch up if we’re now already behind. I think that’s that’s going to be the real challenge for the coming 10 to 20 years.
James Connor 44:48
And you touched on electricity, and the Chinese just announced the construction of this Muti hydro dam. It’s going to be the largest hydro dam in the world, three times larger than three gorge. Dam, which is in China, and you would never see a project like that get done in Canada or the US. Never
Speaker 2 45:06
Well, Canada, could you guys have more rivers than anybody else, they could,
James Connor 45:10
but we don’t have the it all comes down to government bureaucracy, right? They built one in Labrador. It just came online, I believe, last year, and it was like many years, billions of dollars over budget. It was just a complete disaster. Just
Louis-Vincent Gave 45:25
these things are always over budget. The Chinese one will be massively over budget as well. It’s, you know, that’s, that’s the nature of those beasts. But the reality is, in Canada, you probably don’t need it. You already have decently cheap electricity, like hydro, Quebec has some of the high cheapest electricity in the world, etc. Because, you know, you do have, first, you do have a lot of natural gas domestically, plus you have, you have all these rivers, and you do produce a fair amount of hydro already, given the dams that you have. So and Canada doesn’t have that much industry, is the reality. I mean, I know you’ve got the auto parts in Ontario, etc, but it’s you don’t have that much industry where you would need a lot of cheap electricity. China, you know, is the world’s industrial powerhouse. It is the number one car producer in the world. It is the number one tractor producer in the world, number one, earth moving equipment in the world, so on and so forth. Hence, if it’s going to, you know, do all these things you do need. You do need that cheap electricity. So it, you know, it is mind blowing, that that dam is mind blowing. And it comes, and a lot of issues come with that damn mostly geopolitical issues, because that dam is about 15 miles away from the engine border. And India is very, very worried for lots of different reasons about that dam. That dam is also being built in a highly unstable geo like earthquake zone. And so, you know, there’s, there’s, there’s a lot of issues surrounding that dam, but, yeah, it’s, it’s a testimony to how China has embraced the age of electrification, frankly, like no other other country has, and it’s a testimony to the catch up we still have to do.
James Connor 47:23
So okay, so let’s look at these two countries, the US and China. And I know you’re a value guy, so you like to go where the value is. And if I was to summarize our conversation, you see far better value in China than you do in the US.
Louis-Vincent Gave 47:37
Yeah, look, I think there is value in the US, actually, the US has been a bit of a, I think it’s a bit of a disjointed market, just like it was in the late 90s, between very expensive growth stocks and value stocks that, you know, that are essentially priced for, you know, a US dollar that stays strong, which is already rolling over for a China that keeps crushing everybody’s margins. Now on this, perhaps one of the more interesting developments in China of the recent few few months is the extent to which the government narrative around capital investment has really completely shifted. And essentially, the government is now really trying to crack down on excess investment, whether it be in electric vehicles, whether it be in batteries, whether it be they crack down before an excess investment in real estate. But now they’re like looking at industry and saying, Look, we can’t just keep throwing good money after bad and doing excess capital spending and crushing everybody’s margins. First, it’s no good for us, but we’re also getting pushback from from everybody else around the world. So I highlight this because imagine what happens if we move to a world where the US dollar is weak, where perhaps the pressure from China on a lot of these industrial businesses, instead of accelerating, abates a little bit. So I would, I all, I guess I’m saying is, don’t throw babies out with bathwaters. There’s probably some, some tremendous opportunities in the United States, amongst industrials, amongst, obviously, energy stocks, materials, a lot of the sectors that would benefit from a weaker dollar and from a China that where you see some level of consolidation. Now, having said that, I, you know, I mentioned that I like to think in terms of trends, and when I see a trend developing in the market, such as the recent outperformance over the past 18 months of Chinese equity markets. I look at it through five prisms. First fundamentals. Does this make sense? There’s no point in buying things that make no sense. There’s no point in buying sewing machines or horse buggies. I. Um, now the reality is, the outperformance of China does make sense to me. You’ve had a dramatic improvement in human capital. You’ve gone from a country that was graduating a million university students a couple decades ago to one that’s now graduating 13 million university students. You have a country where you now have every year, more patents being filed than in the United States, and you’re seeing the impact on things like the biotech industry, the robotics industry, the energy industry. So like the China is doing, Well, isn’t that surprising? They’re super hard working. They’re moving up the value chain quickly. Then you move to valuations. Now the reality is, valuations in China are very attractive. They’re much more attractive than the United States. You look at the momentum. Now, the momentum used to be horrible, and for the past 18 months it’s been, it’s been very solid. So now you know, then you move to investor positioning. You know, is it crowded? Does everybody already have this trade on. And the reality is, no when it comes to China, that there isn’t there. And then finally, you get to policy support. Because, you know, it’s very hard to make money if you’re fighting governments. And the reality today, you know, the Chinese government has intervened a couple times to prop up stock markets every 10% dip, they kind of step in. So I look at it. Fundamentals are good, valuations are attractive, momentum is positive, investor positioning is light and and the government support is there. So like for me, it ticks all my boxes. And if, if something ticks all my boxes, and I feel I have to go for it, because otherwise, what’s the point of having a process?
James Connor 51:46
I recently did an interview with Patrick McGee, who wrote a book called Apple in China. Have you read it?
Louis-Vincent Gave 51:51
Yeah, no, I’ve ordered it. I have it. It’s on my desk. I actually have it for my for my next big long flight, which is on Thursday. Um, so fascinating
James Connor 52:05
book, fascinating book, and I would highly suggest it. So you’re based in Vancouver, I’m based in Toronto, so I gotta get your views on Canada now, before I
Unknown Speaker 52:12
based in Hong Kong, I’m in Vancouver right now, but I’m based in Hong
James Connor 52:15
Kong, yeah, but the last time we spoke, it was in January, and Justin Trudeau was still the Prime Minister. We now have a new prime minister, Mark Carney. He’s only been in power for a few months, but I’m curious, what are your views? How do you think he’s doing?
Louis-Vincent Gave 52:32
Look, I’m not Canadian, so I feel, you know, I don’t like it when foreigners bash my politicians, even if I carry candles for any of them, what I will say about Connie is this, is that today, I think you’ve had the political tides shift in Canada, and the days where you just, you know, fall back and just do business casually with the US and, You know, sell your oil at a discount to the US, and sell your natural gas at a discount to the US, because building the infrastructure to do anything else is a little too complicated, and it’s easy to sell to the US. So let’s just do that. I think those days are over. And so the first question becomes, okay, there’s been this wake up call. Canada is needs to build the pipelines through BC. Canada needs to build the LNG terminals in the Maritimes. And is this going to happen? Yes or no, and to me, Carney’s Premiership. Will his success or failure will depend on the answer to that question. If he gets that done, then I think he can go down as a successful Prime Minister. If he doesn’t get that done, then he’ll be a failure. I think it’s extremely, extremely binary, because if he doesn’t get that done, he leaves Canada exactly the way that he found it, which is in not a great shape today. Now you could say, Yeah, but all this is going to take money to fund this, etc. Now this is where it gets interesting. Is there is a lot of money in Canada. Well, there’s a lot of money in Canadian pension funds. It’s just not invested in Canada. And when you talk to these pension funds, they say, look, we’d love to buy track, we’d love to fund the beat the BC pipelines. We’d love to fund the NG terminals. You know, today, all we do is buy US stocks. If you give us something else to do, we’ll sell our US stocks, and we’ll bring our money home and we’ll fund this. And this is where it gets interesting. Is that I think Trudeau was way too incompetent to get that done, because he was just a pretty, pretty face and a name put in place. But you know, Carney, if nothing else, he’s he’s a former Goldman banker, right? And if, like me, you believe that you can get the guy out of Goldman, but you’re never going to really get Goldman out of the guy, then you now have all the pension funds coming up to Carney and saying, Hey, give us assets to buy in Canada. Now that’s got to awaken something in the old Goldman banker. He’s got to be thinking, Okay, I have to do this. There’s a deal that can be done. I’m going to get it done. So I’m actually decently hopeful that in the next year, year and a half, some of these deals are going to get announced, and as they do, then you’re going to see the Canadian pension funds sell some of the US assets and bring money back as such. When they do that, by the way, that will be super bullish the loony, because there will be no more sellers of the Canadian dollar. The Canadian pension funds have been natural sellers of the Canadian dollar for years and years, as they exported money into the US. If, instead of being sellers of the Canadian dollar, they turn into buyer buyers. There is no marginal seller against that, so the loonie will go up a lot. So I think you know being short the loonie as being a hedge fund favorite trade. I think it’s a very dangerous trade, because you’re essentially betting that Carney isn’t going to turn into a Goldman banker, and I think the odds are probably higher than 5050 that he does turn out to be a Goldman banker.
James Connor 56:10
Yes, and just for the benefit of our viewers, who might not be based in Canada, you made reference to how bad the economy is, and it’s pretty bad era, the nationwide unemployment rate is at 7% in the province of Ontario, which is the largest province with 15 million people, it’s 8% in the city of Toronto, it’s approaching 10% youth unemployment across the country is at 14% so these numbers are staggering, but I think a lot of Canadians have their head buried in the sand. They really have no idea what is going on. I didn’t vote for Kearney. I thought, if the Liberals are in power for 10 years and you can’t get anything done, it’s time for change. But the majority did. So I’m with you. I’m hoping he’s the right man for the job. I hope he can create some positive change, which is going to result in a higher standard of living for all Canadians. But there remains to be seen. Louis, this is, once again, been a fascinating discussion. I want to thank you very much for making time, and if somebody would like to learn more about you or about your firm. Gav Kell, where can they go? Yeah,
Louis-Vincent Gave 57:13
look always great to catch up. Thanks for having me. The best place is our website. We do lots of different things. We publish research and manage wealth for individuals and for institutions. And you can find all of that on our website, G, A, V,
James Connor 57:27
E, K, a, l.com, and once again, you’re active on Twitter. What’s your Twitter
Louis-Vincent Gave 57:32
handle? Oh, yeah, sorry. I don’t know if I’m active. I’ll just post silly things every now and then, things that amuse me, my Gav Vincent, which is because my real name is Louis von so I just Yeah, Gav Vincent. Vincent
James Connor 57:47
on Twitter. Hey, we’ll post that in the show notes, Louis,
Speaker 2 57:50
once again, thank you. Thanks so much. Great to see you.
James Connor 57:54
There’s so much happening in the world right now, especially when it comes to geopolitics, and if you need help understanding how these events will impact your financial future. Consider having a discussion with a professional financial advisor. You can find out more information@wealthion.com slash free. Once again, that’s wealthion.com/free
