China’s $19 trillion crisis could send shockwaves through the global economy. Andrew Brill welcomes veteran macro investor and DeFi Advisors Founder & CEO Michael Nicoletos to explore his insights on how China’s debt load, bad investments, and capital controls may lead to a currency and banking crisis and what this could mean for global markets. He also shares his top investment safe havens and explains why U.S. markets, despite high valuations, remain resilient, thanks to global liquidity flows
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Michael Nicoletos 0:00
China is in a terrible mess, and has been able to kick the can for five, six years. I’m very hesitant in going into China right now. The main reason is not the liquidity. The main reason is transparency. In getting my money out one day, China will bail in the banks so it will use Chinese depositors money to recapitalize the banks. That will create a huge crisis, and the currency will drop materially. China is facing the music.
Andrew Brill 0:34
Welcome to speak up. I’m your host this week. Andrew brill, Anthony seven pitch hitting for Anthony Scaramucci, and he’ll be back next week, but I’d like to welcome in Michael nicolettos to speak up. Michael is the founder and CEO of defi advisors. Michael’s a macro investor with over 20 years of experience understanding macro landscapes and how behavioral fallacies challenge financial markets. Michael, welcome to wealthion and to speak up. I appreciate you joining me.
Michael Nicoletos 1:03
It’s great to be here. Thank you for having me. Can
Andrew Brill 1:06
you give us a brief overview about you, how you got into the financial world and and how you got to where you are today?
Michael Nicoletos 1:12
Ah, nice. Well, I started in the US I and when I finished my degree, I went to work a bit for the World Bank, but it was something that didn’t really excite me, because the project there take a few years to complete. So I wanted something more exciting. And then I went to where to work for a Greek bank, Euro bank, as I became the head of international equities. And then in 2010 I left, and I launched my own hedge fund. Was a long, short emerging markets Fund, which I ran for 10 years. And in 2019 after having slept, have not slept for more than 10 years, I decided to take a sabbatical, and my Sabari unfortunately became covid. So instead of traveling, I stayed I came back to Greece, because I was in London, I came back to Greece, and since then, I’ve been advising a few family offices. I’ve been, I mean, on the the advisory boards, and I’m advising also in different MNAs.
Andrew Brill 2:19
I think we were neighbors for a little while. I went to a school in Worcester, Massachusetts, and you were in Boston, I believe Correct, yes,
Michael Nicoletos 2:26
at Boston University. Yes, we
Andrew Brill 2:29
were neighboring for a short period of time.
Michael Nicoletos 2:32
Well, we should have bumped into each other.
Andrew Brill 2:34
Yes, absolutely. So Michael, I want to ask you, what do you believe to be the state of the economy here in the United States will get to overseas, because I know that you’re an expert there as well and have a lot of opinions about China, but I want to ask you first about the United States.
Michael Nicoletos 2:50
Well, clearly there’s a slowdown. The question is, if this slogan will become a recession, if you ask 100 people, you get probably not 100 different answers, but you’ll get a few different answers. So it’s hard to say what’s going to happen. It’s clearly there’s a slowdown. The Fed wants to get ahead of the curve by cutting rates aggressively. We saw the first 50 basis points, and it looked like that. It’s going to cut another 50 until the end of the year. And I think probably if we continue to cut rates at this pace, we might avoid the recession, or we might have a very shallow recession. If I can say that, I don’t believe we’re going to have a hard landing. Now this is not a standalone case, meaning that the ECB is cutting rates. China is giving tremendous amount of liquidity in the system. So all that liquidity helps eventually the US will come that later in the discussion, I guess. But my view is that the liquidity all over the world ends up in the US. So given that it’s the most competitive and largest market in the world, money tends to come to the US, and that helps the US in many ways. And
Andrew Brill 4:04
that’ll you think that’ll strengthen the dollar? $1 seems to be somewhat strong right now, but do you think that that the increased liquidity around the world will help the dollar?
Michael Nicoletos 4:12
I think structurally, we’re in $1 bull market. I think in the next few years we can see the dollar much higher. We don’t see the dollar high right now, because PCB was forced to cut trades because the European Union is mostly in the recession. So to a common and we saw also the yen falling, and we saw also the Chinese currency falling. So I think, and we know that central banks talk to each other, it feels to me that, among other things, the Fed wants to help the entire system and lower the dollar so to give liquidity into the entire world system, the dollar is a funding currency in the world. So when the dollar rates go down and the value of the dollar goes down, it alleviates pressure from mostly emerging markets and for. Companies which borrowing dollars. So this is the dollar by itself, helps the entire world, given that everyone’s cutting rates at the same time, besides Japan, it helps the entire liquidity system to
Andrew Brill 5:10
come into the markets. It’s an interesting concept that the US would try and keep the dollar a little bit lower to help the rest of the world explain to our viewers how the world economy is really important, because a lot of people worry about themselves and their own pocketbook. But if the world is struggling, the US seems to be doing great. It still isn’t doing all that well. Is it?
Michael Nicoletos 5:32
Well, okay, the US has the, let’s say, the privilege of its economy being driven by the consumer, more than 70% of the GDP is driven by the consumer. So as long as the employment market is good and the US people make money and they consume, the US economy does well, in principle. Now clearly there are more things to add to it, but this is the the advantage that the US has, clearly, when there’s a global recession, exports fall. US companies can’t export a lot, and they have enough, they get affected on their balance sheet. So it’s not it affects, it clearly affects us, but I think it affects less than to affect someone else. And given that the US has the US dollar, and the US dollar is a global reserve currency which accounts for more than 80% of global transactions, the US has the unique privilege of being able to issue as many as much debt as it wants, or as many dollars, because global demand is so huge that they can afford to do that other countries which are not the global reserve currency cannot do that in that magnitude, and that’s why we see sometimes currency crisis around the world, especially in emerging markets which have liquidity needs a bit different than the US in
Andrew Brill 6:53
your estimation, Michael, do you think the Fed needed to cut 50 basis points? It seems that all the economic data points to the economy doing okay. It seems like we’re kind of rolling along in an even keel. Do you think that the government needed to cut 50 basis points? And do you think they need to cut even further? Look,
Michael Nicoletos 7:16
let me put it this way, if it was the US as a standalone country, and there were no other countries, I would say probably they shouldn’t cut 50, maybe 25 and that’s not clear, but it’s debating. If they hadn’t cut 50 basis points, the dollar would go through the roof. If the dollar went through the roof, all the efforts that the other countries are doing would go down the drain, because the dollar would squeeze all the markets. And let me give an example for people who don’t use usually us people, people in the US don’t understand this because they haven’t been in in emerging market, having traded emerging markets for more than 10 years. I can tell you when the dollar goes up. Let me give you an example. So a Turkish company goes to the bank and wants to borrow for its needs. If it borrows in the local currency, will be with an interest rate of 30% or 25% depending on what it is given today’s terms, if they borrow in dollar, it’s going to be five 6% so most companies tend to borrow in dollars. Now, if the dollar starts appreciating the nominal value to pay back increases so the effect is diminished, so you never you don’t want the dollar being the funding currency of the world to strengthen a lot, and at the speed, at the quick speed, because that affects everyone, except outside the US, and that can Create crisis, where we’ve seen emerging market crisis, in international currency crisis. So I think the US is clearly speaking with other central banks. I think it did no harm to cut 50 basis points in the sense that there is a slowdown. So I think it remains to be seen. But in my view, the ECB needs to cut rates more aggressive so given that the ECB needs to cut more aggressively, and China is in the middle of a of a turmoil, an economic turmoil, I would say, I think the US will continue to lower rates unless, of course, at some point after the election, the dollar becomes a quote, unquote weapon, and the US uses it as a foreign policy, and Lets strengthen, strengthen, to put people on the table. We’ve seen that in the past. It could happen again. It’s an
Andrew Brill 9:25
interesting concept, and I don’t think you know, and I’m so happy you’re here, because nobody’s put it in those terms, where the the US Federal, you know, policy makers actually thinking about the global economy, not just the United States, whereas we just think about the United States, but it’s a, it’s a, I think that it’s a really, really good point, that we’re not just working for ourselves. We have to work for the entire world, because we are the currency of the world, basically. So I think that it’s a, that’s a great point. I appreciate. You making that?
Michael Nicoletos 10:00
Let me, let me say a few things. We’ve seen a lot of discussions about the new BRIC currency, which is supposed to substitute the dollar as a global reserve currency. And the argument is that the huge deficits in the huge debt make the dollar unsustainable. Now, if you take the BRIC currencies and you see their financials, trust me, they’re not better than the US. Also, most of them have capital controls. But again, if, if that was the case, you would see other currencies strengthening and getting a part of that dominance. But that doesn’t happen. So the US has the privilege and the responsibility of having that, that utility. Now, if they cannibalize it and they weaponize it in, you know, I’m saying, if they were to do that, they were to strengthen the dollar, then they didn’t. They would increase the probability of other countries trying to find another way and finding another currency. That would not be easy. It will take 10 years and more, but they the drive would actually be serious. I don’t think the efforts which we see now are very serious. And I don’t think there’s a threat at this stage for the US dollar.
Andrew Brill 11:10
How much does that affect trade? When the dollar becomes too strong, how much does that affect trade, us, exports or imports? Well,
Michael Nicoletos 11:20
it affects it in the current account. So if it strengthens, it exports less. If it weakens, exports more. But that’s not the only thing that the US is looking at. There are a lot of other issues in the economy that you need to pay attention to. The exports are one, one component of the economy. But as I said before, the consumer is the driving force in the US. So the first and most important thing is to look what the consumer is doing. So this is why the Fed is looking at the CPI and the inflation to see if it’s coming down. Because when prices go up, it’s pressure the consumer to spend less. When unemployment rises again. It’s the same thing. That’s why the Fed has a dual mandate of price stability and full employment. It needs to focus on these two things to keep the economy, the US economy, growing and continue to grow as it has the past years.
Andrew Brill 12:16
So Michael, let’s look at the markets for a minute. The US stock market. Equities just keep rising and rising. Obviously, that’s got almost nothing to do with the economy. But How sustainable is the US equity market right now?
Michael Nicoletos 12:31
Well, let me put it in a first of all, markets are a relative game, not an absolute game. So when you’re an investor, you need to find where to put your money. So there are a lot of options, but if you look at it, if you step away and you see where is the best market to invest, you’ll see that the US is the best market right now. So in terms of growth, in terms of prospects, in terms of transparency, in terms of structure, the US, the US economy, the US bond market, for example, trades like, I think, 15 trillion a month, when Europe trades like less than, if I’m not mistaken around five, six so, and China around 2 trillion. So we understand, when you have such a broad market, it tends to help investors feel comfortable to invest in. Now, what more drives markets right now is not valuations, it’s liquidity. And if we look at global with liquidity, we see it clearly increasing, and that liquidity is what driving is driving markets. Many will come up and say, Guys, the valuations are through the roof. They don’t justify the earnings. Okay? I hear that. For example, the hottest topic is Nvidia. Okay, so we’ve seen Nvidia in every headline. But again, first of all, Nvidia always outperforms its forecasts and has a forward be of, let’s say around 3640 I haven’t checked today where it is. I want to remind investors, because I used to trade the market in 19 8019, 92,000, when liquidity comes into the market, and it comes at the paces we see now, because it is the pace with which liquidity comes into the system is unprecedented. From any standard markets tend to go crazy. And I think we’re at the stage where equity markets in the US will do very well in the next six months, even if valuations don’t justify just because the equity will be there and you need to put your money somewhere. And versus other equity markets, the US is the most appealing one.
Andrew Brill 14:37
It seemed like China was there for about two weeks, but that’s taken a nosedive. Let’s get into China for a minute. What is going on there? They’ve just pumped billions of dollars into their economy, and it, it’s, it’s way short of probably what they need, isn’t it? Well, China
Michael Nicoletos 14:55
is in a terrible mess, and has been able to keep the. Can for five, six years at least, I would say, Well, China right now, let me give you the numbers so people can understand the magnitude. China has a GDP of approximately 18 trillion, when the US has a GDP of let’s say I think 27 trillion, if I’m not mistaken. So, and it’s m2 which is the liquidity of money that’s in the system, is around 43 trillion. So like three times its GDP, the US has an m2 of 20,000,000,000,077% of percent of GDP. So you understand that the liquidity of money that’s been pumped into China all these years is staying in China because China has capital control. So imagine a balloon where you pump air, pump air, pump air. The balloon creates Bigger, bigger and bigger. The air can’t leave because you have capital controls and it stays in the system. What happened China all these years was trying to drive its economy through investment, which around was around 43.5% of GDP, and it was doing that by doing bad investments, not only good investment. So unproductive investments have happened. And you I don’t know if people know about the ghost cities. There are entire cities in China which are and they’ve built entire cities where no one lives in and there are, there’s, it’s not one or two, it’s more than 10. So imagine now all that space which has been built, and now it’s not productive, and all these have been happening via the Chinese banks have been lending either to local governments or to corporates to do the investments to understand the size of the banking system in China. It’s around 60 trillion. This is like 340% of China GDP is 54% of global GDP. Japan at its peak was 32% in, I think, in 85 and the US at its peak was 27% in 94 so you understand that the level of the assets in China within the banking system have grown exponentially. Now, are these good assets? Well, you have 60 trillion of assets. Banks have taken provisions for less than 2% of the bad loans the equity market, until recently, in the last three years, have lost more than $6 trillion the real estate market had lost more than $4 trillion so this is a wealth effect of 10 trillion lost. And adding to that is all the unregistered debt by the local government, which is around 9 trillion which is not registering the debt, so which is 50% of China GDP. Now China announced measures which around 400 billion. I don’t know. I haven’t checked exactly, but now I just mentioned a whole of 10 trillion. And we just talked about, we’re here to measure 500 billion. Clearly, it’s not one to one. And if we remember the US crisis, where, when they gave tarp 800 billion initially, and that built confidence, and then the market started rallying. It’s a confidence game, but the confidence gain needs a big bazooka, which will make everyone believe that this is going to be it. The initial measures don’t seem to be it, and by any measure, there’s still a long way to go. So the balance the Chinese banks need to claim their balance sheet, which is very hard in terms of size, many will argue that there’s a term there is a huge savings. Chinese are huge savers, yeah, but they’re huge savers, because the government all these years was in their expense, giving low rates to them and giving low rates to people who borrowed so their expense, all the bad debts have if they were to shift in a more consumer driven economy like the US, which now 50, I think 54% of GDP is consumption. If we were to take to take it to 70% take it Japan during the 90s, it took it. It took 15 years to go from 65% to 75% this is a 10 year process. It’s not something that can happen overnight. So even if you wanted to create a consumer which will drive the economy and substitute the investment like economy that you had until now, it’s going to be an issue. They tried by putting a lot of effort on manufacturing, which was 25% I think of GDP. But again, that’s double what the other countries have, and given what’s been going on in the world, and tariffs are likely to increase, not decrease, the manufacturing won’t be able to be sold at the scale they want abroad, so that will put even more pressure. So now China is within a rock and a hard place. They need to find a way to give liquidity, even if they borrow, which they will borrow, and even if they give, m2 will go even higher now m2 Why do I mention it? I mentioned m2 because m2 right now is 340% of GDP. But how much 240% of GDP 12 times, 12 times its FX reserves. So the FX reserves are around 3.3 everyone. All the numbers I’m giving are dollars. So people can understand, right, if it’s three point trillion, and you have 43 trillion in the economy, and you were to take away the capital controls. Do we think with an economy going that bad, that 3 trillion would be enough to avert a currency crisis? My opinion is No, and I think eventually we will see the currency dropping, but has to be done in a manageable and gradual way so that it doesn’t create a crisis. Now, who’s going to be first a crisis? Or the Chinese managing to lower the Chinese currency? We will find out. But the pressure is enormous of China.
Andrew Brill 21:32
I mean, obviously China is the second largest economy in the world, and we need them to the world needs them to pull themselves out of this. You think lowering capital, go getting rid of capital controls, will get people to spend money and increase their GDP and get more money to circulate
Michael Nicoletos 21:53
anybody another way. As a fund manager being having done this for 10 years, you always try to find others. Try to think what could be go wrong. What haven’t you thought how this could play out? You try to play all the scenarios and try to figure out what’s the way out. How could they do it? How at this stage, in my opinion, they’re buying time, in my view, in my view, and this is speculative, so I’m just saying what I think the end game is. I think one day China will bail in the banks, so it will use Chinese depositors money to recapitalize the banks. That will create a huge crisis, and the currency will drop materially. They will allow the currency to drop materially. And then, in my opinion, if I were China to build confidence, I would take my currency to gold or something like that. In order to bring stability back to the system. Have a lower currency which I can export, and I have clean banks where I can land again. This is the way I see the game being at the end game now again, a lot of things can change, but in my view, this is a way, a way out, unless, of course, which is a big if the US and China become friends, and US supports China with investments, with liquidity and everything and can avert or postpone. I mean, you cannot postpone the crisis, but you can. It’s like it can be a lost decade. You won’t have a loss, but nothing will happen spectacular, and you’ll avert a huge crisis like Japan. So you could have that. But I don’t see us and China becoming friends anytime, anytime soon. At least that’s how I see. I don’t know there are other people behind the closed doors which know much more than me, but from an outsider and reading the news and seeing what is going on. The probability of tariffs going higher, and the conflict, conflict, I mean, quote, unquote, between the US and China increasing. I think it’s highly liked.
Andrew Brill 23:59
So you think that the government just needs to kind of bring it back to ground zero, kind of bail everybody out and say, okay, you know what? It’s going to take us 10 years to pull out of this. But we have to, we have to be in a lot of pain before we can have that kind of gain. I guess. Look, the
Michael Nicoletos 24:16
first goal of the CCP is to remain in power. So you have to think, from an emerging market point of view, how the the head of the country can remain in power, and they will do everything they can to postpone it, to buy time, to give as much liquidity. So these things do not happen overnight. They take time, and then suddenly they happen. But I think the pressure has increased tremendously, and I think China is facing the music. Now it depends on how the next months play out. Now, I believe until the US elections, I don’t see the US doing anything in that sense. They will lower the currency. They will keep markets. Doing. Well, I don’t think anyone wants to destabilize the market for an election in the US, but after that, I think depending on whose government, the discussion with China will begin, there will be hard negotiations. And I think we’re going to see a lot of things. We could see a few things breaking, and depending on how fast they break, and what breaks, you can see if there is a tsunami or not. So I would be I’m very hesitant in going into China right now. The main reason is not the liquidity. The main reason is transparency in getting my money out. If I were to put money in China, how do I get my money out when I need it? It’s not a guarantee. So these are the things that’s scary. It’s
Andrew Brill 25:40
funny. We, you know, the when these stimulus packages were first announced, their their market shot up 20% in a very short period of time. A lot of the money managers and people I’ve spoken to in the last week have said, You know what, I took all my money out of China. I guess they were looking for that rise, and they decided, You know what, we’re going to get out now while we can, because we may not be able to get out down the road. It’s
Michael Nicoletos 26:10
funny what you’re saying, because if you look at the data, institutional investors got out of the market or reduced their positions, while retail investors increase the position. So I guess you are right. A lot of institutional investors were looking for that liquidity event in a positive way, to be able to be able to sell and to reduce their positions. And I think that’s the wise thing to do, in my opinion, at least, look, a market was going down for three years, a bear market always had this rape rallies. Sometimes they’re big, sometimes they’re small, but they always have there’s never a straight line of the market, either on going up or going down, you’re going to see the volatility spikes at some points depending on the events you got that event. Because no one was expecting a liquidity event, a positive liquidity event by the Chinese government, and that took everyone by surprise, and the Squeeze was huge, because I guess there were huge short positions and different positions which were, you know, below, below, below weight. So many came in. They chased the rally. You saw the yesterday market, the Chinese market fell to 7% so and now the the government wants to have a press conference on Saturday to explain and announce more measures. So you see, these things don’t end up that simple. And remember the US did tarp, then did QA one, QE, two, QE, three, QE, forever. But you see, TARP was not enough. But tarp changed the the the the climate of the market. So that was very powerful. I think China needs a lot more measures, and it needs a full package. The package was pretty comprehensive. So they did a lot of things. They didn’t do one thing, but I think they need to do more, and they need to see how they’re going to address all the bad debt in the banks now, in the past few years, just to give an understanding to your viewers, the you needed 13 units of credit to create one unit of GDP, and that number increased every year. So every so you needed more and more debt to keep that GDP growth intact. And because China wanted to keep growing at 5% they needed to put credit. But again, the numbers in China, and I want to say this, GDP is not calculated in the same way as it is calculating the rest of the world. So GDP is not a good measure to compare, because in the rest of the world, GDP is an output number, meaning how much output you create. That I’m putting in simple terms. It’s a bit more technical than that. In China, it’s an input number. It means that they tell the local governments, I need you to produce 5% of GDP, and they create 5% of GDP no matter what. It’s funny, but that’s how it is. Now, if you do that, you create incentives to all the local governments, A, to lie, B, to create that in order to facilitate it and to do whatever they can because they don’t want to disappoint. This is before any reason. Now, last year, China grew 5% I think, and investment, which is 43% was flat. That means that the rest of the rest grew by 10% this is not this is not realistic, and this can be so when we look at the GDP number coming from China, it’s a different set of numbers than the one we understand in the West. So it’s not a good proxy to understand whether China is growing or not. This is very important for investors, and I think it should be clarified, because people you know, when you see GDP, GDP and you think it’s the
Andrew Brill 29:58
same thing. Michael, how. Much before we take some viewer questions, how much are the tariffs that we’ve placed on China hurt them? Well,
Michael Nicoletos 30:07
it hurts for sure. If you if you think that they invested a lot in manufacturing to to expand their growth, it hurts them a lot, because now they have overcapacity and overcapacity you have tariffs and you have all the negative headlines. It doesn’t help. The worse tariffs get, the worse it gets from China. It’s a problem. Of course, China will reciprocate. I don’t think they won’t reciprocate, and they will put tariffs on the US and European goods, in case the Europeans do the same. So it will have an effect on the US, but the magnitude of the effect on the two countries it’s much more different, because China, until now, had been dependent on investment in manufacturing, while the US and Europe is different a bit, and the US was dependent on the consumer. So I think it doesn’t affect them the same, but it affects both. For sure, it will create some form of tariffs, will create some form of inflation, okay, because increased price. But if your baseline commodities, oil, energy, steel and everything, does not spike up and does not spike up either for supply reasons. Example, when we had covid, prices went through the roof, not because demand went up, but because you didn’t have any supply. You could have things like that. Again, these play a role and need to be seen. But I think the US would be much better off than China. In the case of tariffs, there’s a tariff war. Let me put it this way. So
Andrew Brill 31:37
let’s take some viewer questions. We had some viewers that have written into us or emailed us, and we, we have, we have some questions for you. Michael, if you’re, if you’re a game to take
Michael Nicoletos 31:46
them, yeah, of course should.
Andrew Brill 31:50
So first question is from Sam from Florida. Michael with talk of bricks developing a new currency to challenge the dollar’s dominance. Do you see this as a realistic threat to the current global financial order. We kind of touched on this earlier.
Michael Nicoletos 32:04
We kind of touched earlier look Bricsys, Brazil, Russia, India, China, South Africa. Russia has capital controls. China has capital controls. India has capital controls. So you want them to create a common currency which will be tradable, and each one will have capital controls and try to see what liquidity it’s gonna just recently, there was a headline between Russia and India that they wanted to trade, and no one wanted to help hold the other countries currency. They were doing barter. So look, if they were serious, eventually they could, but you cannot have a closed capital account and a global reserve currency at the same time, you need to have an open capital account so money can free, can move freely. So when you accumulate the FX reserve of a big currency, you feel comfortable that you can use it and you can take it out of the country. One thing second is you need to have a transparent and big, let’s say, bond market, because the US currency is not a standalone product. Is a derivative of the financial system in the US, the US system, and the Treasury market in the US is the biggest Treasury market in the world. When I’m the Central Bank of, let’s say, of whatever European country you want, and you accumulate dollars. You don’t have dollars sitting there. You buy US Treasuries, you get a yield. But you know that at any given moment you push a button and you sell the US Treasuries. Now imagine accumulating Russian bonds, India bonds, China bonds, South Africa bonds and Brazil bonds, and you need liquidity. So things are not as simple as we as they can imagine. Yes, the headline discussion has increased dramatically, but if you look at the data points, there is no data point suggesting that the law the dollar is losing power right now. And if it were to lose, for the sake of argument, it would take more than 10 years for this to happen. So this is not imminent. It’s not happening now. I’m not saying it’s not going to happen at some point, because all global reserve currencies at some point change some at some point, with the British pound, it’s no longer the British pound, but these things take a lot of years to have. It will happen eventually, but I don’t think it’s happening anytime soon. And I don’t see like the brick basket being it. It could be, but I don’t think it will be. Let’s
Andrew Brill 34:39
head to the next question, Will recent government spending and ongoing deficits lead to high inflation and dollar devaluation? Are tips? A good hedge? Mike from Texas,
Michael Nicoletos 34:52
now this is a good question we talk about. I’ll give just, just for you know, sake of discussion, the US deficit is such. 7% from around 7% okay, how much is China’s deficit? A
Andrew Brill 35:06
lot more than that. Well, officially, 3%
Michael Nicoletos 35:10
if you, if you include, if you include all the things that they don’t put on the budget, it’s 7% minus 7% deficit. And there are reports from the IMF that take it up to 15% so it’s it’s good to know what’s going on in the world. Now the US deficit, the US deficit, clear, is an issue, and eventually it will become a problem, as long as the US is a global reserve currency and it can afford to give liquidity to the entire world, if foreigners buy those bonds, then there’s no issue. There’s no issue in the sense, yes, the debt goes up, but you can find it now. Inflation will happen if the money that is used from a fiscal budget is given directly to consumers, like for example, why didn’t we have inflation in the US? For the 10 years we had QE, the balance sheet of the Fed went from 800 billion to 9 trillion, I think 9 trillion, around 2019 why didn’t the US have any inflation? Because that money went to financial assets. Covid hits the world. You have a QE, and you have a fiscal deficit, and you have a fiscal budget which gives checks to everyone at their home, so they go and spend. So even consumer finds money on his hands. Let me put this, it is given money and it starts consuming it. Yes, you have another spike in inflation. But inflation is money given without being productive. So if you have, if you were to increase which, my case is that the US in the next few years will have a huge infrastructure spending, which will, like the New Deal, all the infrastructure in the US is pretty old, and it’s a good way to give jobs to people and to create and to fix the infrastructure. So if you produce something with the money you’re given, then inflation is not an issue. And it doesn’t happen if you give money without any production, without any producing anything, and you go and spend it, clearly you have inflation because you have more demand for the same goods. So inflation is something to look at. I don’t think we’re going to see inflation go at the levels we saw, unless there’s something crazy by the government giving start sending checks. If you see the US government sending checks to people, then I agree. You see inflation spike up again. If they give jobs with money, I don’t think inflation will it will spike dramatically. It might go up a bit, but won’t be something that will cause the world for don’t forget that the world has seen inflation 10 and 15% the world was functioning 15% what no one wants to see at any cost is deflation, because if you have deflation in a highly debted world, then you won’t be able to pay the assets. The asset prices go down while the debt goes up, and then the capacity to pay that debt become 60. So you always want inflation at some level so that the asset prices go up as long with the debt. And these two are fully collateralized, or at least as collateralized as it can be. So my fear would not be that I wouldn’t be buying tips. My view is that the US Treasury curve that I would buy the front end of the curve, the two year bond, which is around 4% I think in the next few months, we’re going to see the US curve steepening, because the front, the front side of the curve will come lower, because Fed will cut rates, and because the long end of the curve will start worrying about the deficit and the debt, it might find higher levels to do an equilibrium. So I think the US curve will steepen in the coming months. So I would buy if I were to buy US governments by shorten one, two years, three years, I wouldn’t be buying tips, and I would not buy a long end, and I would, I think duration would be penalized in the coming months. That’s my
Andrew Brill 39:09
another question from a viewer in a market panic or crisis, will long term treasuries rally on expectations of renewed quantitative easing, or could they fall due to fears of us default or monetization? That’s edge from Canada
Michael Nicoletos 39:25
in any crisis we see in the world, whenever there is a crisis anywhere in the world, everyone runs to the US Treasury market. So in time of a crisis, which is the liquid and safest market, the US Treasury market. Now let me play devil’s advocate. If the US Treasury market were to collapse, trust me, there would be anything. Unless you had gold in your in your basement, you would have nothing else to be able to save, to save you from losing all your money. I think you would end up in a big war. Now, again, this is. Far fetched. Takes a long time. I don’t want to be dramatic, but I think in any crisis, the US trade market rallies. And if there was again a discussion about PE clearly the US, both the short end and the long end would rally. I think we
Andrew Brill 40:15
have one, maybe two more questions. Are there any emerging markets you are bullish on, and that’s Xavier from Spain.
Michael Nicoletos 40:24
I think Turkish has gone through a crisis, and it’s doing pretty much better. Their inflation has come down to 25% used to be 60. So just to put it in perspective, and it seems that the central bank is doing better. So I would look at Turkey. They have big companies, they’re highly exporting, they’re good companies. So I think this is a market I would look at. I would definitely look at India. And this is a structure alone, meaning that I don’t think it’s going to pay in the next three months, but I think that if you buy, invest in India in the next five, six years, you’ll be doing very well. So I think these are the two marks I would look at right now, Mexico is clearly a good case, but it’s a better play on the US. If the US does well, Mexico is doing well as well, and now we have the reshoring part. Factors are leaving Asia and coming closer to the US. So Mexico is a high beneficial that policy. So these, these three, I would be the ones that I’m looking
Andrew Brill 41:25
at, can central banks allow any significant market drop, or would it risk the system’s collateral and pensions?
Michael Nicoletos 41:33
Well, I think they cannot allow it at this stage. And if it were to happen, they would come in with huge buzzwords to give liquidity. Now, again, they could have give a lot of liquidity, and maybe the demonetization or your purchasing power will be reduced more than the price of the assets going up. So you would see your price, your asset prices, going up, but your purchasing power would be less than that. So effectively, you would be losing money without you knowing it by looking at your screen and prices going higher. But I don’t think the US government at this stage can permit such a thing. And I think in the foreseeable future, at least in the for the next one, two years, if any liquidity crisis or any market crisis come in, they will pump in liquidity to avert the crisis. That’s why. So
Andrew Brill 42:29
I one, one question Anthony always likes to ask is, if you’re sitting around a table with your family and friends and they say to you, Michael, what am I doing with my extra cash? What are you advising them to do it at this point.
Michael Nicoletos 42:41
Well, the question first is, depending on your risk tolerance. Okay, so depending on your risk tolerance to the answers vary, but for any and the weights vary of what I’m going to say now, because people, I would definitely have US Treasuries shorthand, I would have US equities. I would definitely have gold and gold miners, US gold miners, they’re undervalued, and I wouldn’t buy gold miners that have mines outside the US, because in any crisis, they can seize foreign foreign governments can seize the assets, and this is risky. So look at us miners, and I would have, yes, US stocks and I would also have a percentage in Bitcoin. I think it’s a new technology. I think it’s a generational gap. If you ask any 20 year old if you want to buy gold, because it will tell you Bitcoin. If you ask any 60 year old if you want to buy gold or Bitcoin, it will tell you gold. So I think it’s a generational change. Everyone needs to have some portion in the portfolio that could be 1% it doesn’t matter, or it could be 5% depends on your installers. But I think this asset is here to stay. It’s been here for 15 years. It’s got four drawdowns of more than 80% to survive. So I think it’s something that it’s used in. These technologies seem to have tremendous value, and we’ll see more from that in the future. So,
Andrew Brill 44:03
so you think Bitcoin is gonna be sorry, you think Bitcoin is gonna become more mainstream at some point, I
Michael Nicoletos 44:09
think it will become, it won’t become a currency. I don’t think it’s gonna become a competitor like gold is. I mean, you gotta have a portion of that in Bitcoin, which is a stable asset in the sense that only 21 million can be created, and that creates a limited supply. And given the debasement of the currencies, which will continue, because it’s the nature of humanity, and it has always happened, governs bring more money, give more money. So you have a debasement, which usually is it. You don’t see it unless you have high spikes of inflation, and that asset will benefit from that. So I think these things are very interesting. How could some other patient emerging markets just mentioned? But again, that has to do with the risk tolerance of the vessel. If you’re if you’re zero risk you, I wouldn’t recommend that because. Emerging Markets have a lot of volatility, and sometimes they have a lot of stress, so I wouldn’t recommend them investing in that, but depending on the risk tolerance, I would look at this thing
Andrew Brill 45:10
perfect. Well, you know, Michael, thank you so much for joining. I want to know where people where can people find you? Where can people find your research, your work, and because I know I follow you on Twitter, but where can people find you? Well, people can find on Twitter. My
Michael Nicoletos 45:25
handle is m nicolettos, M, N, i, c, o, l, a, Q, O, S,
Michael Nicoletos 45:30
if you ask me anything, I’ll reply. I tend to reply to everyone, so maybe I’m a bit late, but I’ll reply to everyone. And I have a sub stack where I write a few things. It’s open. It’s free, so people can, if you go to my Twitter handle, you’ll see it. They have a link, and it’s available to everyone, and they can read my thoughts, and if they have any comments or any thing they want to share or discuss, I’m open to discussion. I might be wrong about what I write. I like a good debate. If we all agree, then what’s the point of having a discussion so seriously, if people have different thoughts or different I would love to have a discussion and see where I might be wrong and maybe I am wrong, and this would be beneficial for me and for them. Michael,
Andrew Brill 46:15
thank you so much for joining me. I you know, I know Anthony apologizes for not being able to be here, but I appreciate our conversation, and I learned some new stuff today. So I appreciate your expertise, and I appreciate you sharing it with our viewers. Thank you so much.
Michael Nicoletos 46:31
Thank you for having it’s been a pleasure. You know, I always like to talk to nice people, and they do great work. Congratulations. What the work you do? And again, anytime. And if anyone wants to ask me anything, feel free to comment.
Andrew Brill 46:44
And one day, I’ll get to Greece and I will come and say hello.
Michael Nicoletos 46:47
You have an open you have an open invitation anytime, send me a message. I’ll arrange everything for you.
Unknown Speaker 46:54
Thank you very much.
Michael Nicoletos 46:55
You’re welcome. Thank you forever. Thanks
Andrew Brill 46:58
so much for watching our discussion here on speak up on the wealthion network with Michael nicolatos. He certainly has opinions on markets and the facts to back them up. If you need more facts and help being financially resilient, please head over to wealthion.com/free for a free no obligation, financial review. And of course, if you could like and subscribe to the channel, we greatly appreciate it. Don’t forget to turn on notifications. So you know when we post new videos to the channel, and please do the social media thing with us. All the links are in the description below. And if you like this content and are looking for more ways to achieve long term wealth, watch this video next until next time. Stay informed. Be empowered, and may your investments flourish.
