Bankless - 7 Ideas for Investing in Uncertain Times | Louis-Vincent Gave

Starting point is 00:00:03 Welcome to bankless, where today we explore the frontier of investing in these uncertain times. I've got a solo episode for you today. It's just me. I'm here to help you become more bankless. In today's episode, we have Louis Vincent Gab. He gives us seven ideas for investing in these uncertain times. So Louis is a macro analyst. He's got some hot takes, I would say, some of which are contrarian, all of which are actionable, which are the best kind of macro takes, if you ask me. And if you own assets, if you're an investor, and that's probably everyone that listens to bankless, I think you're going to love this episode. Even if you don't agree with everything that Louis says, and maybe especially if you don't agree. A few things we talk about.

Starting point is 00:00:45 First, we open things up with the recent market mayhem, the yen carry trade. You're probably familiar with everything that happened earlier in the month of August, all of these shenanigans. What does Louis think? Are we headed for a bare market? Then we get to his core ideas. These are the seven ideas on how to invest. in these times. I will list a few of them. These are my paraphrased words. Number one, you got to avoid the bond market train wreck that's coming. Number two, avoid duration at all costs. Number three,

Starting point is 00:01:13 6040 is dead. And he gives us what's replaced it. Number four, U.S. equities, why they're expensive and non-U.S. equities are cheap. Number five, don't worry about the recession. Buy value. Number six, Asia as king and number seven, why the dollar will devalue and what that looks like. At the end, we also discuss our favorite subject, which of course is crypto. He's got some spicy takes on that too. So if all of this sounds interesting, strap in, we'll get to the conversation in just a minute. But first, got to mention our favorite place for buying crypto in these uncertain times. That is Cracken.

Starting point is 00:01:48 If you don't have an account, after all of this time, pause this podcast. Go create an account and get yourself set up with Cracken today. If you want a crypto trading experience backed by world-class security and award-winning support teams, then head over to Cracken, one of the longest-standing and most secure crypto platforms in the world. Cracken is on a journey to build a more accessible, inclusive, and fair financial system, making it simple and secure for everyone, everywhere, to trade crypto. Cracken's intuitive trading tools are designed to grow with you, empowering you to make your first or your hundredth trade in just a few clicks.

Starting point is 00:02:20 And there's an award-winning client support team available 24-7 to help you along the way, along with a whole range of educational guides, articles, and videos. With products and features like Cracken Pro and Cracken NFT Marketplace and a seamless app to bring it all together, it's really the perfect place to get your complete crypto experience. So check out the simple, secure, and powerful way for everyone to trade crypto, whether you're a complete beginner or a seasoned pro. Go to crackin.com slash banklists to see what crypto can be. Not investment advice, crypto trading involves risk of loss.

Starting point is 00:02:48 The Uniswap extension is here. The self-custody wallet created by the most trusted team in DeFi Uniswap Labs, Designed to make swapping feel effortless. This extension lives in your browser's sidebar, letting you swap, sign transactions, and send or receive crypto without ever losing your place on the internet. Plus, with human readable transaction messages, you'll always know exactly what you're signing.

Starting point is 00:03:09 Navigate a multi-chain world effortlessly with support for 11 chains like Ethereum main net, base, arbitrum, and optimism. No more chain switching or token importing. All your assets are right where you need them to be. The Uniswap extension is designed to level up your swapping experience with other Uniswap Labs products as well. easily onboard to the extension using the Uniswap mobile wallet to begin managing your assets across platforms

Starting point is 00:03:29 and take advantage of smooth, seamless synergies with the Uniswap web app. So go and download the Uniswap extension today by clicking the link in the show notes. Just another way Uniswap is helping you swap smarter. The Obel collective is up and running and is maybe one of the most important collectives that you've never heard of. Oble is bringing distributed validators or DVs to the Ethereum staking stack. Distributed validators allow multiple parties of people running multiple nodes to create a single virtual Ethereum validator. Together, this makes participating in Ethereum consensus more accessible, more affordable, and more inclusive. It is a stritz improvement to the Ethereum staking tech stack.

Starting point is 00:04:04 With collaboration from Lido, Etherfi, eigenlayer, and 50 other entities, and thousands of individuals, the OBLE Collective is working to scale and decentralize Ethereum using DVs. And now you can get involved, introducing the Obel Contributions Program. Visit obel.org slash bankless to stake on DVs, either through a partner staking protocol or at home. Earn access to future governance and ownership in OBLE while contributing to retroactive funding for projects that are actively decentralizing Ethereum. This is your opportunity to secure inclusion in one of the most important projects working to scale Ethereum's foundation for future growth. Visit obel.org slash bankless to get started. That's obel.org slash bankless nation,

Starting point is 00:04:44 I'm very excited to introduce you to the first time to Louis Vincent Gav. He is a macro investor who co-founded GavCal research. And I think David and I, when we have podcasts like these, we really enjoy macro investors who do two things. One, they have something to say. And secondly, they make sense. And Louis is definitely one of those. He also wrote a book a few years ago, which I haven't had the chance to read, but I enjoy the titles called Avoiding the Punch, Investing in Uncertain Times.

Starting point is 00:05:12 And I think I want to steal that theme for today's episode, Louie. I think what we're trying to figure out is how to avoid the punch and invest well in these uncertain times on the episode today. So, Louie, welcome to Bankless. Well, thanks a bunch of around me. It's your real pleasure to be here. Thanks for plugging in my book. It's a bit dated now.

Starting point is 00:05:33 To be honest, I wrote it at the time. The main thesis of the book, it was published back in 21. The thesis of the book was, how did you put in cushions in your portfolio in a world in which bonds are slated to get destroyed? And of course, you could argue that since then, bonds have been destroyed. I think we're just at the beginning

Starting point is 00:05:53 of the destruction of the, overall bond markets. But that was the thesis of the book three years ago when he was published. Yeah, I guess it'll be a time will tell whether it's outdated or just at the beginning of a new trend. I mean, I think that's a killer theme. And I think according to you, this is the beginning of a new trend. And we're certainly, we haven't changed from that subtitle, which is like investing in uncertain times. Maybe it always feels like this, but it feels like the 2020s, particularly when I talk to you on August 14, 24, these seem like very uncertain times. Let me just like ask maybe that question. Do you think this time in the market is investing is more uncertain than other decades

Starting point is 00:06:35 that you've been a player in this game? I'm 50 years old. I don't know. And I've been through a few crisis. I actually started my career more or less during the Asian crisis. I was working for a French investment bank and they sent me out to Asia just at the time where Asia was imploded. And to be honest, you know, back then you'd have currencies such as the Indonesian Rupia, the Malaysian Renga, that would fall 5 or 10% a day. And that felt like the whole world was collapsing. And of course, the 2008 crisis did feel like all of a sudden you were wondering whether you'd be able to get money out of the ATM come Monday morning.

Starting point is 00:07:12 You know, again, I'm 50 years old. Over three decades, I've had periods of deep uncertainty. I think the uncertainties today, What's fascinating is they're not even uncertainties. The biggest issue I think we're confronting is the fact that here we are at the top of the economic cycle, record low unemployment, U.S. economy homing along at 6, 7% nominal GDP growth rates. And the U.S. government is running budget deficits of 7% of GDP at the top of the cycle. You know, this is, this to me is, it's not an uncertainty because you can see it.

Starting point is 00:07:54 You see the numbers. What is highly unusual, and by the way, this is true of Canada and this is true of France and this is true of the UK. What we're coming to, the big uncertainty is you're looking at welfare states everywhere. Welfare states that were essentially built as one big Ponzi scheme. You know, it was always, you know, as long as you had more people coming in at the bottom, more new workers coming in and not so many old people, the welfare states worked. And the reality is the welfare states have stopped working and financially they're now breaking down.

Starting point is 00:08:28 And you're seeing this all across the Western world. And you're seeing the manifestations of this everywhere where they've been failing public health systems or they've been failing educational systems. The welfare states are collapsing. Now, they're not going to collapse at the same time everywhere and they're not going to collapse in the same fashions. But, you know, when you look at a U.S. government that is slated to issue, you know, on a good year, two trillion of additional bonds in debt, and on a bad year, four or five trillion, the numbers start to get really, really big. So, you know, the odd thing is that it's not even uncertain. It's there. You know, we see it. The maths are there. What's uncertain is how this will all play out. Yeah, I think a lot of listeners to bankless, regular listeners of bankless will have come to a similar kind of thesis as yours, that things are getting out of hand in like Western welfare states in particular. It's, you know, part of our crypto thesis in general, of course, which we'll get to. And I also want to get to kind of what does this mean? So what are the conclusions? And Louis, I feel like you have a fantastic perspective on a few key conclusions. In fact, I saw the slide with seven of those conclusions. And I want to, like go through them one by one and then maybe work our way back to how you came up with this

Starting point is 00:09:48 conclusion. But actually, before we do this, since you brought up a crisis in Asia, let's talk about what just happened on August, I believe it was the fourth. So this is a couple weeks back. So we've had some dust that has settled. And we had market mayhem, chaos, the VIX spike to like 60. We saw in our world in crypto, I mean, price of Bitcoin was down on a Sunday, 15%. Our markets trade 24-7. Price of ether was down 25%. It felt like a shock. We had some macro investors on. Tom Lee from CNBC. He came in. He said, not to worry. This is just a growth scare. Others have said, look, this is more permanent. This is the beginning of a bear market. What's your take on why this happened now that some dust has settled and where we're headed?

Starting point is 00:10:37 So my stunning point is that there are, there was and there are still three massive anomalies in the world that we live in. Three prices, three, that make absolutely no sense. The first is the Japanese yen. I think you have to travel to Japan to realize how the Yenna 160 just doesn't make sense. You know, being able to go to Tokyo and have by far the best meal of your life for half the cost of, a meal anywhere else and of a mediocre meal anywhere else in the world. It tells you that the yen is deeply, deeply misprice. And the fact that there's so many tourists in Japan today is a testimony to this.

Starting point is 00:11:20 So that was the first anomaly coming into the summer. I think there's a second anomaly coming into the summer. And that's the valuation of everything linked to big tech to AI to semi-conductors. If you look, take the MSCI Seymiconductor index, it was trading on nine times book coming into the summer. This is for a deeply cyclical, deeply capital intensive industry. You know, nine times book is just crazy. Historically, semi-conductors trade two to six times both, six at the top of the cycle, two at the bottom of the cycle, and here we are at nine. So you had this second massive anomaly, and I think in the world that we live in is a third anomaly.

Starting point is 00:11:58 And the third anomaly is that China right now is running trade surpluses of $100 billion a month. And it's running trade surplus of $700 billion a month because in the past few years, China has massively leapfrogged Western industry on pretty much everything, on cars, on solar panels, on trains, turbines, turbines, I mean, you name it. China has grown leaps and bounds and is now way more productive than everybody in the Western world. So with that, logically, the Remembe should have gone up. You know, when you're running trades opposed to $100 billion a month, logically your currency should be going up. But it hasn't because over the same period, everybody decided China's uninvestable. So over that period, everybody was taking capital out of China rather than putting it in, even though China was gaining productivity by heaps and bounds.

Starting point is 00:12:57 So those were the three anomalies coming into the summer. Three, in essence, deeply, deeply unstable equilibrium. And, you know, when you've got prices that are way out of whack, it doesn't take a lot for these prices to ship. So what we saw this summer, I think, was, or a few weeks ago, two weeks ago, was obviously the yen started to go back towards some semblance of fair value, or at least some semblance. of not being just ridiculously undervalued. And we started to see the air come out of the AI bubble. And, you know, everybody points to, oh, the yen-carry trade was the trigger for the online. But I actually think it started a bit before that.

Starting point is 00:13:40 I think it started when Alphabet came out and said, oh, yeah, we spent tens of billions on AI. And we're not quite sure how we're going to make money out of this. And perhaps we'll never make money out of this. And then all of a sudden, it's like, wait, hold on. We're not going to make money with us. And what the hell is the point of all of this? And so I think with that, you had a market shift. And so to your question, if we started at bear markets, I believe we have,

Starting point is 00:14:06 partly because the past bull market that we've had was mostly focused on US tag, mostly focused on the AI and all these things. But bear markets are not the end of the world. In our work, you always see there's two kinds of bear markets. You've got your garden variety bare market at 20% drop. And then you got your Ursus max, you have sort of 50%. of jobs that our career ending. You know, 20% drops are healthy. They happen and they allow capital to shift themes to evolve, capital to move from what used to be hot to where it's going to go now.

Starting point is 00:14:40 Now, what's interesting is I think we've started this fair market and as things, not an Earth's magnet, it's a sort of 20% job. And as it does start to settle, what do you find today? as you look through the landscape and you look at what is making new all-time highs as we speak. You know, what is the one asset class that is making a new all-time high today? And you might not like this, but what is the new, the one asset class making an all-time high? It's gold, right? Gold is the only asset class today making a new all-time high. And I think that's a very important message right there.

Starting point is 00:15:16 Yeah, it's a fantastic conclusion here. So I guess when we're talking about maybe a garden variety bear market, my question for you is like to go through that a little bit. So how does that feel? What does that look like? Does a recession kind of kick in? It seems like a garden variety bear market. And like some of bankless listeners, their order of magnitude for what a bear market means. Yeah, you mentioned a 50% down. That would be like a career ender. We call that a regular bear market in crypto. In fact, that would be like a muted bear market. I mean, like our assets go down 70, 80%. And and those are the top tier assets. Like the majority of the long tail go down 95% plus. But anyway, I understand in kind of the equities world and the real world, so-called, 50% is like real bad. But like 20%, that feels like healthy. It feels like a bare market correction. I guess it also depends, though, on how long it lasts.

Starting point is 00:16:10 So can you go through some more characteristics of this bare market? Does this mean we're in a recession? Does this, you know, like take kind of like months to sort of reset and heal? with a new set of assets that take the lead. What else does this look like? The point you just made here is fascinating. You know, as you just said, oh, you know, in crypto, 20% that's just a, you know, a sort of bad day.

Starting point is 00:16:33 Yeah, we call that a Monday. Like whatever. And to your point, I think a lot of that is linked to the demographics of the people involved in the asset classes. Like 20% iniquities is a bit of a problem. 50% is a huge problem. In crypto, like you said, it's whatever. We see this few times a year.

Starting point is 00:16:57 And I think it talks to the difference in demographics, right? If you're young, and if you're in your 30s, you can take a 50% in bear market. If you're really convinced of the asset class and that it's going to come back, it's a good option you can buy more. The reality today, when you look at the ownership of U.S. equities, it's a lot of people, you know, that are either already or within five years of retirement, which isn't the case for Bitcoin or the crypto space. And if you're retired or on your way to retirement, a 50% drop in your equity value is devastating. It's, you know, it's going to absolutely crush your ability to be retired, which is why, you know, I tend to believe that.

Starting point is 00:17:49 that, you know, U.S. policymakers are now so massively sensitive to changes in asset values. You know, in the U.S., 70% of people own equities, 70% of people on equities, and pretty much all of that 70% is people who are 45 and older, and who happen to vote. So I'll give you a parallel. in China over the past five years, we've witnessed a two-thirds drop in equity prices and a one-third drop in real estate. Now, if this was the case, if you had that type of epic balance sheet recession in the United States, the economy would grind to a halt. It would be one black hole of... Wait a second.

Starting point is 00:18:40 Did you say two-thirds of equity evaluation drop? Over what period of time? over the past five years. Equity has went down two-thirds in China. Wow. Equities went down two-thirds and real estate prices went down by a third. Imagine if this occurred in the U.S. Now, in China, this occurred and today, auto sales are recognized.

Starting point is 00:19:01 Movie sales are recognized. Restaurant sales are recognized. Now, I can guarantee you that if real estate prices went down by a third in the U.S. and equity prices went down by two-thirds, nobody would be buying new cars. And nobody would be going to restaurants. It would be absolute mayhem. And this goes to the fact that no economy is as financialized as the U.S. economy. Financial markets are now the very heart and soul of the U.S.

Starting point is 00:19:37 And de facto, it means that they can go down 20%, as we discussed, that's a healthy correction, especially if the correction happens to be in things that are expensive that have already run up a lot in recent years. And, you know, there's a rotation from that part of the market that got to be too big a part, two bigger percentage of the market towards other things. Sure, why not? And this is what I'm describing. But once you get past that, very quickly, as you saw, you know, equity fell for three days.

Starting point is 00:20:09 And before you knew it, everybody was on CNB saying, oh, the Fed needs to do with emergency. rate cuts and the Fed needs to cut 75 basis ones. The Fed needs to cut 100 basis ones because the U.S. really can't withstand a big, like, I can easily withstand a 20 percent. Don't get me wrong, but it can't withstand much more of a bear market. Particularly during election years. It's election year every other year in the U.S. But, no, no, but it's definitely, you can't withstand it during the election years. You're absolutely right. But it's, you can't withstand it during the election years. You're absolutely right. But it's. You know, again, you have to look at who owns all these U.S. stocks?

Starting point is 00:20:48 It's mostly baby boomers and Gen Xers. And, you know, when are they retired? And how do they own them? And they mostly own them through index funds. Okay. Well, so then connect some dots for us, right? So it doesn't this point to the fact that if bear market, if it even happens, right? If 20% down, we're not going to 50% down because the powers that be just like can't let that happen.

Starting point is 00:21:13 the political establishment can't, Janet Yellen can't, Jerome Powell can't, none of these cast of characters can actually let that happen. So, like, it can't be any worse than, like, 20% off because 50% gets us closer towards the Armageddon that we were just, like, talking about. So are you making the case that that's why this will be, like, a shallow type of bear, let's say, and not, you know, 50% plus? Yeah. Look, you saw it during COVID, right?

Starting point is 00:21:39 the asset prices fell. And before you know it, you had monetary policy stimulus and fiscal stimulus such as the world as simply never seen. You know, the Fed balance sheet blew up from $3 trillion to $9 trillion or $8.5 trillion. It was through everything they had at it. So, yeah, that's, I mean, we know. So going back to we live in uncertain times, there's a lot of uncertainties. but this isn't wonderful.

Starting point is 00:22:10 Yeah, it almost feels like we live in uncertain timing, but not times. Like we know what the outcomes are. We just don't know when exactly it's going to happen or what the order of events will be. All right, so let's get to the investment conclusions that I was teasing, because I think these are very valuable and will be sort of a skeleton for the rest of this conversation. So you had seven of them, and some of this will be just like kind of catch up for some bankless listeners. But I think illustrates the perspective you have on the world. world in managing your portfolio through these uncertain times. So the first one that I read,

Starting point is 00:22:44 and by the way, this was taken from, I think it was a slide that you guys produced, like your research company produced. So I don't know if you gave this slide or what or how familiar these investment points are for you. But for me, they were incredibly valuable to just distill what the conclusions are. So we're going to start with the conclusion and then work our way back for each of these to just figure out how in the heck you came to this conclusion. So the first is this. bond investors will lose money, but policymakers will deflate bond bubbles slowly. I think a way to illustrate this is maybe the slow motion train wreck type of take. And I'll read that again.

Starting point is 00:23:20 Bond investors losing money, but policymakers will deflate bond bubbles slowly. Okay. So first of all, what types of bonds are we talking about? Are these like long-duration bonds? Are we talking? And what geography are we talking about? It's just like all countries, is this the West? Is this primarily the U.S.?

Starting point is 00:23:38 What is that bond investors losing money piece? All great questions. So here we're mostly talking about OECD government bonds. So Western, you know, whether you look at Europe, whether you look at the U.S., in essence, you know, Canada. So you're looking at Western welfare state government bonds. They're all more or less confronting the same issues. And the losses will accumulate.

Starting point is 00:24:03 in many ways, but look, in real terms, so far this decade, bonds have already been an absolute disaster. You know, it's in real terms, in nominal terms, it's been a disaster, but in real terms, given that inflation's accelerated a lot already this decade, you're now so far behind if you held a 10-year U.S. Treasury, you know, a 10-year French bond, or a 10-year GGB or German Boond, that you're just not going to catch up. You're not. And you know that your scenario for you to catch up, i.e. there's going to be a big deflationary bust.

Starting point is 00:24:44 It's growth is going to collapse, etc. You know that they're going to do exactly what they did during COVID. They're going to go back to fiscal. They're going to go back to monetary policy. The Fed balance sheet will move from $8 trillion to $12 trillion to $15 trillion. So they'll debase their. currencies before they allow the colonies to deflate. Which brings me to the second part of your question.

Starting point is 00:25:12 This is definitely true of pretty much all Western countries. But it is not true of emerging markets. What's been fascinating so far this decade is the extent to which emerging market bonds, whether Brazil, whether Mexico, whether India, whether China, Indonesia, etc., all your big emerging markets, you know, the, the, the, the, the, the, the, the, the, the, the, the, the, the big economies have actually delivered very adequate returns for their bondholders. In all of these countries, the bonds have actually beaten inflation. And to be honest, you had another sign of it in the past few weeks.

Starting point is 00:25:53 For most of my career, things like Indonesia, like Brazil, they were the red headstep children in markets. If things go badly, they were the first one. wants to get beaten up. And, you know, here we are, you know, markets over the place. You mentioned the VIX at 65, et cetera. And the Brazil Maria was up. You know, the Redmond B was up. The Indonesian-Ukia was up.

Starting point is 00:26:18 It's, you know, this didn't use to happen. But it tells you that the world is changing. Can I ask you a question that I've never been able to figure out here, Louis, when people talk about this, which is, who is, who is, holding this dog shit. Which dog shit? Like, honestly, like, this is not, this is, as you pointed out, I mean, everyone sees the Fed balance sheet.

Starting point is 00:26:42 Everyone knows the playbook, right? A lot of savvy. Like, so who is actually holding long duration bonds in this environment? And why are they doing that? I can never figure out who the sucker at the table is here. So you have a lot of regulatory buyers. Guys, you have no choice but to own these things, regulatory reasons. So think of all the insurance companies in the world.

Starting point is 00:27:04 We have to match liabilities who, by law or by regulations, have to match liabilities. So, you know, your car insurance company and you know that over the next five years you're going to get X amount of claims because that's what you calculated. And by the law, you have to match those. So you've got all the insurance buyers, huge buyers, all the pension fund buyers. Huge buyers. Again, your pension fund, you have a regulatory duty to say, okay, and next year, I know I owe X, the year after I X plus 10%. And the year after I have to match this with coupons. And so I think a lot of, so you know, so you have those regulatory dollars. But what happened to a lot of these guys is that, you know, for five, six, six, basically a decade after 2008, they had zero percent interest rates. And all these guys, if you're running an insurance company at a pension fund, that was a disaster. Because, you know, how do you match your liabilities with zero interest rates? The answer is you can't.

Starting point is 00:28:18 So technically, a lot of these guys were technically bankrupt. I mean, they didn't go through bankruptcy, but if you had stepped in at that time, they would have been technically bankrupt. So when all of a sudden, And the government say, okay, now you can earn 3%. Now you can earn 4%. Now you can earn 5%. After a decade of, you know, getting absolutely screwed over. Oh, this is awesome. Yeah.

Starting point is 00:28:43 Thank you. Thank you so much. But it's almost, you know, akin to the guy who gets whipped every day 10 times. And now you tell him you're only going to get whipped twice. So it's awesome. Only get whipped twice. Happiness, good times. And this is the case.

Starting point is 00:29:00 of, again, the pension funds, the insurance companies, etc. They were in such dark streets that, you know, if you go through the desert and you're given some feted water, you're still going to drink it because you're pretty darn thirsty. And that's what these guys were. I think it's kind of unfortunate because like when you go to like, you know, pension funds, who ultimately owns pension funds, right? I mean, it's workers on the other side of that equation who are getting, you know, subpar pensions into their retirement years, which that's the unfortunate part.

Starting point is 00:29:34 It gets worse than that. I mean, I don't want to depress you, but, you know, I was talking about... Oh, we're well past that, okay? Well, okay, let me get up. Let's talk through the pension funds, because if you go back to 2008, so, you know, 2008, the equity markets collapse. Barne yields go to zero. And now, imagine the CIA of a pension fund, and you know this.

Starting point is 00:29:58 So now you're in a hole because... your equities have just collapsed. You know that the SMPO, with a very long term, is going to give you 8, 9% at most. And to get out of your hole, you need to make 15%. You need to make 15% a year for the foreseeable future. And so you're scratching your head, I'm not going to get 15% from bonds.

Starting point is 00:30:21 They're yielding zero. I'm not going to get 15% from equities because historically they make 8 or 9. Now, wherever there's a need, Wall Street will find a way, and we'll slap on a bunch of fees on it. So what Wall Street does at this time is it comes to all these pension funds and it says, hey, I got the answer for you. It's got private credit.

Starting point is 00:30:43 It's got infrastructure funds. It's got real estate funds. It's called private equity funds. All these guys, you know, if you're willing to forego liquidity through the magic of leverage, we can give you 15%. And so all these pension funds do it in spades. Now, what you see as a result is in liquid assets, again, private credit, private equity, real estate, et cetera, go from what the money managed by those funds goes from $1 trillion to $15 trillion. Now, perhaps you can make 15% on $1 trillion.

Starting point is 00:31:21 Can you still make it on $15 trillion? Now, this is where the math gets funky. $15 trillion is more than half of U.S. GDP. So, you know, you look at this and you think, hold on, U.S. GDP nominally is growing by about 5% a year, you know, 3% inflation, 2% growth. U.S. nominal GDP is 5%. And cost of debt is now 5.5%. If you're getting a low cost of debt, if you're a private equity guy in, it's typically more like 7 or 8. So on an economy that's growing five, with the cost of debt or six or seven, on an asset base that's more than 50% of U.S. GDP, I'm going to return more than 15%. The maths don't work. It can't work. You have an equity market that's gone from 100% of GDP to 170% of GDP on the hope that it continues delivering 8, 9% of the year. You have private assets that have going to 100% of GDP to 100% of GDP on the hope that it continues delivering 8,

Starting point is 00:32:22 from 5% of GDP to about 55% of GDP on the hope that that was going to deliver 15%. And then you have overall debt that's 330% of GDP that suppose, you know, China government and corporate and et cetera, that's supposed to deliver, let's call it, four and a half, five percent a year. All this supported by an economy that's growing by 5% a year. Can't work. the math will work. And so, I mean, to answer the question of the, like, the suckers at the table, it seems like there's some regulatory obligation for some people who are, like, for some corporations,

Starting point is 00:33:01 insurance companies, et cetera, to be forced into that position. It's also the pension fund managers who are in really unfortunate circumstance, but that filters down to, like, those that own the pension. And where does that obligation go back to when the pensioners come to the government? and they're basically like, hey, this money, these returns I were supposed to get, it's worthless. It just kind of feeds in on itself. I think, I guess on the flip side, I mean. Well, eventually be the taxpayer. Right.

Starting point is 00:33:28 I guess on the flip side of this, because, you know, like a number of people are the suckers at the table, whether they know it or not, unfortunately. I guess the opportunity, or maybe the lifeboat is if you see this. And this gets to kind of, you know, the second point here, fixed income investors should avoid duration, favor, credit and inflation protection. So if you don't have some sort of regulatory obligation to keep your store value, your wealth in long-duration bonds, and if you're listening to this bankless episode, unless you're managing an insurance company, you probably don't. And you're probably a bit more active with respect to your portfolio. You're just not letting some pension CIO kind of like manage everything. You have some autonomy over this. You can like avoid the

Starting point is 00:34:16 iceberg that everyone sees that we all see coming at us. And like a thing that you should do, the implication is into your second conclusion is just avoid duration fixed income bonds, right? And make sure that you are doing, what, is this like T bills are okay? Because like you can get in and out of them quickly and make sure you're looking at instruments that favor credit and inflation. Like if you're looking for some fixed income, what are the fixed income sort of Is there anything that's safe here? When I look at a lot of those Western countries, I gave in reverse the U.S., but they're not that dissimilar for France, for the UK, etc.

Starting point is 00:34:56 If things don't add out, eventually the variable of adjustment ends up being the currency. So yes, you can be in T-bills, and yes, that's better than being in long-dated bonds, for sure. But fundamentally, what we're describing is at some point a massive repricing of currencies. what's going to happen is all these unfunded liabilities start to shift onto the balance sheets of the governments. And as people realize, there is no way out of this except through massive money printing, a realization that is dawning on people. And so people start to think, okay, to your point, how do I cushion myself against that? Right now we're in the face.

Starting point is 00:35:40 As we saw with this, people start to think, hold on, this may be a bare market unfolding. what was interesting is, A, you didn't have a rally in the dollar. So, you know, the whole, oh, the dollar is the safe haven. That did not work in the past few weeks. Instead, gold was the safe haven. Everybody fled into gold. And again, gold is the one thing making the all-time hunts.

Starting point is 00:36:03 And again, an important message there. You know, as odd as it may sound, you know, I think it's actually now safer. And I've argued this for the past 10 years, but it's safer to be to now be in long-dated Brazilian bonds or long-dated Chinese bonds. Well, and it's not just a valuation argument. It's also think of where the marginal savings in the world are happening today. You know, Brazil's running record by trade surpluses.

Starting point is 00:36:33 China's running record high trade surpluses. And, you know, historically a lot of these excess savings that, China, that Brazil, et cetera, have accumulated, tended to be redeployed in U.S. assets, other U.S. treasuries or U.S. equities or U.S. real estate. Now, if increasingly that money just stays at home because the perception is, oh, the dollar's not going down instead of up, then, yeah, you'd rather be in Brazilian bonds. Yeah, you'd rather be in Chilean bonds, Mexican bonds, and so on. So I think the opportunity set today, if you're a fixed income manager,

Starting point is 00:37:13 The opportunity said today, and again, I haven't even talked about valuations where the valuations are so much more compelling. You can buy Brazilian inflation index bonds offering you 5.5% real, which is if you think that equity markets over the very long term tend to offer 4.5, 5% real, it's like, you know, what else do you need? You get 5.5% real from Brazilian inflation index bonds, unless you think Brazil is going to be. going to turn into Venezuela, which there's a few reasons to think that. Then, you know, so anyway, all this to say that, yes, you know, in the whole scheme of things, I'd much rather own T-bills than Bonds, but there are some much better things to own than T-bills. New projects are coming online to the Mantle Layer 2 every single week. Why is this happening? Maybe it's because Mantle has been on the frontier of Layer 2 design architecture since it first

Starting point is 00:38:10 started building Mantle DA powered by technology from EigenDA. Maybe it's because users are coming onto the mantle layer two to capture some of the highest yields available in Defy and to automatically receive the points and tokens being accrued by the $3 billion mantle treasury in the Mantle reward station. Maybe it's because the Mantle team is one of the most helpful teams to build with giving you grants, liquidity support,

Starting point is 00:38:30 and venture partners to help bootstrap your Mantle application. Maybe it's all of these reasons all put together. So if you're a dev and you want to build on one of the best foundations in crypto, or your user looking to be a business claim some ownership on Mantle's Defi apps, click the link in the show notes, so getting started with Mantle. Launching a token? Don't let complex legal and tax issues slow you down. Toku provide specialized support to optimize your launch and ensure that you as a founder and your team

Starting point is 00:38:53 and your investors get the most tax-efficient outcomes. The Toku team understands the crypto space inside and out and will ensure your token launch is fully compliant while maximizing tax efficiency. Toku can connect you with the best attorneys if you need them to make sure that you have the best advice and Toku can help to optimize your taxes so you pay the least possible amount of taxes while still maintaining legal compliance. With Toku's guidance, you can concentrate on building your company while Toku handles the logistics. Token launches don't have to be complicated. Talk to Toku today to get a free initial token valuation. Arbitrum is the leading Ethereum scaling solution that is home to hundreds of

Starting point is 00:39:26 decentralized applications. Arbitrum's technology allows you to interact with Ethereum at scale with low fees and faster transactions. Arbitrum has the leading defy ecosystem, strong infrastructure options, flourishing NFTs, and is quickly becoming the web-free gaming Hub. Explore the ecosystem at portal.arbitrum.io. Are you looking to permissionlessly launch your own Arbitrum orbit chain? Arbitrum orbit allows anyone to utilize Arbitrum's secure scaling technology to build your own orbit chain, giving you access to interoperable, customizable permissions with dedicated throughput. Whether you are a developer, an enterprise, or a user, Arbitrum orbit lets you take your project to new heights. All of these technologies leverage the security and

Starting point is 00:40:04 decentralization of Ethereum. Experience Web3 development the way it was always meant to be. Secure, fast, cheap and friction-free. Visit arbitram.io and get your journey started in one of the largest Ethereum communities. Well, let's talk about those much better things. So if number two was basically avoid, you know, anything that has duration with respect to fixed income, like long-term, like Western bonds in particular, then your third investor conclusion is that a balanced portfolio should mainly be hedged against inflation, not recession. And I wrote in some notes here, basically the 60-40 plan, you know, 60% equities, 40% bonds, that idea that your financial planner, at least in the U.S., that is kind of like accepted logic, that if you want to do well with your 401k or your

Starting point is 00:40:55 retirement, you know, it's 60-40. And by the way, that's aggressive, right? You know, 60% equities is a lot. I think what you're saying here, your investment conclusion is basically that's dead. and it shouldn't be 60-40 equity and bonds. It should be something a bit more like 60-40 equity and gold is your take, or equity and maybe a different assortment of bonds, not Western bonds, maybe some of the Brazilian bonds like you're talking about. So let's talk about this, because this is, if we've talked about what not to do, the question is, what should we do?

Starting point is 00:41:30 So what is a decent modern portfolio construction to kind of weather? the iceberg that we see coming right at us. You know, I think if you were brought up properly, you were taught pretty early on that there's no such thing as a free lunch. And that is true, of course. There is no such thing as a free lunch, except the one exception.

Starting point is 00:41:54 I knew there was an exception. Yeah, the one free lunch you get in financial markets is the benefits of diversification. And to your point, for really two generations since 1981, 6040 delivered basically the same returns as equity with a third of the volatility. That was the free lunch.

Starting point is 00:42:18 That was the free lunch. That was, and everybody picked out on it. It was amazing. It was great. All you can eat buffet. That only exists in America, I'm sure. That was terrific. And it is now over.

Starting point is 00:42:34 It's now over. as, you know, basically all government's overdid it. And when you're issuing an additional $2 trillion of debt every year, you end up killing the golden goose, which is what they've done. Now, the big challenge is indeed, how do you replace that 40% that provided you not only with absolute positive returns, but with uncorrelated returns to equities? Because to be clear, you need that 40%. You can't just do 100% equity

Starting point is 00:43:08 and have the benefits of the free lunch of diversification, right? I think it depends how old you are. I think the rule of thumb I was always told is you use your age. You go 100 years minus your age, and that's how much you should have inequities. So if you're 40 years old, 100 minus 40,

Starting point is 00:43:28 you should have 16 equities. And if you're 80 years old, 100 minus 80, you should have 20% in equities. and the rest in bonds. That was the sort of old rule of thumb. So all this to say that if you're a young guy, you can be 100% in equities. And now, the big challenge, I think, for any and all investors is that U.S. treasuries for, you know, 40 years, they were, in essence, the Michael Jordan of assets.

Starting point is 00:43:58 They were just the, they were just absolutely amazing. And why? Why were they so good? Well, first you started off with valuations that were way, way out of whack. And then you had 30 years of deflation. You know, you had China that emerged on the scene and added 20 million workers into the global capitalist structure every year for 25 years. You had Japan that imploded and that kept exporting capital. You had, I mean, you had so many different deflationary forces.

Starting point is 00:44:31 come at once. You had the past 10 years, the U.S. moved from 5 million barrels per day of oil production to 13 million barrels per day of oil production. You had just, you know, you had Europe massively slashed its defense spending because they didn't need to be worried about being invaded by the Soviet Union anymore.

Starting point is 00:44:49 So you had, like, so many different things that essentially, and we were in the demographic sweet spot. You know, we were in the phase where we didn't have a, bunch of retired people yet, and we all stopped having kids. You know, we went from having three kids to having none. And so we were in the demographic sweet spot where everybody was saving, everybody was consuming, everybody was working. We didn't have to pay for old people. We didn't have to pay for young people. You know, that was great for asset prices. Now that we're getting more and more people retiring, all of a sudden, the maths that worked so well for us demographically

Starting point is 00:45:28 for years now worked against us. And we think, we think. thought in the Western world, okay, our demographics are terrible. Our entire welfare system and our entire welfare state is based on us having good demographics. So we're going to solve that by bringing in a bunch of people. In the U.S., we're going to bring in a bunch of Mexicans and Guatemalans and Hondurans and in Europe, I'm going to bring in North Africans and Turks and whatever else. As it turns out, unfortunately, you know, the productivity of a worker coming in from Senegal or Algeria in France isn't the same productivity as a French worker. And in fact, the cost of that person turns out to be, you know, quite high. And then there's other issues.

Starting point is 00:46:19 Very often they come with their parents. So actually, you make the top of the pyramid also pretty heavy. Anyway, leaving all this aside, the welfare states are now failing. And so we're on down into a very different zone, one of inflation. Now, in the inflation zone, of course, if it's structural inflation, bonds no longer do the jobs you want them to do. So you're stuck in the situation of how do I replace Michael Jordan. Now, the Chicago rules are still trying to figure it out, you know, like 40 years later, 30 years later, they're still trying to... Yeah, there's never been another Michael Jordan's.

Starting point is 00:46:55 be clear about this. There's Chicago is still trying to figure it out. So you could say, oh, I'm going to buy gold. I'm going to buy

Starting point is 00:47:02 energy. I'm going to buy Bitcoin. I'm going to buy emerging market debt. And I would say that a combination of all of these

Starting point is 00:47:12 is going to be your answer, partly because any one of these is massively volatile and much more volatile than U.S. Treasuries. So any one of these individually is going to

Starting point is 00:47:24 add volatility to your portfolio. And any one of these tends to be actually more positively correlated to equity markets than U.S. Treasuries used to be. Now, together, if you say again, we're going to do 10% in gold, 10%, Bitcoin, 10% in emerging market debt, 10% in energy, together, that volatility is dampened somewhat. But let's not kid ourselves that you build yourself into Michael Jordan because you haven't because then Michael Jordan doesn't exist. And we could wish that it does. Of course we would,

Starting point is 00:47:59 especially if she probably goes from an office. Of course you would. But we have to invest for the world that we live in, not the world that we wish we had. And the world that we live in is not an inflationary world, which inherently means a more volatile world. So we kind of have to accept a higher volatility for our portfolios. You know, the magic days of the 60-40 are gone. We can all be moaned it. It's sad and then you move on. You make you, you know, you bury it and you move on. Okay. So in this inflationary world, you still want to have sort of some split. And again, I'm just using a 60-40 default, but of course, like your age range, your circumstances may vary. Maybe you're skewed like one percentage or the other. But there's some percentage in this

Starting point is 00:48:46 breakdown on the kind of the 60 portion that is like equities. And we'll talk. I think you have mother takes conclusions on what types of equities to look at in this market. And then the 40% is no longer bonds, okay? What you're saying, that was Michael George. No longer Weston's gone. He's retired. Because you can buy American market bonds. Okay. So now what we're, what we have to do with that 40% is we have to create this Michael Jordan Frankenstein of a basket of assets that might include commodities and energy and gold. And yes, even maybe crypto. I think crypto bulls will probably be skewed on that side of things. But that's what the 40% really is.

Starting point is 00:49:22 Oh, and maybe emerging market bonds as well. And you have to kind of piecemeal it together. And it's going to be Frankenstein Michael Jordan. It's not going to, you know, it's not going to shoot as well. It's not going to, like, perform as well as like 90s Michael Jordan did. But that's the best case. It's going to shoot better, actually. It's going to shoot better as long.

Starting point is 00:49:42 Better than Michael Jordan? It won't defend as well. We're really going down the analogy here. Yeah, because Michael Jordan was, like, won a number of years. He won the defensive player of the year. Like, that's what made him an absolutely outstanding player. It was obviously a great shot, et cetera. But he was also one of the best defender in league.

Starting point is 00:50:02 You know, this sort of crypto, gold, commodities, emerging market bonds, that won't do well for you when things go well. No doubt about it. It'll be when you have to play defense that you'll be like, oh, my God, this isn't doing its job. All right. So basically get used to volatility with the Frankenstein that you have to build in that section. Okay. So this gets to number four investment conclusion.

Starting point is 00:50:25 U.S. equities are expensive. Non-U.S. equities are actively valued, but more cyclical. So basically the idea is equities in the U.S. are expensive. Non-U.S. is cheap. So now we're talking about the equities portion of that 60-40. And let's dive into that. So why do you think U.S. equities are expensive? I mean, do you have like metrics that you look at?

Starting point is 00:50:49 And also when we say expensive, we sort of mean relative to like what? And I would say probably relative to other non-U.S. equities, right? It's kind of the point that you're making. But like, why do you make, why do you think they're expensive right now? I think they're expensive relative to their own history. I think more importantly, they're relative to their expensive relative to the earning, long-term earnings power of the U.S. economy. Again, you know, getting back to the Buffett indicator of the market cap relative

Starting point is 00:51:16 to GDP, you know, it's at extremes today that you've seldom seen. You saw it in 2021, then it came back down and now you're back up there. But here's perhaps one way to illustrate the expensiveness of U.S. equities. Today, the U.S. is roughly a fifth of global GDP, give or take 20%. If you look at the U.S., it's 70% of the World MSCI. So you buy the World MSCI today, getting 70% U.S. Now, for that to make... MSCI, give people who are in these indexes. Sorry, it's the global, it's the global equity index of reference. Got it.

Starting point is 00:51:58 So, you know, most people might think of the SMP 500 as the index of reference for the U.S. The world MSCI is the index of reference for global equities. So basically, you're saying, is it 70%? Is that we said? So that's 70% of all equities are U.S. equities, basically. Of the global market. U.S. equities is U.S. Yeah.

Starting point is 00:52:16 So I think if you look at actually the global market cap, so not look at the index, if you look at the global market cap, I think the U.S. is like 64% of the global market cap. So let's go with that. Let's go with 64%. Let's go with two-thirds. So the U.S. is a fifth of global GDP,

Starting point is 00:52:32 two-thirds of the global market cap. Now, if the U.S. is two-thirds of the global market cap, in essence, you know, what do you buy when you buy an equity? You buy a stream of future earnings discounted by an interest rate. Now, essentially, if you're saying, I'm going to buy global equities and two-thirds of it are going to be in the U.S., you're inherently making the bet that over the next 10, 20, 30 years, 2-thirds of global profits will accrue in the U.S. But the U.S. is 20 percent of global GDP.

Starting point is 00:53:05 Can 20 percent of global GDP accrue two-thirds of global profitability? Can 4% of global population, which is where the U.S. says, accrue two-thirds of global profits, account for two-thirds of global profits? The answer is unlike. To me, that seems way out of whack. Just like when Japan in 1989 was 45% of global market gap, and you were looking at it and you thought, hold on, can Japanese companies really accrue 45% of global profits for the next 10, 20, 30 years? So, you know, again, you look at it and you're like, hold on. U.S. painfully grows 5% a year. It's already two-thirds of global market gap.

Starting point is 00:53:50 How much more can it grow? Is it going to be 80% of global market cap? 90% of global market cap? Over the next five to 10 years, it seems more likely that the trim is the other way. Okay. Can I say two things in response to that to give the counter take? And the first is I'll say, what about American dynamism with respect to technology. I mean, we have the MAG 7 in this country, and AI is the next big thing to

Starting point is 00:54:16 revolutionize the world in the way that the Internet did. So that's one thing I'll say. And you park that idea. The second is the U.S. has a fantastic history with respect to its capital markets. And it's, let's call them, settlement assurances, a history of, you know, like property rights, let's say. And so what are you telling us? Like, you're going to go to an emerging country that doesn't have this history and maybe has a history of like revolutions or some political instability, we're going to go to China and like where government has de facto rights that like certainly they don't have in the U.S. So I'll say those two things. Basically, there's a premium because America has a property rights system and capital markets second to none. So we just

Starting point is 00:55:01 benefit from that premium. And firstly, we also have the Mag 7. We have tech. Like AI is, absolutely massive and don't fade it. So I'll start for the second one because the property rights are indeed super important. And I wish that perhaps we'd have some Iranians or Venezuelans or Russians or Sudanese on this call. You could tell them all about American property rights and they'd be delighted to hear about them. Because if you were Russian and you owned a property in New York or a property in Miami or some bonds or some U.S. equities, they were just taken from without trial, without anything, just at the stroke of a pen. And this started really about 10 years ago with Sudan and then they moved to Venezuela

Starting point is 00:55:48 and then they moved to Iran and then moved to Russia. And so increasingly, I think if you're foreign, I think you fall increasingly into one of two categories. You've got the category of foreigners like me who are French, I'm French, who think, yeah, I'm safe in the U.S. you know, U.S. isn't going to take away my assets because I'm French. But if I'm Chinese, if I'm Saudi, if I'm Qatari, if I start to think, well, if my leaders don't do what the U.S. tells them to do, then do I get all my stuff confiscated?

Starting point is 00:56:24 And it's starting to be a doubt in the back of my mind. So you're saying the property rights are good, but only good if you are a U.S. aligned country and a U.S. aligned citizens. How can you not come to that conclusion with everything that's happened in recent years? And if your property rights are not sacrosanct, if they're dependent on who you are and where you're from, then they're not property rights at all. Let's call a spade of spade. If your property rights depend, I'll say it again, on who you are and where you're from, then they're not property rights. You know, I think you are 90% of the way to being a full-on crypto bull when you say things like this.

Starting point is 00:57:08 Because we've got an alternative property rights system. I'd love to introduce you to. It's called Bitcoin and Ethereum and Crypta. Let's take that aside. How about our tech? How about U.S. dynamism around like big tech and AI? And it's certainly taken the places the world leader there. Okay.

Starting point is 00:57:27 So what is the purpose of tech? What is the purpose of tech? You know, the purpose of tech, I would argue, is to produce better things at a cheaper cost, right? To enhance productivity. To, you know, sure, it's nice to get public videos on the internet. And I laugh. And it's nice, et cetera. But deep down, the purpose of technology is to enhance productivity, produce more at a cheaper cost.

Starting point is 00:57:57 So with that in mind, yes, the US has max. and it's awesome. What goods and service does the U.S. today produce at a cheaper cost than other countries? Because what I see. There's a long silence because I can't. Nothing really comes to mind. You're talking about physical goods, right? You're not talking about brands.

Starting point is 00:58:20 You're not talking about media. You're not talking about software. What does US tech done for U.S. cities? I travel in the U.S. all the time. It feels each time I go, New York, is worse than the previous time. Oh, well. Yeah. What is?

Starting point is 00:58:35 This is like, this reminds me of the Peter Thiel take of like, where are flying cars, basically like productivity has languished. And yeah, tech has innovated and made a whole bunch of people rich from network effects. And the result has been things like Google and social media. But like these aren't necessarily adding to the two things that tech is supposed to do, which is productivity increases and like quality of life increases. So, and actually, since you bring that up, you know, over the past 10 years, years, so the U.S. spends 18% of its GDP on health care. And for the past 10 years, the life

Starting point is 00:59:10 expectancy has been falling. The U.S. is one of the few countries in the world with the falling life expectancy. And I always point to this when people tell me, oh, you know, talk about it, U.S. exceptionalism, we're so far ahead of everybody on tech, et cetera. It's like, well, how come people are dying younger? Like, you know, how can that be? How can the U.S. now have a worse line of expectancy than China. Like, isn't this mind-blowing? Like, 20 years ago, the U.S. was living 20 years longer than China. Now, you look, you know, you go to Shanghai today.

Starting point is 00:59:44 You go to Beijing. And I can show you all the ways that tech has revolutionized those cities. From the fake tech on your phone in terms of ordering calves, in terms of, from the, you know, the trains that are fast, work on time. the traffic that gets regulated, all these things. You do see it. But yeah, you don't have the massive tech billionaires that you have in the U.S. That's for sure. But, you know, the Mac 7s, you can say, well, smartphone is awesome, and it is.

Starting point is 01:00:21 And Apple has created a great ecosystem, and it has. And as a result, Apple has gone from trading at 10-time journeys 20 years ago to 35-time earnings today. Do we think Apple goes from 35 times earnings that are, by the way, no longer growing to 70 times earnings? If not, why do I want to own this stock? I think that's the key point of the investment conclusion here. You're not saying that basically the U.S. economy is dead and there's no innovation. There's no bright spots here. You're just saying, hey, it's overvalued relative to other things, which brings in the question, okay, what other things? The statement is non-U.S. equities are attractive relative to U.S. equities. So, like, where?

Starting point is 01:01:03 I'll give you some. I don't do. I'm much rather on Tonset, which has 15% of its balance sheets, of its market cap and cash on the balance sheets. So Chinese equities would be a place, Chinese tech equities. You know, I think you have to go look into individual equities, but I look at a company like Tenseit, and it's a video game play, it's a fintech play. It's a, it's a social media play. And, you know, all under one roof, all integrated, and, you know, trading at whatever it is, 13-time journeys, 14-time journeys. It's, you know, growing double-digit every year. You know, this seems to me like a much better proposition than an apple trading at 35 times whose sales haven't grown for the past four or five years now.

Starting point is 01:01:56 I'll give you that. Let me ask you, too, though, if you're looking at these markets as a citizen of France, right? Are you worried that your property rights in China around buying Tencent or something like this are good if you are a citizen of China, in the same way they're good in the West if you're kind of like under the umbrella of the U.S. capital apparatus? But if you're from France or you're from the U.S. or somewhere in Europe, that is kind of like, I guess, in this bipolar world, U.S. aligned, maybe your property rights are going to to be like not good. So maybe what you're saying works for like someone in China who's listening

Starting point is 01:02:32 this podcast and they're like, okay, yeah, sign me up. I'm like, I'm already all in the risk here in my jurisdiction. I may as well buy Tencent, but maybe it doesn't work as well for a citizen of the West. So when did the Chinese government ever seize the assets of a Western citizen? Now, I'm asking, because I can show you plenty of examples of Western government seizing the assets of Russians, of Iranians, of Venezuela, et cetera, because their government didn't do what they were told. But have we seen China do that? Not yet, no.

Starting point is 01:03:03 I mean, this big brings into question of... So are we not projecting ourselves onto China? It's like, we've done it, so we expect them to do it as well. To be fair, probably in a retaliatory position, it almost doesn't matter who starts doing it first. Do you know what I mean? So if you get into a circumstance where, let's say China is not the aggressor in this type of capital freeze type of situation, and they're put in this position.

Starting point is 01:03:26 where they're always responding to, say, like Western aggression to freeze assets, you know, you get into a tit for tat scenario where it almost doesn't matter who the original aggressor was. You could still, like, think of a world where... If we go down that path, the entire global economy freezes

Starting point is 01:03:45 and it becomes a moot point anyway. I don't know. No, no, look, you know, you're talking... The world you're describing is a world where Apple can no longer produce in China, where Tesla can no longer produce in China. Everything's going down in that world. Where Walmart can no longer produce in China.

Starting point is 01:04:01 In this world, you have 150% inflation rate in the United States. In this world, you know, like it's... Of course it can happen. You know, China at the U.S. to market and say, I want nothing to do with you. I've seized all your assets. I completely lock you out, et cetera. But let's not kid ourselves that, you know, if this happens, Stars everywhere are down 90%.

Starting point is 01:04:28 So at this point, it becomes a mood point anyway. Can I ask you just like really practically, having not explored this much myself? Like so if you want exposure to non-US equities, what's the best instrument for that sort of thing? Well, you have lots. I mean, if you're, again, it depends if you're American, if you're not American, but if you're American, you have lots of ETFs. And I would argue today, you know, things always evolve. But I think, you know, Chinese equities and especially tech equities are very attractively value. So you can look at an ETF like the K-Web, you know, which is the Chinese tech ETF trade in the U.S.

Starting point is 01:05:09 But I think Brazil is just crazy cheap today. You know, you look at the two Brazilian behemas, Valet Petrauss, they've both derated. If you're a bit of a commodity bull, which I am, Vali today is basically back on its March 2020 lows, having massively shrunk the share account between down then. And the share price is pretty much back where it was. Now, of course, you know, you could say, why would I want to buy R&MOR if a slowdown is coming into the U.S. if China's almost back, et cetera.

Starting point is 01:05:42 But that's where the chief price is where it is. So, you know, you could buy EWZ, the Brazilian ETF. I think, to be honest, most of the Latin American markets look, look. look terrific. And then, you know, India is having a massive bull market, but it's a super expensive market. Southeast Asia is growing super fast and pretty much forgotten about by foreign investors. But, you know, countries like Indonesia, like Malaysia, we're really, really handsomely. Japan, you know, you've just had a hell of a volatility spike between the yen and the collapse

Starting point is 01:06:23 in the markets, I think it's a pretty interesting buying point on Japan. So, yeah, lots of opportunities outside of the U.S. I love these takes. All right, let's get to number five. So equity's leadership will rotate from growth to value as global recession fears vanish. And basically you're saying no recession means value over growth. What's your take here? So are you making kind of like two conclusions? Are you saying that global recession fears will vanish? Or are you just saying like if they vanish, then we move from growth to value type equity plays? I think they will vanish. I think people have overplayed the recession fears for, you know, the past two years.

Starting point is 01:07:00 Basically, when the U.S. yield curve inverted two and a half years ago, everybody started jumping up and down, some recession, recession. Meanwhile, if you look at countries like Australia, like the U.K., they've had inverted yield curves pretty much constantly for the past three decades, mostly because of the forced buying of pension funds and insurance companies that we discuss. before. And so if I look at today, my take is to get a recession, most households, most businesses can withstand one punch. And we had a punch. We had the higher interest rate punch. And, you know, broadly people have adjusted to it. To get a recession, you need at least a second punch.

Starting point is 01:07:43 And historically, the second punch has been higher energy prices. You know, I start off with the premise that economic activity is energy trim. Now, one of the things we can say is that over the past 18 months, energy prices have been increasing, I've been immensely well-behaved. You know, they're basically were insuredrated, 75 to 85 bucks on oil, around two to three bucks on natural gas. Energy prices have not been a constraint for anybody out there. Now, you could tell me this is going to change, and all price are going to spike, et cetera.

Starting point is 01:08:16 And if they do, then I'll change my mind. But now, energy prices are will constrained, and interest rates have risen, but not to the point of crushing everybody. And we're now about to start a Fed easing cycle, which is going to lead to a weaker dollar. Now, what I know is that with a weaker dollar, you're going to get stronger growth in Latin America. You're going to get stronger growth in Russia. You're going to get strong growth in China. I also know that the rally in the yen is terrific news for places like China, like South Korea. And so I highlight all this because, you know, I look at it.

Starting point is 01:09:01 If I'm right that the U.S. dollars start to roll over and is now on a weaker path, whatever growth we're going to lose in the U.S. we're going to make outside and the rest of the world. And for a company like Vali that I was describing, like Petrobras, et cetera, it's really what matters in China. What matters is what happens in China, India, and Indonesia, and the East, that's what matters for these guys much more than what matters in the U.S. So when it made this statement, equities leadership will rotate from growth to value as the global recession fears vanish. So global recession overplayed, but growth to value, you're talking about, yeah, what does that mean? Yeah, if you look at your value stocks, I mean, you look at your value indices today.

Starting point is 01:09:42 It's basically financials, materials, and energy. These are all the stocks that are trading on low price to both values. These are all the stocks that are trading on low price to cash flows. And they're trading on these valuations because the perception is the recession is going to come. And these guys will have either big asset impairments or big write-offs or big losses. But if you don't have all – if you don't have asset impairments, if you don't have losses, then all of a sudden you're like, huh, why don't I own this bank at one time? book. Why don't I own this energy producer at five times cash flow? And why do I have to be in Microsoft

Starting point is 01:10:22 at 37 times earnings? Now, if I don't know what the future's like, if I'm very uncertain about growth in the future, then yes, I will pay up for Microsoft at 37 times because I know that Microsoft will deliver come with me. I'm a small business owner. I use Microsoft. And every year Microsoft hikes prices on us by 15% and every year we pay it because, you know, we don't have much of a choice. So it's a terrific business, amazing business. And people pay 37 times earnings for it when they're uncertain about the future. If they feel there's lots of opportunities elsewhere, then the capital goes there at a much cheaper price. Whenever someone brings up, you know, like value equities, I just like the name that's inescapable. I think for a lot of

Starting point is 01:11:09 people, myself included, is Warren Buffett. And he, he, he, he, he, he, he, he, he, he, he, he, he, he, He's sitting on like 300 billion, something close to $300 billion worth of cash right now. What is this guy waiting for? Is he waiting for that kind of like value rotation? I know he's perceived to be value, but he's really, you know, he's also perceived to be a quality investor and growth, growth, what is it, growth that an affordable price and a mode guy. You know, I think what Buffett likes is to own businesses, indeed, with big modes

Starting point is 01:11:41 and high predictability, which is why historically he's stated, he's not done very much in commodity space, why historically he's not done that much in financials. And I know he's spontaneously at the bottom of cycles, or he's made the bottom by doing things with Bank of America, with Goldman, et cetera, when financials get cheap enough. But so what is he waiting for? Well, I think, to be honest, two things. The first is he realizes that valuations in the U.S. are too stretched, what we discussed, that, you know, 20% of global GDP, 70% of global market gaps, so 65% of global market gap.

Starting point is 01:12:18 So he realizes this, but he's also not that comfortable in buying abroad because, A, he hasn't done it that often. B, it's not, it's not his brand. It's not his brand. It's like, you know, his brand is, I buy America. Yeah, he's done, you know, he's bought a lot in Japan in recent years. So he can, and they bought BYD in China, which was a huge home run for them. So he'll do things spontaneously, but let's face it, he doesn't have the, probably the level of comfort doing things abroad or doing things in very large size, because $300 billion is, you know, pretty hefty sides, abroad that he does at home, which is understandable.

Starting point is 01:13:04 Everybody's got a home bias. So that gets to kind of the investment conclusion number six, which is all about home bias, maybe. capital will flow from U.S. to Asia and emerging markets in both equities and bonds, I feel like that's been a throughline of all of the other investment conclusions that we've talked about, so maybe we don't need to dwell on it. But I guess I'm just kind of wondering what you think is the base case here, is there going to be effectively the world split up into kind of two blocks, the China-aligned-type blocks and the U.S. blocks, and then maybe there's this third group of kind of independence, India, and such. like how do you think the world will kind of bifurcate?

Starting point is 01:13:43 Are you a believer in the great decoupling type of idea? And if so, how do you think that happens? I'm not really a believer in it's because for all the talk. I mean, obviously it's been all the talk of politics, etc. for the past five, six years. But if you look today, you know, China exports, you know, pretty much just so much to the US as they did five years ago. And then if you include all the Chinese companies

Starting point is 01:14:06 that have set up factories in Mexico and Vietnam, Louisiana to sell to the U.S., then, you know, indirect Chinese exports plus direct Chinese exports are like massively at record highs. The reality is for all the talk of de-globalization, global trade continues to expand and expand rapidly. Having said that, where you're seeing the fastest growth in global trade, it's emerging markets to emerging markets. And this is where this is where all the trade is happening. Now, I think what just happened in August, just a few days ago, was interesting.

Starting point is 01:14:41 It's markets, you know, fell apart, and you and I just discussed this, but, you know, Asian currencies went up. They didn't go down. Now, granted, you could say, well, who was linked to the yen, et cetera, but, you know, the Redmond V went up. The, this was, I think this was one of the first time in my career where you had a massive risk off event, because that's what it was. We had a big risk off event. You had a big risk off event and the Renmin v. rise. which is, you know, something pretty new. And same story for the Korean War and same story for the Malaysian Ringet and Indonesian

Starting point is 01:15:17 European and so forth. And I think this tells you something important. And it's not so much that Western savings are saying, oh, you know what, maybe I should get myself a little Asian portfolio. This isn't happening for all the reasons you've highlighted, the fear of China. Oh, my God, they're going to steal my money, et cetera, et cetera. And that's not going to happen. But what is happening is that domestic savings.

Starting point is 01:15:40 increasingly stayed at home. And here, I think you have to start off with the reality that China is running $100 billion in month trade surpluses. That's just gargantuan amounts of money. And that five years ago, when really the US started bashing China like crazy, that number was $40 billion a month. So, you know, to put things in perspective, China was running trade surges of $40 billion in months.

Starting point is 01:16:06 The US said, you know what? China's a bad actor. They're like bad hombres. We need to cut these guys off from the global trading system. And over that period, China's trade surplus has gone from $40 billion a month to $100 billion a month. So talk about a complete failure of policy. People in the Western world in Washington, D.C. should be looking at themselves. The people who came up with the idea of we're going to cut off China from the global trading system

Starting point is 01:16:33 should be hanging their heads in chain. Now, you can argue, well, if they hadn't done that, it'd be $200 billion. But let's not kid ourselves. 100 billion is the biggest trade surplus any country has ever had in history. It's bigger than Japan's biggest trade surplus plus Germany's biggest trade surplus ever in history put together. So if that money, instead of being recycled into U.S. treasuries, instead of being recycled into Microsoft and Apple shares, starts to stay at home, that's enough to bid up your currencies,

Starting point is 01:17:03 bid up your bonds, bid up your equities. Yeah, I mean, I think you could also argue for all of that hard talk about kind of like you know, trade and decoupling, it's just like political posturing and they didn't really mean it because the incentives and the game theory is just like not to do that. I mean, global trade kind of like benefits everybody when it works well. I guess maybe on this, on this. Yeah. I think it's a very important point. You might say, oh, it's political posturing and they don't mean it, et cetera, and they don't follow through with anything. All of which is probably right. But now if you're China on the other side of it, let's imagine your C.G.

Starting point is 01:17:40 And you're hearing all this noise, all day, every day, we need to cut China off. We can't give them CMA conductors. We can't do this. We can't do that. We need to isolate them. Do you say that? They don't mean it. Oh, they don't.

Starting point is 01:17:54 No. You have to adjust your policies in accordance to these very hostile declarations coming out of Washington, D.C. Concretely, what does this means? This means giving preferential trading and tax. treatments to countries like Indonesia, to Thailand, to the whole of Africa. It means going in there and offering cheap loans for them to buy your goods. It means trying desperately to crack open new markets. And this is where China's growth has come from. So, you know, we could say, oh, well,

Starting point is 01:18:29 you know, we sell these things, but we don't really mean that it doesn't matter. But on the flip side, China behaves as if it does matter. And when you look at China's growth in trade with Central Asia, with Russia, with Southeast Asia, with Africa, it's all gone absolutely parabolic. Let's get to the seventh and final investment conclusion. Then we'll kind of wrap all of this up. It's just fantastic. I've learned a ton. This is about currencies and the value of currencies over time. You said this. The dollar will have to devalue eventually, but mainly against the yen and the rememble. So the idea that the dollar will devalue. And I wonder what your like timeline is for this type of thing. I think it's started. Investors have made the case that, you know,

Starting point is 01:19:14 the dollar in the short run is a wrecking ball. Others have said, like, over the long run and all of this kind of like inflation of bonds, et cetera, leads to the U.S. losing its dollar reserve currency status. What do you think about both the short medium and the short medium and the long term of this dollar devaluation? So I think that something is two separate questions. There's the value of the dollar and there's its use as a global reserve currency. You know. Oh, you don't think they're linked? Are they linked at all in your mind?

Starting point is 01:19:45 Let me bring you this way. You've had plenty of dollar bear markets and the dollar is still being used as a global reserve currency right now. Of course, if the dollar stops getting used as a reserve currency, then its value will absolutely plummet. But the dollar can go down a lot and still be used as a reserve currency. And so for now, I would say that we have started a dollar bear market. and that, you know, this dollar bear market is going to get more pronounced as the Fed starts to ease as interest rates come down in the U.S.

Starting point is 01:20:13 at the short end. A lot of the cash is just, you know, waiting there, starts being recycled into other economies. So, no, look, I think we have sort of the dollar bear market against the yen. We started against the rem and me. We've probably started against the euro. It's hard to get excited about the euro. because of all the inherent contradiction that come with the currencies and that are, I think, pretty well documented.

Starting point is 01:20:43 So it's hard to get super stoked about the euro. But the reality is the dollar is very, very expensive. It explains why this summer there were so many European tourists, so many U.S. tourists in Europe, why there were so many U.S. tourists in Japan. So, look, I think we have started to see the dollar roll over. You know, whether it stays the world's reserve currency, has. perhaps less to do with valuation as with U.S. policies and U.S. politics. What do you think about that then?

Starting point is 01:21:13 Well, to be honest, I think for me, I was never much of a believer of the world, the U.S. are going to lose its reserve status, et cetera, until the U.S. decided to confiscate all of the Russian assets, you know. And this is not me being a Putin apologist or anything like that, but the way I look at the world is if I look at the U.S., the very reason you, you know, you. mentioned earlier, it's like, oh, we have a great comparative advantage. We have the rule of law. We have property rights. You can be black, white, brown, Asian. You can be. It's credible. It's credibly neutral. It doesn't differentiate who you are. You can be Muslim, Jewish, Christian.

Starting point is 01:21:54 You go in front of a court of law in New York, you're going to get the scene fair shake as the next guy. Then we add a little asterisk to this and say, except if you're Russian. If you're Russian, you can take all your stuff away. No questions asked. No debate in Congress. No bill and wrong. Just because the president decided you're Russian and take your stuff away. Now, if you're from an emerging market, this feels very familiar. If you're Chinese, you say, oh, if the president decides he wants to take your stuff away, he can, well, then this is just like, oh, this is what I have back here. Like, this is no different. The president wakes up one morning and decides, oh, because I don't like your president, I take your stuff.

Starting point is 01:22:34 And so I was never again a big believer, but I think this broke something. And I don't think, I think if you live in the Western world, you underestimate the extent to which it broke something because when you live in the emerging markets, you live with that fear. You live with that fear of confiscation of your assets because you live typically. And again, I'm not saying this of all emerging countries, but most emerging countries, that's one of the reasons that's developed, live in places with. without independent judicial systems and with limited property rights and limited rule of all. And I think in the past few years in the U.S., you know, it's been attack on individual rights after attack on individual rights, whether it be the confiscation of the Russian assets, whether it be the vaccine mandates, whether it would be the crazy COVID confinement laws, you know, whether it be the jailing of the January 6th protesters. It's like thing after thing after thing that makes you question, hold on, is the rule of law really a thing here? And what if I just fall out foul of the government?

Starting point is 01:23:47 Does that mean I lose everything? And I never used to think the U.S. was that way. But now I don't know. So I hope it gets better. But I would say in the past five or six years, it's been one worst thing after the other. So, Louie, this has been fantastic. And maybe just to kind of dovetail to kind of my last question, those have been the seven for bankless listeners. I think there's just like a lot of alpha and value just jam packed into this.

Starting point is 01:24:16 But since we're talking about financial sanctions and credible neutrality and rule of law and property rights, have you heard about this thing called crypto, Louis? That's kind of what we're all about here, right? Which is incredibly neutral money system. Okay. So what's your take on it? Just give me, like, I know you're a gold bull. That 40%, let's say, I mean, your case will vary bankless listener, but just some allocation to crypto, to Bitcoin.

Starting point is 01:24:46 I get that it's a different investment. You're sort of betting not just on an established kind of store value. You're sort of taking a speculative bet on a store value that might emerge, like a future gold. You're taking a bet on just generally the propagation of this, you know, like credibly neutral financial system taking hold. So there's some equity-style bets there. Anyway, how do you think about crypto or do you even think about it? So I have this debate all the time with my dad who, you know, and in our debates about it, I would position myself perhaps more as a Bitcoin maximalist, for lack of a better word, where I do think, I do, I would tend to say that if the ecosystem really,

Starting point is 01:25:29 you know, just like you had one currency for the US dollar, it's the sort of, the sort of to the winner goes the spoils. Kind of, you know, everything goes to Google and everything goes to Amazon. Power law win. Power law wins. So, I would say that, now you could

Starting point is 01:25:48 say it's not going to be Bitcoin, forget that, it's going to be a $3,000, etc. I can have that debate. But I would say if the ecosystem is everything to be able to really flourish as a parallel financial ecosystem, then the way

Starting point is 01:26:04 human condition just revolves. It tends to be to the winter goes and spoils. And right now, it seems to be Bitcoin. So you're bullish on crypto, but in particular, bullish Bitcoin relative to other crypto assets. Is that right? To the big problem with crypto is, there's so much junk in the, you know, so many shitcoins, so many, like, so much of it will get washed away and the whole side of things. And that's, to be honest, If things are successful, if it does manage to assert itself as a parallel system, then to me, in my mind, it has to be, again, through a Bitcoin maximalist point of view. If it works, it's so I look at a lot of, you know, the shit coins, for lack of a better word,

Starting point is 01:26:52 it's if crypto does manage to, if we really do start transacting a crypto and if really, it does become a parallel currency and all these things. and a parallel store of asset. It de facto almost means the death of all those shit coins. And if it doesn't, then what's the point? What do you think if Bitcoin is successful? What do you think happens to gold? I think gold does fine.

Starting point is 01:27:15 I think that there are two separate things, to be honest. I look at, so for me, gold is first and foremost a play on emerging markets. You look at where the physical demand of gold comes from two-thirds is China and India. And a lot of that is for cultural reasons. So if people in China and then they get richer, they buy gold. They buy gold for their darbors' dowries. They buy gold because they don't trust their banking system. They buy gold because they don't trust their governments.

Starting point is 01:27:45 And I don't think you shift that anytime soon, that sort of cultural bias. And I would further say that it's like me. You continue to think that wealth is going to keep growing in, in India and China, then gold will do very well. So for me, they're basically different drivers. Now, you can say both are driven

Starting point is 01:28:10 by the debasement of the dollar, both are driven by, you know, Fed expansion of its balance sheets, et cetera, et cetera. But beyond that, they have very, very different drivers. So you mentioned that you and your dad have this recurring debate

Starting point is 01:28:22 and, like, obviously your dad is, is older than you, right? And you said you're the Bitcoin maximalist. Yeah, I was going to say, is your dad the shit coiner? Is he the one like buying meme coins on uniswap? Yeah. Absolutely.

Starting point is 01:28:34 Absolutely. But he's always been, in fairness, he's always been about loving the shiny new thing. He's always been, I remember when we were little, do you remember those sharper image stores? Yeah. You probably too young. I don't know if you're. No, no, no. I know what you're talking about.

Starting point is 01:28:53 Those sharper image stores that had like all sorts of gadgets, like stupid. He could spend hours in there. like a radio shack maybe that kind of thing yeah yeah but it was it was sort of you know like robotic dogs and yeah like gadget guy it was yeah it was like just a bunch of gadgets that looked really cool and you'd buy them and then you would never use them uh you know and anyways i think they went out of business so well back i hope that continues to be an ongoing debate in your family as you can imagine it's also an ongoing debate in crypto we're not done with that particular part of the debate. But hey, it's been awesome to just have this chance to talk to you.

Starting point is 01:29:32 I've listened to you on a number of different podcasts. And then I saw some like tweets that really sparked my interest. So I knew I wanted to have you on. And this episode was even better than I knew it would be. So thank you so much. And you're certainly invited back. Can I ask, where do people like find your material, your content? If they, they want some more hot takes from how you think of the market, what's the best place? So I'm on eggs. You can look me up by name. So I post something every now and then there. But the easiest, you know, we have our website, gafcal.com, G-A-V-E-K-A-L. But that's mostly for institutional investors.

Starting point is 01:30:11 We have a joint venture in the U.S. Private Wealth business where we publish also free newsletters. That's called Evergreen GafCal. Yeah, so you know, can go to Evergreen GafKal for the free newsletter. If you're an institutional investors, go to GafKal. go to Gafgal or yeah, follow me on X. Everything that Louis just mentioned will be in the show notes for you, Bankless Listener. Thank you so much for joining us today.

Starting point is 01:30:34 This has been fantastic. Pleasure. Gotta let you know, of course, none of this has been financial advice. Crypto is risky is what I usually say, but so are global markets around the world, including those 50% drops that could be coming in store. You could lose what you put in, but we are headed west. This is the frontier. It's not for everyone, but we're glad you're with us on the bankless journey.

Starting point is 01:30:54 Thanks a lot.

Bankless - 7 Ideas for Investing in Uncertain Times | Louis-Vincent Gave

There aren't comments yet for this episode. Click on any sentence in the transcript to leave a comment.