Odd Lots - Nouriel Roubini's Vision for a New Safe Haven Asset

Episode Date: December 5, 2024

For years, investors have relied on the classic 60/40 portfolio of stocks and bonds. The idea behind this was simple: bonds tend to go up when stocks go down, so the two things should act as a natural hedge. But when inflation spiked in 2022 and 2023, the 60/40 portfolio performed terribly and bonds failed to act as a safety cushion. In this episode, we speak with Nouriel Roubini, chief economist and portfolio manager of the new Atlas America Fund, an ETF that is trying to create a new type of safe asset that can withstand big risks, including stagflation, deficits, and de-dollarization. We also talk about the outlook for the US economy in 2025, and the big risks that the chief economist and portfolio manager of the Atlas America Fund sees on the horizon.Read more: Roubini Launches Treasury-Alternative ETF to Ride Trump-Era RiskCrypto Critic Nouriel Roubini Is Working on a Tokenized Dollar ReplacementBecome a Bloomberg - Business News, Stock Markets, Finance, Breaking & World News subscriber using our special intro offer at Bloomberg Subscriptions | Digital, All Access, Corporate & Student . You’ll get episodes of this podcast ad-free and exclusive access to our daily Odd Lots newsletter. Already a subscriber? Connect your account on the Bloomberg channel page in Apple Podcasts to listen ad-free.See omnystudio.com/listener for privacy information.

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Vanguard Marketing Corporation distributor. Bloomberg Audio Studios. Podcasts Radio News. Hello and welcome to another episode of the Opots podcast. I'm Tracy Allaway. And I'm Joe Wisenthal. Joe, do you remember, I think it was in 2022? Hmm. Everyone was talking about stagflation.

Yes, of course. Because we had, right, because we had markets were low. So people were talking about recession. The Fed was hiking interest rates aggressively. And inflation in 2022 was peak. So it certainly seemed like we could have had the combo right then for essentially elevated inflation and some kind of recession. Yes. And in fact, before we recorded this episode, I went back and I looked at a Google Trends chart for the words tagflation. And like at the peak in 2022 is just amazing. And then it sort of fell off because we definitely had inflation.

We didn't necessarily have lower economic growth. But I think now at the tail end of 2024, Some of that stagflation talk is beginning to creep back into, I guess, the economic discourse. Yeah, a little bit. I mean, what I would say is, I would agree with you. There seems to be a couple things going on that are very confusing to say the least. But one is the sort of, I don't know if it's acceptance or reality that like inflation has come down quite a bit, but maybe it's going to keep bumping up against the ceiling or maybe it's going to keep like bouncing off the floor. floor, so to speak. Yeah, that last mile is going to be difficult. There's still, and then on some measures, the economy still seems good, but you look at some of the PMIs, ISMs, other industrial measures, labor market measures, some seem to be slowing down. So, like, I still think this idea of, like, I don't know if I would call it stagflation,

but this sort of unpleasant combination of not great growth, not great real growth and inflation that's still like at the higher end of what people are comfortable with feels like something that could very plausibly be the case for a while. It's definitely in the air. So we need to dig into this particular argument and who better to speak to than Noreal Rubini. He is, of course, the chief economist and portfolio manager of the Atlas America Fund, which is a new ETF that has just launched. And he is also the chairman and CEO of Rubini Macro Associates, really the perfect guest. to do this type of macro with us.

So, Nuryl, welcome back to the show. Great being with you, Tracy and Joe. Do you get the same sense that the risk of stagflation is starting to pick up again? Certainly is one of the risks that we have to consider. And I think that the question on everybody's mind, of course, is what will be the economic policies of Trump and their impact on growth and inflation.

If I have to look ahead, I would say that some of his policies actually could increase growth and reduce inflation, being pro-business in general, making those tax cut permanent, having, you know, government efficiency, deregulating the economy, maybe even increasing the production of fossil fuel and reducing the price of energy. Those go in the direction of policies that actually increase growth and reduce inflation. But on the other side, there's a long list of other policy that could be implemented. First of them, of course, tariff protectionism, an economic war with China.

Secondly, draconia restriction to migration, if not mass deportation. Three, unfunded tax cuts and runaway fiscal deficits. Four, potentially an attempt to weaken a dollar in a disorderly way. Five, maybe trying to interfere with the independence of the Fed. Now, if that second set of policy were to be implemented, their impact will be higher inflation over time and lower economic growth. So those sets of policy will be definitely in the stockflationary direction. That was an amazing summary, by the way, of the two ways of thinking about paths.

And I guess what's striking listening to you sort of list off the two columns is within Trumpism or within the Trump administration, it feels like there are several competing camps, so to speak. And we don't really know how it's going to resolve, but there are a lot of internal contradictions, whether on personnel or ideology, and to some extent what you just laid out are sort of, I don't know, maybe the fork in the road, so to speak, of how things could go. Yeah, you're absolutely right. There is a spectrum of positions on the variety of economic issues. Some are truly protectionist, others like Scott Besson says, we want to escalate as a way of de-escalating. And we're not going to know until after, of course, inauguration,

in which direction the economic policy will go. I would say, however, the following observation, I think that the potentially more stackflationary policy will be constrained by several factors. One, of course, is the choice of some of the economic advisors. Some like Scott Besson understand markets, and he knows that if you do things that are radically stagflationary, it'll be bad for the economy and bad for the market.

is going to try to push down against those. Secondly, I think there will be also significant impact of market discipline. If you have runaway budget deficits, migration restrictions and tariff that increase inflation, then the bond market vigilante is going to wake up, expect that inflation will be higher, real rates will be higher. And then rising in bond yield could lead to a correction of the stock market. If there's one thing that Trump cares about is one, the stock market, We also cares about the bond market because high bond yields imply high cost of borrowing,

and that's going to be hurting the economy. I think the other constraint is going to be, of course, the fact that the Fed is still independent. If some of these policies were to be pursued, the Fed will likely cut next week in December may not cut again or may cut much less than the market are expecting next year in an extreme scenario in which inflation goes much higher. that could even increase interest rates. And that's going to be, so there is both market discipline and there is also fat discipline that might

constrain to some extent those statutory policies. Setting aside the Trump administration and what they might do, and I realize that's a big thing to set aside right now. But the path of inflation, it has come down from the peaks that we saw in 2022, as Joe was talking about. Why did that happen? did that happen in your opinion? Because you were one of the, you were one of the few voices I remember in early 2020 when the pandemic was just unfolding that predicted inflation. And, you know, it happened.

But since then it has petered out a little bit. Yes. I mean, the reason why we had this burst of inflation during and after COVID were both bad policies, the amount of monetary fiscal and credit easing exposed that turned out to be way excessive, given the size of the economic shock that was relatively temporary. But second, there was also bad luck. There were three negative aggregate supply shocks that essentially reduced growth and increased inflation. One was the impact, of course, of COVID on the supply of labor, on production of goods and

on global supply chains. The second was the impact of the brutal Russian invasion of Ukraine on commodity prices. and three, the kind of a zero-COVID policy of China that further restricted global supply chain. So why inflation fell? In part was, of course, central bank gave up on quantitative easing, normalized policy rates. But if that was the case, we should have seen inflation falling dramatically, but probably a much stronger slowdown of economic growth, maybe a recession the way most economists thought about it. And instead, we got the reduction inflation,

but growth, saying the US has remained robust, above potential, 2.5% in the last couple of years. So in part, we also got lucky. And luck was that these three negative aggregate supply shock got reversed. First, we're at the end of COVID, so supply of labor increased. We started producing goods and services.

Supply chains got, I'd say, unstuck. The impact on commodity prices of the invasion of Ukraine became reduced because they were new. sources of energy coming from Middle East, US, and so on, that went to Europe. And finally, China gave up on his zero-COVID policy. So we got luck. And on top of it, there was another set of factors, at least for the US, that maintain growth strong.

One was that we had significant amount of migration, documented or otherwise. People estimated that maybe up to 10 million people entered in the United States in the last four years, that increased the labor supply. increase growth and reduce some pressures on wage inflation. Definitely right now, political, of course, migration is a hot topic, but from an economic point of view, it increased growth and reduced inflation. And we had also other fiscal stimulus that helped growth from the Infrastructure Act, the IRA and the Chips Act.

And then we had got also, of course, the AI revolution has led to significant increase in CAP-X. So at least for the United States, I think, was a combination of a variety of factors that implied that inflation fell and growth remained robust, not so in other parts of the world. Today's show is brought to you by Vanguard. To all the financial advisors listening, let's talk bonds for a minute. Capturing value and fixed income is not easy. Bond markets are massive, murky, and let's be real.

Lots of firms throw a couple flashy funds your way and call it a day. But not Vanguard. At Vanguard, institutional quality isn't a tagline. It's a commitment to your clients. We're talking top grade products across the board of over 80 bond funds, actively managed by a 200-person global squad of sector specialists, analysts, and traders. These folks live and breathe fixed income. So if you're looking to give your clients consistent results year in and year out,

go see the record for yourself at vanguard.com slash audio. That's vanguard.com slash audio. All investing is subject to risk vanguard marketing corporation distributor. Eating well shouldn't be complicated, but somehow it turns into recipes, prep, cleanup, and half your Sunday gone. Factors solves all that. These are fresh, ready-to-eat meals designed by dietitians, delivered to your door, and ready in just minutes. No prep, no cleanup, no excuses. And it's not just about convenience. You're getting real food, balanced nutrition, and zero artificial stuff. Meals that help you stay on track for all of your goals,

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That's 11 meals, free shipping, and free sides for life, but only with the code fit at factoramills.ca. Factor, Canada's number one, ready-to-eat meal delivery service. I want to talk a little bit more about the dollar. And there are so many different ways that you can begin a conversation or about thinking about the role of the U.S. dollar. You can think about the effects that tariffs will have on inflation or the strength of the U.S. dollar relative to other currencies. You can think about the central role that the U.S. dollar plays in global trade and finance and whether there are possible rivals that are emerging. One of the things that we,

saw recently from President Trump was a threat that he put on his truth social account against any of tariffs against any country that would attempt to form a rival currency block. And he specifically mentioned the BRICS. I don't know if the BRICS is a real thing or not. It sometimes seems like a meme to me. But there is an organization called the BRICS and sometimes you see headlines about dollar alternatives. In the short to medium term, is there a real prospect of some other currency, the Chinese UN, perhaps, taking sizable market share and global trade from the US dollar? Well, I would say for now, not yet, but the dollarization process that could occur over time. And what could trigger it was, of course, that we have rightly or

wrongly weaponized the dollar in the last few years for national security and foreign policy purposes imposing a variety of sanctions against a variety of strategic rivals of the United States and the West. The issue about finding an alternative to the dollar is complicated because you cannot essentially replace something with nothing. And the question is, what's the alternative to US dollar? The former US Secretary of the Treasury Larry Summers once jokingly said that people don't like the dollar, but Europe is a museum.

China is a prison, Japan is a nursing home, and Bitcoin. So for now, is an experiment. So there is something of an happiness with the US dollar, but for the time being, I would say the US dollar is still dominant. And by the way, I would probably argue that the Trump policies regarding the dollar a little bit confused, because on one side, there is this concern that a strong dollar has led to de-industrialization, loss of competitiveness, large trade current account deficits, people free riding on the US.

So there is a sense I would like a weaker dollar. But if you think about policy and economic fundamentals, tariffs will strengthen the dollar. And threats of tariffs have led since election to the dollar becoming stronger. Trump says, I don't want other country to, unquote, the dollar rise, and I'm going to impose tariff on them if they do. So he wants to maintain the role of the dollar as a major global reserve currency. If that's the case, the demand for dollar has to remain high.

The dollar remains strong. In terms of relative growth, the US is doing stronger than Europe and other advanced economies that should strengthen the dollar. In terms of relative monetary policies, probably given these differentials in growth and inflation, the US or the Fed is going to cut rate less than other countries, while in Europe where the economy is weakened and there'll be more cut. and overall, given the productivity growth of the US, the boom of new technologies, AI, you name it,

capital flows are going into the United States. So I think there is this dilemma that fundamentals and policy would suggest that the dollar is going to become stronger, but then that objective of trying to reduce the trade imbalance of the US through a weaker dollar, unless you have a big agreement on currency, is hard to fathom how you're going to do it. There are some ideas along those lines is going to be, to say, challenging. This is something I completely agree with.

And I think I've said on the podcast before that it feels like Trump doesn't know what type of dollar he wants. Because instinctively, I think there's a sense that he wants to say the dollar is strong. It sounds good when you can say those types of things. And generally it means that the U.S. economy is doing well relative to others. But if he's serious about boosting manufacturing and, exports than he needs the weaker dollar. There's also that tension between decoupling the U.S. economy from the rest of the world, maybe becoming more self-reliant, and also wanting the dollar to be at the center of a globalized financial system. Are there ways that the Trump administration could

like kind of thread the needle between those two different objectives? No, it's not going to be easy because either you want a weaker dollar to try to improve competitiveness, reduce the trade balances and so on, but then the dollar will have to weaken, or instead if you want to maintain the global reserve currency role of the dollar, then the dollar is going to remain strong. And by the way, the risk of doing an agreement to try to weaken the dollar is that that could occur in a disorderly way. Because if you do another, people talk now about a Mar-a-Lago agreement, because

in the past agreements to move currencies, we're always in resorts like Bretton Woods, Plaza, Louvre, Cam David, you name it. So people think about maybe getting together all major economies in Mar-a-Lago and finding an agreement where Europe,

Asian allies, and others let their currency appreciate the dollar weekend. But, you know, if people expect that from happening, then capital is going to suddenly move out of the US because you're going to have a massive capital loss, 10, 15, 20% on your dollar assets. And then you could have a spike in long rates

or you could have a correction in US equity. So how do you engineer an orderly weakening of the dollar without causing significant tightening of financial condition? That's also problematic. It's not going to be very easy to be done. The other trade-off that I think is complicated, that is not just a weaker, strong dollar as a currency role,

but also your tariff policies. Because on one side, if you impose the tariffs, the dollar is going to strengthen. And on the other side, also, if you're going to raise tariffs, you need revenues, but raising tariffs, if it's very significant, is going to be highly inflationary. Now, some people within the Trump come say, well, in 2018-19, when we increase the tariffs on China,

there was not significant increase in inflation because the R&B depreciated, and therefore import prices did not increase very much. But suppose that you impose the tariffs and the currencies of all your trading partners weakened, then you might not get the inflationary burst of the tariff. That's correct. But then you're not going to have an improvement

of the competitiveness of the United States, and therefore inflation is not going to rise, but your trade deficit is going to remain very large. vice versa. If tariff are imposed and the dollar does not strengthen other currency weaken, you might get actually some improvement of your trade balance, but then you'll have some inflationary impact of this. So in all these cases, there is not really a free lunch. Yeah, I want to actually dive further into this because a lot of times when tariffs come up, one thing people say is that, okay, well, it's a one-off, it's a one-off, right? The prices may go

up at some point, but that doesn't necessarily represent a new inflationary trend that say the Fed would have to worry about. And perhaps that's true. But it also occurs to me that if part of the impulse here is to be less reliant on global trading partners for, say, various manufactured goods and to have more domestic building, et cetera, of various things, this is happening at a time of still high resource utilization already. So the unemployment rate is at 4.1%. There are already a lot. There are shortages of industrial parts yesterday. We're recording this December 3rd, by the way. Yesterday we got the ISM manufacturing, and it showed that electrical components have now been in shortage for 50 straight months, so over four years. So it seems to me that regardless

of, you know, if you have this impulse to build more here, et cetera, you're coming at it at a time in which resources remain quite constrained. I think your point is very correct and valid. In some sense, actually, the U.S. economy right now is not in a soft landing, maybe in a no-landing zone, because growth has remained above potential, and inflation has fallen, but, you know, core PC this year probably is going to be 2.8, even 2.9%. And next year may still remain elevated, especially next year if you impose tariff, if you do significant draconian restriction to migration,

if you have runaway fiscal deficits that stimulate further demand. And if you have a policy of trying to weaken the dollar. So, yeah, we live in an economy is already a no landing where resource constraints are significant. Labor market is significantly tight. Goods market are also tight. Imports can help you. But then if you're going to restrict the labor supply to migration restriction,

if you're going to weaken the dollar, if you're going to impose tariff, You're going to make those inflationary pressure going higher and then may trigger the Fed than having to act and stop cutting rates or maybe even increase them over time. I mean, the counter argument to the no landing idea is that we have seen some signs, as Joe mentioned in the intro of the labor market softening. And even yesterday, you know, we already mentioned the ISM, but we had PMIs as well that also looked kind of sluggish.

Is there a possibility that the economy weakens significantly into 2025? Well, I would say that the risk of economy weakening significant in 2025 will be one in which those sets of statulationary policy are followed. If you really impose massive tariffs, if you deport millions of people, if you try to weaken the dollar, if you have a massive fiscal deficit then lead to bond yields rising, crowd, and economic growth, you could be in a situation in which growth significantly slow downs and inflation goes higher. I think that's definitely a risk. As I pointed out at the beginning, however, there are sets of policies of Trump that are actually positive for economic growth.

And some of those policies will be implemented. So if you had to choose from like column A or column B, what would be like the higher probability as of now? I would say that the impact on growth for next year is going to be a wash because on one side definitely is pro-business is going to deregulate there'll be some increase in capital spending. Stock market

is strong. Financial condition are easy. So those are positive for increasing growth. But then some of the other policy especially on labor market and tariff and protection is when some increase in long rate are going to weaken economic growth. So I think that

the impact for growth next year is that if This year we're growing, say, 2.8%. Next year, we're gonna still grow about potential, but less, maybe 2.4, but don't think there's gonna be a massive slowdown, unless he goes really radical with the statutory policies. However, on net, in an economy, is already in a tight resource constraint, labor, goods market,

and otherwise, that is more in a low-landing zone, where even before Trump was elected, the Fed was started to say, wait a moment, should we really cut rate as much as we promised, given that growth seems to remain robust, that inflation remains more sticky, that in that world, in my view, inflation is gonna be on net staying high

rather than going towards the 2% target. So I would say the net impact on growth for the time being is a wash, but the impact on inflation probably, the inflation is somehow higher. And that's gonna impose something of a dilemma for the Fed. Of course, there is a tailoring, risk that it goes fully stackflationary. But as I pointed out, there are two major

constraint. One is really in market discipline. The market would punish those policies and it will have to reverse. I mean, take an example, in the UK because there was a fiscal stimulus, was excessive. Then suddenly the pound collapsed, bond yields went higher, the pension crisis and least trust prime minister lost power in 44 days. Now, that's not going to happen in the United States, but I think that people should not underestimate how market discipline can really punish even a country like the United States. So between the constraint of the Fed being still independent and the market discipline, probably excessively stack pressure policy will be constrained next deal. Eating well shouldn't be complicated, but somehow it turns into recipes, prep, cleanup,

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Not someday, but right now. Register at democrat homes.com and get everything you want right now. So amid all of this extraordinary uncertainty, you recently at the end of November announced, you have a new ETF, the Atlas America Fund, and it looks very interesting. You know, I think, like I want to get into what it is, but I think, you know, when people think about, say, like a well-diversified or all-weather portfolio, and it sounds like we all want an all-weather portfolio because there's just so much uncertainty right now, as you've been talking about for the last several minutes, something that would thrive and be stable amid all this

uncertainty. You know, for years, people talked about the 60-40 portfolio, and it had a certain, I guess they would say, intellectual elegance to it because the two legs of it generally produced positive of real returns, but also they had a sort of natural hedging component against each other. And so usually if stocks were going up and bonds were doing a little worse, and then when your stocks would go down, the bonds were going up, worked very beautifully for several years, basically until 2021. And now I'm not sure if people feel confident at all to go back into that. And people come up with reasons why there's a lot of distrust about using bonds or a heavy allocation of bonds as a good ballast for a portfolio.

What is the sort of, before we get into the specifics per se, what do you talk about sort of like the intellectual or conceptual framework but to find your approach, which is to come up with a new sort of diversification strategy that can work across cycles? Yeah, the logic is as follows. I wrote a whole book titled Megatreats, where I argued that the era of the grid moderation

where we had low growth and low inflation is over, even the era of the secular stagnation that followed the post-GFC period where, again, growth was low and there were disinflationary forces is over. And there are a variety of forces that are going to lead to stag inflationary pressures in the global economy, both on the supply side and on the demand. On the supply side, I consider ten factors from geopolitical fragmentation to de-globalization, protection. for insuring, reshoring, reshoring, to ageing of population, restrictions to migration, global climate change, pandemics, cyber warfare,

backlash against liberal democracy and pro-labor fiscal policies, and potential gradual de-dollarization. Now, all these factors gradually over time, reduce growth and increase inflation. And on the demand side, we live in the world of very large private and public debt.

They're going to become larger. We're going to spend more on the fence all over the world. We're going to spend more on dealing with climate change. We're going to spend more to deal with pandemics. We're going to spend more because there's going to be disruption coming from AI robotic automation. We're going to spend more because there are many people left behind and we need the bigger social safety net. So we spend more. We have limits to how much we can raise revenues.

So structural budget deficits are going to rise. And therefore, there will be an incentive to wipe out the real value of nominal long duration. that through unexpected inflation. Now, I'm not talking about hyperinflation or even high inflation, not even double digits. Let's assume for a moment that this supply and this demand forces imply that over this decade, inflation is not a tool, let's say, 5, 6%. It is very reasonable. We were at 9 just two years ago. And I think these forces over time are going to essentially materialize. And the policies of Trump, some of them exactly go along. the same stackflationary direction of lower growth and higher inflation that we described.

So in that world, think of it this way. Bond yields 10 years right now are about 4%. But if inflation was six, bond yields have to be at least 8. 6% for expected inflation and 2 for the real, because in the world of high debt and deficits, the equilibrium real long rate is not zero anymore. It's closer to 2. Suppose the bond yields go gradually from 4 to 8%. then a 10-year treasury is going to lose 30, 40% of its value over time.

And we saw what happened in 2022. In 2022, 6040 did not work. It did not work because 6040 assumes that there is a negative correlation between the price of stocks and the price of bonds. Risk gone and growth, equity do well, bond deals are higher, the price is lower. So you make money on equities, you lose money on bonds. bonds, risk off, recession, equities go down, bond yields fall, the price goes up, you make money on the bond part of your portfolio, you lose on the equity. But that negative correlation assumes that inflation is low and stable.

When inflation is not low and stable is rising, then what happens? Bond deals are higher and you lose money on the bond component. And like it happened in 22, and it happened again even last year, when bond deals are significantly higher, stock prices correct, and therefore you get a positive correlation between bond prices and equity prices. Paradoxically, actually, in 2022, SMP 500 fell by 15%, but the price of 10-year treasury fell more, fell by 20% as 10-year treasury yield went from 1 to 3.5. So in a world in which bond yields gradually could go from 4 to 8, the traditional defensive asset in a 60, 4%. portfolio, this long-duration treasury doesn't work anymore. And therefore, this is not an all-weather

portfolio, RETF, is something of an alternative to the traditional defensive assets, an alternative to the 40% of the 60-40. It's not the 60 part. So we're just working the 40 here. We're working mostly on the 40. And the point is that if you do believe the story, or even if you assign a meaningful probability that inflation is going to be gradually higher and nominal long bond yields are going to be higher. You have essentially $20 trillion of long duration fixed income, mostly treasury, but also high grade, high yield or EM debt that is the denominator dollar. And it's significant gradual rights in those bond yields is going to imply that your defensive asset actually loses as much, if not more, than equities. So then you have to think in a world of gradually higher inflation, which are the

other alternative asset that provide you a hedge against inflation, against the basement of fiat currency, against diesel polarization, against geopolitical risk, against financial crisis, and against climate change. And the range of assets that we have chosen for this ETF is one that provides you a better hedge against those still risks than traditional defensive assets like 10 year treasury. That's the idea behind this new ETF. Yeah, I find this ETF fascinating because it touches on so many different themes. You know, obviously there's the macro and the risk of inflation. There's portfolio construction in the form of 6040, which you just discussed. But there's also this idea of maybe creating a sort of like dollar or U.S. Treasury alternative.

that is backed by real assets. So you mentioned, you know, the stuff that could do well in an inflationary environment and withstand some of those big risks, stuff like gold, U.S. property that is somewhat climate resilient. So I guess in the Northeast and short-term U.S. Treasuries where the rates will more or less follow inflation. And one of the other interesting things about this whole project is Atlas itself is based out of Dubai, where there are, you know, it's very close to some very large pools of capital that have been investing in treasuries. Talk to us more about that angle, this idea that you could pitch it as a sort of treasury alternative for some big investors.

Well, as I pointed out, any investor, starting from institutional investor, large sovereign wealth funds, private and public pension funds, endowment foundations, let alone retail investors, hold some allocation of their portfolio in long-term treasuries. And that's because it has been traditionally the safe, defensive asset. Speaking about literally $20 trillion plus of debt. And in the world that I described right now, the losses that occurred in 2022 or summer of last year, when again it was a spike in bond yields to 5%,

there was a correction equity, will occur. So you're going to lose money. on the equity and on the bond side of portfolio. That's why, by the way, even fancy models like Rispirity, that are glorified versions of 60, 40, 70, 30 have not done very well. And therefore, I think there is a nervousness around the world, the large pools of money that have this allocation to long-duration treasuries. They are concerned about a variety of the risks that I described,

and they're thinking about alternative. And as you pointed out, the combination of the assets is one exactly that does reasonably well, actually, in normal times and is a convexity. So if some of these tail risk were to materialize, of course, the return is going to be much higher. So, for example, you want to stay completely away from long duration treasuries, and instead you want to be in short duration treasury, which is really goes higher and don't have the same price correction if bond deals are going to be higher. You want to be into tips that of course are going to do well if there are increases in unexpected inflation. The allocation to gold is a hedge both against inflation and the basement of fiat currency, but there's also a hedge against potential de-dollarization. If you think about

the only liquid foreign reserve asset that cannot be. seized because the last few years in Russia, in Iran, North Korea, we have had massive sanctions financial and seized their foreign assets. The only liquid asset that cannot be seized is not euro, it's not dollar, it's not the end, all of those have been seized. But it's going to be gold bullion. If you hold gold bullion, you're going to go and be safe. And that's why, for example, significant central banks, not only of the strategic arrivals of the US, but even of the frenemies of the US have gone into gold this year, the surge over 40% in gold prices is significantly driven by that geopolitical

risk of the dollarization and diversification. You want to be in some allocation for commodities, especially our commodities, because in the world of climate change, the demand is going to be there, but there'll be supply disruption, as we have seen, spikes in commodity prices driven by climate change. And real estate traditionally is a good hedge against moderate increases in inflation because rents and other things can go higher and in the short run, real estate is a fixed supply.

But because of climate change, of course, lots of parts of North America are going to have significant problems and asset dials are going to be reduced. I mean, many parts of Florida, Louisiana, California are not even more insurable in terms of home insurance. people will have to move.

And as they move, prices are going to fall in the region where you have climate change and they're going to increase where you are having better climate. And therefore, some allocation is in real estate, but we have data at the zip level for every zip level county of the United States. And we look at each one of the rates in North America. We see what's our allocation to different regions. We have a whole global climate change map based on big data that allows us to go into the reach that are going to be benefiting from climate change

as opposed to those who are going to be hurt by climate change. So it's a combination of assets that provides, you know, solid returns with very low volatility and is an alternative to the traditional defensive asset. Yeah, just looking through the holding, so gold and short-term treasuries and tips and a short 20-year trading against the 20-year treasury and Equinix and American Tower. Interesting mix. All right, I have one last question. question. I'm not going to ask you the obvious question. And one thing I noticed in here,

there's no Bitcoin ETF, but I don't want to relitigate a Bitcoin conversation because it's the end and I don't want to have that. But I do want to ask an adjacent question to that, which is that when you talk to overseas investors and talk to people with high amounts of ultra high net worth people, today in 2024, when you talk to them, how seriously did they view, setting aside your own views? How serious? How serious? do they view Bitcoin or crypto as some component of the portfolio that they want to have? You know, some people are opening up to the idea of holding crypto assets, but those investors that are looking, say, for a safe asset that does well, given this tail risk,

are not going to look at crypto assets. The paradox of crypto assets is that they were doing actually quite poorly when inflation. was rising and the Fed was tightening and they're doing better when inflation is falling and the Fed is easing. They're not negatively correlated with equities actually. They are kind of like

high beta equity. Exactly. So if you want something, this is a substitute for the 40 component, I would say the combination of assets that we have considered and look at them carefully gives you stable returns and

reasonably high returns. If you add any crypto asset, you add a huge amount of volatility, and there is a wide range of investors that don't want that type of volatility. When we were first talking about the ETF, there was some early discussion of maybe tokenizing it in some way. Is that still a possibility? Yes, it is. The idea is that I do believe that actually tokenization of real and financial asset

has some validity as opposed to, crypto assets are backed by noting vaporware. And I think that the process of some degree of tokenization is going to occur. And the benefit of tokenization will be that these types of liquid asset, the ETF is not widely available in a variety of jurisdiction, especially in parts of the world,

like the Global South, where there is significant inflation, the basement of fiat currency. You could have something that would actually have a stable store of value, It's still dollar-ringed, but gives you positive return, and it's going to be a good hedge against some of those theories they're facing. So it'll be a way of eventually making it available to many investors all over the world. But that will be stage two.

tokenization, not for the timing is the ETF, yes. So I have just one more question, and every once in a while, I get the urge to start an ETF of some sort. maybe the odd lots ETF that is full of like thematic related assets to the stuff that we talk about on the podcast. And then I never do it

for obvious reasons. But what has been the most challenging or unexpected part of launching this ETF? Well, you know, it takes a lot of work. You know, you have to build a team collaboration with Goldman Sachs.

Oh yeah, because this one's actively managed as well. Yeah. Yeah. So, you know, one thing is to write about money. Another thing is to manage it. You have a daily P&L. But for me, it's a new and interesting challenge.

I've been an advisor to many financial institutions over time. There's a big picture view here, is that secular stagnation is over, cyclical inflation is rising. So it's not just a little twist on a new idea, but says there is a big asset class, It's the defensive one. There's not going to be this safe asset anymore in a world in which there'll be a variety

of new tail risk. We have to find a hedge against it. So I think the thesis is going to take time. It's not something's going to happen. Overnight is a medium long-term story. But I do believe that investors are getting nervous about the whole spirit of things and have to think about an alternative to traditional. But, you know, making the idea, designing it, implementing, convincing people that that's

the right doing to do. takes a lot of time and effort. It's hard work. All right, Nouriel Rubini, truly the perfect guest to talk about stagflation and some of the other big risks out there. Thank you so much. Great having me. Thanks so much. Joe, it's always fun to catch up with Nureole and see how his thinking is kind of evolving and also how he's putting some of the big picture like theories into practice with the new ETF. I love that, chat. I thought there was a fantastic chat with Noreal. And I thought, A, he does a really good job of laying out what has very clearly the sort of, for better or worse, look, all presidents come in and have different factions, right? That's not weird.

The coalitions are coalitions and what they are and there's always tensions. But there do seem to be some very interesting sharp divides within the broader tent of Trumpism. There's the sort of traditional Wall Street, quote, pro-business, unquote view. And then there is the sort of much more nationalistic anti-immigration, anti-free trade, stagflationary view. And it's very unclear who will what mix will win out. You know the other thing I like about Nereal is he kind of like self-catalog. his thoughts while he speaks, like number one, number two, number three, number four. The other thing I was thinking, okay, this has been emerging as like a big talking point in a

variety of our conversations on the podcast now. And also, you've written about it. I've written about it to some extent, but the idea of the market as a limiting factor on what's possible. And part of me is a little bit nervous about that one because it seems like maybe a big ask for the market to police the new administration. But the other thing I was thinking about was the importance of growth in all of this. And like what becomes possible if the economy continues to grow? Maybe that enables like some of the more, I don't want to say radical, but like creative ideas from the administration. Yeah. Adventurism and heterodox and sort of, yeah, for sure. You know, I think also I really enjoyed hearing his theory of a new safe haven. Because,

Because you do see this, like a lot of people's big holdings to bonds got blown up over the last few years. And you think, okay, well, now they're yielding, like, I don't know, a few percent. Maybe it's a good time to step back in. But the short end is yield. The 6040 has made like a little bit of a comeback recently. A little bit. But like, you know, there's a lot of people who say, why am I buying the 20 year when the short end is yielding more or is yielding about the same with much less duration? And so that and then gold has obviously done phenomenally well the last couple of years.

thinking about what makes real estate a safe haven in the specific properties of like climate, et cetera. Just some very interesting ideas. There are many ETFs that get launched all the time. Most of them just sort of disappear. This will be one I at least pay attention to. Yeah. And the ticker I just realized is USAF, which is kind of funny. Yeah. Anyway, shall we leave it there? Let's leave it there. This has been another episode of the All Thoughts podcast. I'm Tracy Allo.

you can follow me at Tracy Alloway. I'm Joe Wisenthall. You can follow me at the stalwart. Follow Nureole Rubini at Nouriel. Follow our producers, Carmen Rodriguez, at Carmen Armin. Dashel Bennett at Dashbot and Kale Brooks at Kail Brooks. Thank you to our producer, Moses Andam. From our oddlots content, go to Bloomberg.com slash oddlots,

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