The Duran Podcast - Weaponization of financial system and Debt-to-GDP. w/ Raymond Zucaro

Episode Date: December 13, 2025

Weaponization of financial system and Debt-to-GDP. w/ Raymond Zucaro

All right, Alexander, we are here with Ray Zuckerow, who is an expert on emerging markets, and we are going to discuss emerging markets. We are going to discuss Japan, China, and the global economy. And no one better to discuss this with than Ray. So before we get started, Alexander and Ray, where can people find your work and read your analysis and your papers? I know you have a website that you would like to direct viewers to Ray. Thank you, gentlemen, for having me on. Yes, the firm's website is www. rvx-am.com, where we publish our quarterly outlook pieces.

I cut my teeth in a very global macro world, but I do focus on emerging markets today. And I will have that link in the description box down below, as well as a pinned comment as well. So definitely check out Ray's analysis. analysis, it is the best out there. So Alexander, Ray, let's get started. Let's talk emerging markets. Let's indeed talk about not just emerging markets, but about the general economic world system, because it all interconnects, as is often been said, everything connects with everything else. And we are at a time when decision-making is becoming increasingly eccentric, especially I would say in Europe at the present time, all kinds of ideas about actions relating to frozen assets and seizing frozen assets and more sanctions to stop imports of oil from Russia and liquefired natural gas altogether from Russia and things of this sort.

So the Europeans are making all sorts of decisions which perhaps they haven't really thought through. because I get the sense that the politics and the emotion is what is driving these decisions rather than anybody actually sitting down and thinking down and thinking through the implications of them. And we're also seeing something a little is like that, I think, in Japan, where the Japanese government seems to be making statements which seem to be increasing tensions in the Northeast Pacific. I know that there are some people who say that this is not, this is not the Japanese government's intention,

but they have made certain comments. The EU Prime Minister has made certain comments, which I think were perhaps unwise. And this is coming at what looks like a delicate time for Japan anyway. And there have been certain commentaries, certain discussions in the media, especially in Britain, if I can say, saying that the period when Japan is going to be exporting capital, as it has been doing, may be coming to an end.

So these are important, they said that they're important, that would be an understatement. These are key things. These are things that are going to shape both the present and the future. and I think there are things that we need to discuss, absolutely need to discuss, and they need to be discussed with an expert. And I get the sense that in Europe, at least they don't consult experts very much anymore. And Ray is such an expert. And we are very privileged, very privileged indeed, to have him on this programme.

So, Ray, where are we? We are seeing all of these moves in Europe. you've been telling us about movements that are taking place in capital markets. How are the markets responding to all of this? Because, of course, they can read, they know what's going on. They listen and they watch, and they're the people who ultimately will make the decisions. You know, thank you again for having me on. Look, I think one thing is very interesting that a lot of people don't realize is that

China has issued sovereign dollar denominated debt just two to three weeks ago. And that debt trades inside U.S. treasuries. So not to get bogged down in legal speak, but or in financial speak, is the yield on a Chinese sovereign debt pays you less than you would get for U.S. Treasuries, which in the world of finance, U.S. treasuries are seen as the risk-free asset. What is that telling you? the market's pricing in higher risk for holding U.S. government debt than the U.S. government dollar denominated debt than you are getting paid for U.S. dollar denominated Chinese debt.

And why is it? I think it has a lot to do with what you mentioned. What is Europe doing, this idea of seizing Russian central bank assets, the idea of Euroclear, you know, and protection of capital. If you're an Asian-based investor, you have more comfort in owning Chinese sovereign debt in dollars than you are in U.S. treasuries. Why? Because it's a return of capital as opposed to return on capital. And I think the Europeans with this idea of breaking the seal in Eurocler, they don't realize the true detrimental that will have on global markets as a whole. Is not the United States government itself concerned about this? I would have thought they would be very concerned about this. For me,

for me absolutely US treasuries were considered by the kind of people that I used to know as solid and as liquid as cash I mean it was the sort of thing that you absolutely relied upon there was no safer

financial no safer or more liquid financial asset to hold than treasuries which is why they were always so willing to fund U.S. debt. Well, again, you've seen a weaponization of the financial system. I saw rumors yesterday. You could probably opine on this better than I could, but the UK, France, and Germany

threatening to sell their holdings in U.S. treasuries if the U.S. doesn't support their views in Ukraine. During the COVID outbreak here in the United States, you had right-wing political pundits saying seized Chinese holdings in U.S. treasuries. This idea about weaponings, weaponization of the financial system has gotten way too far. And absolutely, I think the U.S. government should be concerned about it.

But this is another example of something that gets zero coverage in the news, zero. And one of the things, you know, having focused on emerging markets is I've always had to rely on non-mainstream news sources. And really in the last five years, the mainstream news sources have really discredited themselves to the point where I don't even read Bloomberg News anymore because it's so biased one way. I use Bloomberg for factual information, but their opinion pieces are entirely biased now. Can we turn to Japan? Because this is an interesting story. They don't seem to be keen with what the Europeans are doing about Euroclear at all. They said they're not going to do this to Russian

assets. As I understand, they said, they're not going to do it to Russian assets in Japan, but they themselves now appear to be having problems. And I should say again, Asian people that I've known, and I've known a few. In Asia, Japanese debt used to be considered in the same way that in Europe we used to think of treasuries, at least amongst the people that I used to know. I mean, even though Japan was running up enormous debts, it had 250% of GDP was government debt or whatever it was. They weren't worried because Japan always had these enormous savings and it had these assets around the world and it was always seen as something that was very strong and very secure and something that people wanted to buy. Is this changing? Yeah. Look, the Japan,

the Japanese financial system did 30 years of frankly market manipulation. Who was the largest holder of government dead was the government itself. They bought interest rates down to not only to zero, but at some point it's negative. Look, you're defying the laws of finance. At some point, you're going to have to pay the piper. And with 239% debt to GDP, when you're financing it at zero, it doesn't really have an impact to your financial system. But over the last year, China has moved away from that zero interest rate policy. So while today the government yield is under 3%, which doesn't sound like a lot, when you have debt to debt to GDP of 200, and 39 percent, it adds up. So you're going to see a much larger cost of servicing the Japanese debt.

And I also think it's interesting timing in this recent national defense piece that came out. One of the things that the U.S. would like is Japan to increase their spending. All at the same time, they're having to spend much more on their interest cost. So Japan, I really see in a very difficult situation, sort of a no-win situation, right? Their cost of financing is going up, and their spending on defense will also go up. At the same time when you have some of the worst demographics in the world and the stock of debt, frankly, the metrics that I see today in the developed world remind me when I started my career 28 years ago in emerging markets.

I see debt to GDP in the developed world, you know, the U.S. 120%, Japan, 240%. And you have countries like Russia, 23%, and Turkey, a 25%. So you've really seen a switching of placing in the world of, you know, frankly, a lot of, oftentimes you see better metrics in the developed, in the developing world than you see in the developed world. But I do think Japan is an overarching concern because the last 30 years people associate Japan with exporting cars, really what they've been exporting capital. And now that you've seen the rise in interest rates, it actually costs Japan. investors that would they would sell their Japanese yen, hedge by dollars, and buy treasuries. Because of the rise in rates and the differential in hedging costs, it actually now costs a Japanese investor to own treasuries. So you're going to see the return of capital to Japan,

and I've seen estimates between one to one and a half trillion dollars of Japanese exported capital. So what will that happen? What were the implications for the U.S. treasuries? Well, if they're not buying treasuries, supplying demand would imply rates need. to go up. Can I ask where all this leaves Britain? Because of course, I am based in Britain. And we are very, very spooked here about our situation with bond markets and with people wanting to buy our debt. And I don't think it's widely known, but apparently a lot of Japanese capital has historically flowed to Britain. So if that dries up, is that, that, you know, is that, you? going to have an effect on us, a further effect on us? Absolutely. Again, the UK is in that developed

countries with debt to GDP over 105%, I believe. And I do think, but I don't think it's unique just to the UK. I think it's a global phenomenon. I think Japanese capital from, you know, you look at the timing of the, Japan announced a stimulus package about two weeks ago. I'm not saying it's directly correlated, but the timing is interesting because you even saw a sell-off in Bitcoin. I think Japanese capital found its way in many, many financial assets. And the UK will, again, in my opinion, be also be impacted by higher debt costs if the Japanese are no longer a buyer. So how important were the Japanese to the global financial system? Or rather maybe, let me correct that. How important were they to keeping debt costs low across the, you know, the Western

part of the world, if I could like that. At least in the U.S., they've either been the number one or number two largest holders of U.S. treasuries. So the idea like, oh, well, they'll leave and everything will adjust. Yes, we will get through it, but at a higher cost of capital, right? At a time when yesterday the Fed finally lowered rates, but you look at the underlying economy, the U.S. economy is very sluggish. I see unemployment rates in every segment, particularly the young segment.

As you look at people coming out of college, the unemployment rate is 20 to 24 percent. So these people are coming out of college with college debt and are unable to find a job. And frankly, that's why, not to get off the topic, but why did I see, what is my explanation for what happened in New York City, the electing of a Mandani-like figure? It's populism. people are looking at the society and saying, look, my politicians, whether it be Nancy or whomever, are getting rich, and I can't pay my mortgage. I can't pay my services. I can't get around the city. You look at the subway system in New York.

It's currently $2.90 going up to $3 at January 1st. You know, the cost of a young person, that's why they want change. And they want change either through the ballot box or other. other ways. But I don't think the politicians, particularly in the Congress, really realize that the underlying economy in the U.S. is very weak. And so you have the added on of potentially higher rates. What will that impact? That will impact the mortgage markets, right? Higher mortgages. So again, that same segment, that same young person, the idea of owning a home and what does Trump come out with? Oh, I'll do 50-year mortgages. So you're basically in debt forever.

So you're really alienating that base. And frankly, that's the future voting base, you know, 10 to 15 years out. And you've already seen representation of what happens in New York City. Can I sort of sort of split from one country to another, but can I ask now about China? Because, again, there is a very widespread view. You read it all over the media here, that China is in either recession or deflation and recession, that the two often go together, of course. But the China is in recession, that its economic numbers are not really strong,

that the Chinese economy is not in a good state, that the fact that it is exporting so much, one trillion dollar trade surplus in the first 11 months, is actually a sign of demand collapsing inside China. But then again, against that, you have the situation where people, in Asia are now buying Chinese dollar bonds which doesn't

that doesn't the tucy to correlate to me. What is the actual state of the Chinese economy European? Look, when I started off in my career 1997, China had 35% poverty rates. Today it's single

digits. I've never seen And, you know, people, you know, I'm an umpire. I call balls and strikes. And I've seen the Chinese miracle. I've seen, you know, the Shanghai subway, 1990 didn't exist to today being the largest subway system in the world. So yes, does China have problems? Absolutely. Is the housing market going through a turbulent time? Sure. I've seen, you know, I've been impacted by winners and losers in the Chinese property sector. But that said, if you look at the overall system, I think Chinese doing well. Actually, Morgan Stanley published a report yesterday that China has moved up in the value-added exports. And, you know, people often think of, you know, Germany is the value, 60% of the exports were value-added.

China's running around 60%, 60%. So they're really catching up. And the Morgan Stanley report says it's only going to grow going forward. And I also think it's very interesting that the same national defense report that I mentioned earlier, instead of confrontational, we're going to, you know, go against China. China, the report read, we're going to help China increase domestic demand. So working with China, helping, and I do think, look, given numbers are numbers, right, 1.3, 1.2 billion people, whatever the actual number is, and the amount of engineers and the education and the infrastructure,

China will be the growth engine going forward. You know, people get upset when I say that, but it's a numbers game. And if you can increase domestic Chinese consumption, not to the, where you see U.S., but let's just say half of it, a lot of that exported goods could be satisfied domestically. And I thought the stance that the National Defense Report took working with China as opposed to budding heads with China. I thought, I read that quite positively. Interesting. Well, where are we heading in all of this? What is the underlying story? I mean, we have Chinese bonds now rising. You talk about China being the growth driver.

Are we looking at prolonged period of economic stagnation in the West? Again, that narrative is all over the place. In Britain, the mood is very bad. I was talking to a friend of mine in Germany, and he was talking about how glass production in Dresden, for example, is now collapsing. And that's another part of the German economy that is sagging. So are we looking at a slow burn crisis in what used to be called the developed

economies? Are we justified any longer in using terms like developed economies to talk about the West and emerging economies to talk about the others? Look, I share a lot of your concerns about Europe as a whole. The cost of productions have gone up and you've alienated your natural client base to the east and to the far east. I see Europe in a particularly difficult position. But let me talk about the U.S. because that's where I'm based and much closer to. You know, I was quite positive with what Trump was trying to do with the tariff policy, reshore domestic manufacturing. I have a very close family member who works for a medical device company based out of Europe. And when the tariffs were announced, they seriously looked at buying a production plant in the U.S. Northeast.

And then Trump flip-flopped and lowered tariffs on this said country. So they said, okay, well, if it's only 10 percent now, we can absorb that. So consistency in policy, I think would be very helpful. And again, I have a firsthand example of a company that, okay, well, you know, if we're going to be tariffed at 30 to 40 percent, then we will domestically, we will build something in the U.S. But if it's only 10%, we can absorb that and save the costs and time of developing something in the Northeast. But that said, I am more optimistic in the U.S. because, you know, we do have a large energy basis. We're able to feed ourselves. We are a continental economy, and our domestic demand is strong.

So if we could have a little bit more consistency in industrial policy, I'm not as pessimistic. again, not to harp again on this national defense report, but I think the stance that the U.S. is taking in terms of Latin America. I like the term Trump buyer. He calls it the Trump corollary, but the Trump buyer of what he's trying to create. And I'm actually quite encouraged from an emerging market point of view because encouraging domestic capital markets, reshoring. So not as a confrontational, I think it bodes ultimately well for Mexico. and the Americas, from an economic point of view, from a geopolitical point of view, saber-rattling, you know, I'm sure, I think Venezuela is an interesting topic if you'd like to touch on that. But, you know, I see a much more confrontational U.S. policy in Latin America,

but from an investor point of view, that can often create opportunities. But Europe more pessimistic about? Unfortunately, yes. I, I, from a, again, from a demographics, from a cost of production, from alienation of client base, I think some of the policies that Europe has done will have medium to long-term impacts that are still working themselves out. It takes time, I'm sorry, it takes time to work to re, you know, reconfigure production chains and you're seeing it with, again, the report, the Trump report talked about a German chemical

companies moving to China. I mean, that takes time to build a plant, but, you know, in the medium to long term, everything is, is, every variable can be changed. German companies, German chemical companies moving to China and using Russian energy, whilst they are in China, that was what the reviews, what it said, whether that's actually true, by the way, I'm not, I'm not completely convinced, but, but still, And of course in Europe, we are not particularly nimble in reorganising supply chains in the way that I suspect, well, in the way that you definitely, that they definitely are in the United States. So we don't have that flexibility and in fact the rigidities, if anything, appear to be increasing. But anyway, just to ask this other question then,

are we going to see a big recession, in the West at least? Because there is a lot of discussion about this again. There is talk, certainly in Europe, this is an omnipresent discussion. I mean, some people say that we are already in recession and not just in a recession, but that it's going to be a very, very long recession. Perhaps a contraction would be more correct. But are we going to see a recession? How stable is the world, the economic situation generally?

I unfortunately am not going to be an optimist here. I do feel we are sluggish at best, so not real economic growth. Recession, you know, again, the administrations have an ability to redefine what a recession is. But certainly, I'm not optimistic in terms of global growth. I think there are pockets, I think to develop, like if, you know, from an asset allocation point of view, I think the developed world is in a very challenging spot. Like you look at, you know, how is the U.S. going, you know, given their cost of debt, how are they going to potential remanufacturing, having a weak dollar, right?

So making the cost of imports into the U.S. more costly. So, you know, it's a very precarious time in the global economy. last country which i know you know a little about which is a lot of a lot about which is russia Putin gave a recent speech to a business forum and he was talking about many things he was talking about democracy he was talking about other things but he was also talking about labor productivity in russia and he was complaining that labor productivity was increasing very slowly and that this was a long-term problem there and that he wanted it to be addressed. And I think he gave a figure of 0.7% growth in labour productivity per year, which does seem very low. I mean, is this,

is this, I mean, is this, does this in accord with your own understanding? And is there any prospect of the Russians being able to address that? Because I would have thought that would be a major limiting factor on the development of their economy, if it is correct? Yeah, frankly, look, I'm no one to challenge Putin in his knowledge of his domestic economy, but my experience with Russian in terms of engineers, in terms of businessmen, some of the best, sharpest people out there. So that kind of productivity number does take me aback. But, I mean, Russia, frankly, as the entire world is facing demographic issues, I know they've been policies to try to increase child production and importing workers from, you know,

Central Asia or potentially even India recently to address some of the overall productivity. But, I mean, it's hard for me to count out Russia. And again, given the education that they have in the infrastructure, I'm more optimistic than Putin is. But again, he's probably closer to the ground. Maybe he's doing it as a way to motivate the base. could it also be that one of the factors here is stagnant productivity in the energy complex, which is dragging productivity figures down and that if you looked at, say, more manufacturing

side, it might be different there. Because again, I have to say it did surprise me because it didn't seem to be in accord with pretty much everything else about the economy that I've seen. Perhaps some type of impact because of the inability to fully export their energy complex is flowing through the numbers. But again, I go back to the people in the education. That's what will maintain and lead the country forward. And in that area, I'm not concerned about Russia. Great. Do you have any, first of all, can I say thank you? And you for answering your back question so precise. I very much look forward to you coming back. and we can do more specific programs on specific topics as they arise.

But do you have anything, any last point you'd like to make at the end of this program? Well, I think Venezuela is a very important topic right now. And, you know, I have family ties back to Venezuela. And I saw, you know, what happened. And again, why did, why was Mandani elected in the U.S.? because of the haves and the haves not, the gap became so large. Venezuela, back in the 80s and 90s was seen as a rich country. And yet the population was getting poorer.

You had these 12 oligarchs in Venezuela, they called them the 12 apostles, who were these businessmen that were benefiting at the expense of the population. So today you have Maria Machado, who's seen as a replacement for the Maduro government. But what I don't think foreign, the U.S. and foreign investors realize that Chavismo or populism, if you will, in Venezuela is still very popular. Chavez, as a view, is seen favorably with 60% of the population. And I do think people don't realize that you've had, I've seen U.N. estimates between 7 to 8 million people have left Venezuela. So you have a little bit of self-selection. So the idea that, you know, Maduro will leave, Maria will come in tomorrow, and everything will be great. see what she's actually, if you hear what she's actually said, it's very much, you know, moving towards the U.S. business model. And again, I don't think that will sell well to the Venezuelan base. You know, having the gringoes or the imperialists come back and running business, that's why Chavez won originally. People, you know, you look at what Chavez did for addressing poverty, and the numbers,

he did benefit from an oil boom, but the numbers did go down under his term. So the idea that you're going to come in and inject Western capitalism to the people and they're going to take that, I think that's more of a fallacy that people don't realize how entrenched it will be. I don't think Maduro is entirely popular. But again, that has to do with the intended effects of sanctions. Venezuela issued a lot of debt. And how does Venezuela, what's his largest producer of hard currencies, through oil sales? So you sanction Venezuela's ability to sell oil.

So suddenly Venezuela has a large refining assets in the U.S. in distribution called Citgo. So Venezuela is not able to service their debt. So now the U.S. courts and investors are moving to seize those assets. So you're really putting Venezuela. You know, I'm a Venezuelan citizen and I see the imperialist flying jets over my regions. I see the Navy bases and now they're taking my assets. Oh, and tomorrow I'm going to welcome them coming in and running the country for me. I don't think it's going to be that easy.

Well, Ray, we will discuss Venezuela because I think this is an interesting topic, which is going to become a lot more interesting over the next couple of weeks. And I hope we will be able to see you again. I hope you will be happy to come on our program again, because this has been very, very informative and very educational for ourselves as well. And also, I'm sure, for our viewers too. Thank you. Thank you.

Thank you, Ray. And before you go, Ray, once again, a plug for your website. at www. rvx dasham.com. All right, then that link is in the description box down below. Thank you very much, Ray. Thank you, gentlemen. Take care.