May 6, 2025 • 37 mins
The dollar is wobbling. Not everyone is mad for Treasuries anymore. The US is likely headed for recession and it looks like the future of technology might be in China. What’s an investor to do?
Move with the times, says Gavekal founding partner and Chief Executive Officer Louis-Vincent Gave. In other words, you don’t have to invest in the US, and in conversation with Merryn this week, he shares his thoughts on the best places to move your money.
Gavekal Research: https://research.gavekal.com/article/prejudice-and-china/
Erik Prince video Louis mentions: https://www.youtube.com/watch?v=WsKtfLRSo2c
See omnystudio.com/listener for privacy information.
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Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Speaker 1 (00:02):
Bloomberg Audio Studios, podcasts, radio news.
Speaker 2 (00:08):
Hey Maren Talks Money listeners.
Speaker 1 (00:09):
We are doing things slightly differently this week as things
are moving so fast. We recorded this week's main INFI
on Friday, but we wanted to get it out to
you right away before things change, because boy do they
change a lot.
Speaker 2 (00:21):
So here it is.
Speaker 1 (00:23):
You will still hear later in the week the next
one in our housing series, which is about freehold versus leasehold.
I think some of you know what I think about
that already, and post the Bank of England. Later in
the week you will get our usual round up from
me and John chatting about all sorts of things. But
for now, onto our interview. Welcome to Marin Talks Money,
(00:46):
the podcast in which people who know the markets explain
the markets. I'm Maren Somerset Web. This week we are
talking a little bit more about the end of US exceptionalism.
It's been exceptional for decades. You've had the dollar as
the dominant global currency, You've had treasuries as a dominant
reserve asset, you've had persistent current accunt officits, and of
course you've had the US providing a global security umbrella
(01:07):
to everybody. Those days appeared to be gone, Have they
really gone? What might happen next, Who's going to take over?
How much longer will the trade wark keep going? And
what is going to happen to markets? So for all this,
I'm joined by the perfect person with me today is
Louis Vincent Gaff, founding partner and.
Speaker 2 (01:25):
Chief executive of gavcal.
Speaker 1 (01:27):
Louis careersmans from serving in the French Army to working
as an equity research analyst at Parabout, where I also
worked once upon a time, by the way. In nineteen
ninety eight, he co founded Gavcall in London with his father,
Charles Gaff, and economist journalist Anatol Kolatsky, acknowledging.
Speaker 2 (01:41):
Asia's growing role in the global economy.
Speaker 1 (01:43):
In two thousand and two, he moved the firm's headquarters
to Hong Kong.
Speaker 2 (01:47):
Louis, it's great to have you here, thanks for coming on.
Speaker 3 (01:50):
Thank you so much for I'm to be delighted to
be here.
Speaker 1 (01:52):
So I want to start with the US and US exceptionalism.
Your fan recently put out a chart book and the
title Global Strategy Investing After Exceptionalism. So before we move
on to after Exceptionalism, I wanted to just ask you,
are you sure the idea of US exceptionalism has come
to an end.
Speaker 3 (02:13):
I think it's come to an end for now. I
think you always go through different waves in the markets.
We've gone through a period essentially of fifteen years where
US markets where the US dollar itself outperformed pretty much
everything else out there and behind. And this corresponded to
genuine realities. I think you had two massive events in
(02:35):
the US over the past fifteen years. One of them
that's not talked about enough was the US shel Revolution.
In the course of roughly eight or nine years, the
US added to Saudi Arabia. It added eight and a
half million barrels per day to its all production. Now
it's unprecedented, huge productivity gain. All of a sudden, the
US had a cheaper cost of energy than anybody else, etc.
(02:55):
And that was a huge pillar to the growth story
of the US for the past fifteen years. At the
same time, while the US was basically more productive on
energy than anybody else, you had the birth of the
whole smartphone ecosystem. Apple launched the iPhone and the broader
smartphone ecosystem from Google to Apple to Facebook. It was
(03:16):
essentially controlled by the US. Now, both of these huge
events started to run out of gas a few years ago,
but I think there was another wind to US exceptionalism
thanks to all the excitement surrounding AI. There was all
of a sudden AI was going to be the new
golden goose, and Nvidia went through the roof, and Microsoft
(03:38):
went through the roof, and this was also proceeding swimmingly along,
and the market essentially developed this belief that in order
to participate in this new golden goose, she needed to
do fifty billion of capex every quarter, and there were
only a handful of companies in the world that could
do that, and they all happened to be in the US.
(03:58):
And this whole belief in AI is the golden Goose
was essentially shut through the heart in January when China
released Deep Seek and then followed up with Ali Baba's
L and M model and Buy Dance and Baidu, and
before you know it, it seems that every other week
we had another Chinese company also entering the AI space
and doing it at a fraction of the cost of
(04:19):
the Americans. And so all of a sudden, this belief
that was out there that AI was going to be.
This golden goose was no longer there because I think
anybody who's been involved in the markets for the past
twenty five years knows that when China enters a room,
profits walk out. The idea that you can make money
while competing with a Chinese company is ludicrous. So this
(04:42):
is where we are today. You've had US companies that
have essentially poured hundreds of billions into AI solution, and
China comes along and says, hey, I've done this with
a piece of gum and two pieces of strain. And
so now you look at these companies and think, okay,
where's the golden goose? How are these guys going to
generate outsized profits from here on out? Now? Throwing on
(05:03):
top of that all the political uncertainty of the past
six weeks or two months, all of a sudden, this
belief that just like any typical emerging market policy in
the US has made off the cuff with no predictability whatsoever,
no really any kind of process. And then, all of
a sudden, I think most people start to take a
(05:25):
sit back and say, hold on, the US is seventy
percent of global marketcap. It's added twenty trillion in market
cap in the past three years. To put in perspective,
the total market cap of Japan is seven trillion. The
total market cap of Europe is six trillion. So the
US has added more than the whole market cap of
Europe and Japan together in the past three years. So
(05:47):
you take a step back and you think, hold on
the US is twenty three to twenty four percent of
global GDP, at seventy percent of global market cap, it's
got uncertain political leadership. What I thought was going to
be the golden goose ism there, and yeah, and capital
is starting to look for opportunities elsewhere.
Speaker 1 (06:03):
But if you look at it like that in terms
of the US as a percentage of global GDP and
then as a percentage of global market cap, and you
think maybe those two numbers should match up a little
more than they do, then you're looking at US markets
falling by a phenomenal amount. What you've seen over the
last the volatility of the last few months, it's nothing
relative to what that might mean.
Speaker 3 (06:24):
Well, look, if a proper bear market usually wipes out
two or three years worth of gains in inequity market,
and that would be a twenty trailing wipeout. To have
a proper bear market, usually you need a recession, and
then you get to the question of are we heading
towards a recession in the United States? And to your
point on US exceptionalism, if you look at the past
fifteen years, we've had fifteen years in the US where
(06:47):
almost year in year out, US economic growth not only
surprise on the upside relative to expectations, but also outperformed
everybody else that I've performed Japan, it outperformed Europe, it
performed essentially China that kept disappointing over at that time period.
As you look forward to twenty twenty five, this might
be the first year in quite a while where actually
(07:11):
the US is going to end up with the weakest
growth around. Why well, because if you look at recent years,
what was really pushing US growth faster than everywhere else.
One of them was massive fiscal easing that's now gone.
The second thing was very strong capital spending in technology,
mostly in AI that's now mostly gone or at least
(07:34):
it's rolling over. And the third was outsized spending by
higher end consumers who were making lots of money on stocks,
making lots of money on crypto and therefore spending more.
And today the US equity markets are actually under performing
the other markets. So you're now left with the countrary
of you're seeing fiscal stimulus in China, you're seeing fiscal
(07:57):
stimulus in Europe, and you're seeing fys cool and monetary
policy contraction in the US, who've got a tighter FED.
They're still doing quantitative tightening. You have on the fiscal side,
you've got doge and the effort to cut spending down.
But even though they're both tightening, they're also pointing the
finger at each other. And here I'll just disclose something
(08:18):
were all the fruits of our own experiences. I moved
to Asia in the mid nineties, and I witnessed firsthand
a train wreck that was Japan through the nineties and
nearly two thousands, and part of the zoo are you were.
Speaker 2 (08:33):
A japan all the way through the nineties, witnessing first had.
Speaker 3 (08:37):
And one of the things, so you'll remember that one
of the characteristics of that period was the bog and
mf kept pointing the finger at each other. The Bank
of Japan and the Ministry of Finance in Japan kept
pointing the finger at each other and blaming each other
for the unfolding slow down and not really tackling the problem,
which was, Okay, our banks or boss, we need to
recapitalize them, et cetera. Well, fast forward to today, and
(09:00):
you have exactly the same set up in the US.
You have the Fed and the Treasury pointing the finger
at each other as the economy is slowing down. And
again we're all the fruits of our experiences. Maybe I
have PTSD from that period and I'm still licking my
wound from the amount of money I've lost in Japan
over the years. But I look at this and I'm saying, Okay,
I've seen this movie before. It feels somewhat similar in
(09:23):
the US to me today.
Speaker 1 (09:25):
Slight tangent. But the one thing that the US does
have that certainly most of Europe, for example, doesn't have
the UKA in particular, is cheap energy. And if we
think of economic activity as energy transformed, obviously, as you say,
then the US does still have that massive advantage over
most of the rest of the Western world.
Speaker 3 (09:44):
Absolutely that it does. But having said that, markets are
made at the margin, and I think the coming years,
a couple things are going to happen when it comes
to Europe. We three years ago, following Russia's invasion in Ukraine,
we told Katar, look, will fund your new gas terminals.
And in the next year you're actually going to see
a lot more gas coming out of the Middle East
(10:05):
and going into Europe. This is all the more so
if the pipeline finally does get built through Syria and
into Turkey and from there and from there onwards. So
I'm not saying that Europe is going to have all
of a sudden the same cheap cross of gas as
the United States. But we're not going to be in
the same shortage situation as we've been in recent years.
And price could very well be lowered now. To your point,
(10:27):
and this is an important point, and economic activity is
energy transformed. And today, wherever you care to look in
the world, energy costs are lower than they were a
year ago. All prices are like sixty bucks. All prices
is super cheap. If you'd think back a year ago,
two years ago, the US was the only place that
had cheap energy. It really was. It was the only
place that had cheap energy. And that made the US exception.
(10:51):
Today essentially everybody's got cheap energy now. Now Granted, you
could say that's not going to stay this way, but
my view on this, at Europe, you might very well
have a natural gas glood coming in. That's number one.
Number two. Today, everybody's very excited that the fiscal stimulus
that Europe is starting to implement is all going to
(11:12):
go into weapons. So everybody turns around and buys Ryan
Mettal and buys Taless in France and all sorts of
weapons producers. Personally, I struggled to buy that argument. I
started to buy that argument because we don't even have
armies anymore. So it's like, why are we going to
buy tanks? We don't even have guys to drive the tanks.
And if you look across Europe, the reality is France
has somewhat as a little bit of an army, the
(11:33):
UK barely has one, and Poland has one, and that's it.
Like nobody else has an army.
Speaker 1 (11:38):
And it's also tor I suppose that the nature of
war has changed, and if there's anything that the Ukraine
Russia war has shown us is that the old weapons,
the tanks, etc. Maybe useless, possibly worse than useless in
future grand wars, should future ground wars even exist?
Speaker 2 (11:52):
Under the circumstances.
Speaker 3 (11:54):
Yeah, absolutely rights. And on this I really recommend to
your listeners by Eric Prince. Blackwater, the world's biggest mercenary army,
essentially equivalent to the US of Bargner Group. Eric Prince
gave a speech in February at Hillsdale College in the
Future of Warfare and essentially the lessons from the Ukraine War,
and it is fascinating. It's well worth an hour. But
coming back to your point, I don't think we're going
(12:15):
to spend a ton on weapons, but in Europe we're
going to spend a ton on our energy grid. Because
if you take a step back, the US essentially guaranteed
two things for Europe. One of them was the security umbrella,
no doubt, and the other was the guarantee that whatever happens,
we'll be there to deliver energy to you. And we
saw this during the Ukraine War. You know, when the
North Stream pipeline very mysteriously blew up, the US at
(12:39):
least had the courtesy to turn around and say, you
know what, will empty our strategic petroleum reserves and we'll
provide you with a bunch of cheap energy. And essentially
that brought the price of energy back down and allowed
Europe to have a decent winter. So I highlight all
this because you know, for me, the trend of the
coming few years in Europe is, yes, we're to have
(13:00):
fiscal stimulus. No, it's not going to go in the army.
It's going to go into the other thing that the
Americans were providing for us, which was energy security. And
that means that I'd rather own Siemens than Ryan Mittau.
Speaker 1 (13:12):
And that's something's definitely highlighted by the blackout in Spain
and Portugal.
Speaker 3 (13:15):
Exactly, you've got this huge blackout. It shows that we
are far off where we need to be. So all
this to say that you're absolutely right, the US still
have a huge comparative advantage on energy, but that was
the big story of US exceptionalism. Do we think that
comparative advantage grows from here or do we think of shrinks?
The direction of travel matters tremendously, and with Europe, I
(13:40):
think realizing that we need to invest across our grid,
whether it be in nuclear, whether it be in LNG terminals,
whether it be in more solar panels where well.
Speaker 1 (13:50):
Isn't of a couple of weeks ago that maybe the
last thing we need to invest in is more solar panels.
Speaker 3 (13:55):
Yes, the first thing we need to do. The reality
is there's a short term solution and that's more LNG
because energ doesn't pollude very much. And there's a long
term solution, which is more nuclear. That's essentially it. And
if you have the political willingness, and I think in
Europe's increasingly the political willingness to do both, then Europe
is in a better place.
Speaker 2 (14:16):
Yeah.
Speaker 1 (14:16):
Okay, let's go back briefly to the US and it's exceptionalism.
The dollar been dominant for so long. There's a lot
of discussion about dedollarization, and that bey one of the
last nails in the coffin of US exceptionalism. If the
dollar is no longer the most dominant global currency, how
do you see that panning out?
Speaker 3 (14:34):
For me, I'll go back to this Eric Prince video
because for me, it's a super important to understand Donald
Trump's world view today because Eric Hunce happens to be
very close to Donald Trump. The message of that video
on YouTube is essentially, the primacy of US weapons on
the battlefield is over. Now. We can debate this all day,
et cetera. But what matters is Eric Prince is close
(14:55):
to Donald Trump, so he tells him this. And the
way that Donald Trump reacts to this is to say,
you know what, I'm going to fold back onto the Americas.
Like Europe can sort itself out, Asia can sort itself out.
America's is mine. And so you know, essentially that goes
back to JD Vance's speech in Munich. That was a
(15:15):
breakup speech. And so now if you're Europe again, you know,
for years, the US has run massive twin deficits. And
by the way, say if you're Indonesia, same if you're Thailand,
same if you're any anybody in the greater US orbit.
The US has run these huge twin deficits. And you
got these dollars, and you thought, Okay, what do I
do with these dollars? The default mode was I'll buy
(15:36):
US treasuries, partly because if anything goes wrong, if Russia
invades Ukraine, if I need to buy energy, if there's
a tsunami, you know whatever. If I need to buy weapons,
I can count on the US Navy delivering those. Now,
the new reality of the world that we're in is
you have a US administration today that is extremely predatory foreigners.
(16:01):
Everything they're doing is trying to make foreigners pay for
their mistakes of the past. So the US is thirty
seven trillion dollars. It's like, got we're going to fill
that hole with tariffs. We're going to fill that hole
by selling five million gold cards to the richest foreigners
who are going to come here and pay taxes here.
We're going to fill that hole by charging higher capital
gains and higher income taxes on people who invest in
(16:23):
the US and so on and so forth. So now
if I'm a foreigner, I think, well, do I want
to keep buying US treasuries on the premise that if
I go wrong, the US will backstop me. To be honest,
if I live in the Americas, yes, because the America's
Trump has made very clear he's building Fortress America. He's
not going to put tariffs on the Latin Americans. He's not.
(16:43):
He's going to do more trade with them. So if
you're in Latin America, you're fine. But if you're Europe,
if you're Asian, I think you start thinking, well, instead
of buying treasuries, I'm going to use these dollars. Right now,
all they're doing is buying gold. My point is at
some point they'll say, you know what, I'm going to
build my own strategic petroleum reserve. I'm going to build
(17:03):
my own strategic copper reserve, nicole, because it just makes
more sense than owning treasuries. I was buying treasuries in
case I needed these commodities in the future. I'll just
stop bother the true And you could say, well, there's
a cost to start puling the treasure the commodities, for sure,
but you now know that in a crisis you have them,
you have them, while in a crisis you don't know
(17:25):
if you can count on the US anymore.
Speaker 2 (17:27):
Yeah.
Speaker 3 (17:28):
So, yeah, we're entering a very different phase of the
dollar global standard, absolutely, one in which I think commodities
are going to reraiate massively.
Speaker 1 (17:37):
So it sounds like you would expect the trade war
to just keep going. This is not something that's going
to end quickly, and the relationship between China and the
US to continue to break down and possibly at a
long term division between East and West and a shift
of economic activity to the East.
Speaker 3 (17:53):
So look, there's short term and there's long term. So
to answer your question, short term, like I think things
are as bad as they can be short term. So
short term, it's pretty obvious that that Trump is desperately
looking to walk back some of the China tariffs because
if he doesn't, by the time the summer rolls around,
(18:13):
there'll be no fireworks at the fourth of July. They
will be empty shelves at Walmart. And what was it
two days ago? Trump came out and said, maybe instead
of having thirty dollars, girls can just have two or
three dolls. And I listened to this and I thought,
is there anything more on American than this? The idea
that you do with less seems to me completely anathema
(18:35):
to what everything the US believes in the last time,
the last guy who tried that was Jimmy Carter and
that didn't work out for So in the short term,
he's gonna need a deal with China. Now. The problem
he has is when you need a deal real bad,
you get a real bad deal. And she jimpings stimulating
his own economy to compensate for the loss of the
(18:57):
US export markets. But essentially there's a power play unfolding
right and cgmping. He's out there trying to show Trump
that China has no pushover and domestically the positions are
now completely opposite, and that the longer the trade war lasts,
(19:18):
the less the popularity of Trump because the worst thing
for any elected official is to get involved in the
war that your people don't want. And there isn't real
no indication that Americans have any interest in this trade war.
So the longer it lasts, the stronger CG and PING
gets in, the weaker Trump gets. So what's the incentive
for cgmpin to come to the table. At some point
(19:42):
he will because you know, you do want those manufacturing
jumps back, but it might take a few months. We
might be in for a tough summer.
Speaker 2 (19:52):
It wouldn't expect more blinking from Trump. You just expect
a tough summer standoff.
Speaker 3 (19:56):
I think the seas have already been planted for a
tough summer. We've got everything now. You know, you've got
all the ism surveys, that all the soft data is collapsing.
I think you've got a lot of anecdotal evidence of
supply chain dislocation starting in the construction sector. Projects starting
to get canceled, workers trying to get to get fired.
(20:17):
Like anything where you have a bit of a supply
chain complication. People pulling back. You're starting to see insurance
rates for car insurance and home insurance starting to go
up on the premise that replacement costs are going to
be much higher because you've got all the dislocations. It's
going to be like COVID all over again. So insurance
rates are going up, which in turn is going to
(20:40):
squeeze consumer disposable income. Now against that, you could say, well, yeah,
but energy prices are low, food prices are low, so
that's going to keep money in the consumer's pockets. And
that's true. That's the sort of silver lining to what
I think is a pretty dark cloud showing up for
the US economy.
Speaker 2 (20:57):
Okay, well that doesn't sound great. It's entirely what I expected.
Entirely what I expected.
Speaker 1 (21:04):
Let's talk a little bit about where people might invest.
Speaker 2 (21:10):
Where they might invest.
Speaker 3 (21:11):
Now you mentioned lots, of.
Speaker 2 (21:13):
Course there are there always are that loads of places
to invest.
Speaker 1 (21:15):
And if America was exceptionally expensive, then a lot of
the world was exceptionally cheap. If we're looking at equities, right, absolutely,
now your area of expertise, but you have every area
of expertise, but you know, an awful lot more about
China than most people, and that market, as you've written yourself,
was until relatively recently considered by most institutional investors or
many institutional investors, to be uninvestable.
Speaker 2 (21:36):
But that's not the case anymore. Right, they're coming around.
Speaker 3 (21:39):
It depends where they're from, to be honest, it really
depends where they're from. I think if you were from
the Middle East, you never considered China investible to begin with,
and you're more than your probably your eagerness to invest
there continues to grow. Europe is slowly starting to change
its stripes, I think the China, but the US it's
still a very dirty word. China sover dirty word. Having
(22:01):
said this, and to your point of there's many places
to invest, we take a step back and we think, Okay,
we're now entering a period where I think it's very
likely that the US dollar goes down from here as
foreigners as you know, the trend that we've started to
see of foreigners leaving China leaving the US, that's you know,
these things unfold over time. It's a new trend, it's
(22:22):
going to be a trend for years to come. So
if we're starting a phase of structurally weaker US dollar
number one, while at the same time China is stepping
on the gas big time, both through fiscal and monetary
policy and putting pressure on banks to lend more aggressively.
And at the same time, energy prices are low, and
at the same time food prices are low. On the
(22:45):
liberation day of the announcements of the teriff, I was
in Latin America. Imagine you're Latin America's central banker. Are
you the central banker of Peru or Chile or Columbia wherever?
And you now have an environment where old prices are low,
US dollars going down, the prices are cheap, and China stimulating.
That is literally like you couldn't asked for more for
(23:06):
Christmas and so and you don't even need to believe
in Santa It's just been delivered to you. So it's
for most emerging markets, whether you're called India, whether you're
called Indonesia, whether you called China, an environment of falling
dollar week oil, China stimulating. It's a bonanza. It's as
boad as good as it gets. And now this is
(23:26):
unfolding out of time when a lot of these assets,
perhaps not India but you look at Brazil, you look
at Colombia, you look at China, you look at Indonesia.
A lot of these assets are about as cheap as
they've ever been, or at least as they've ever been
in the past ten years. Perhaps they were cheaper post
as crisis, but that was a lifetime ago anyways, So
it's I think there's a lot to be done, and
(23:47):
there's a lot of exciting stories out there, and then
a lot of things that are completely under owned. The
reality is that for the past five six years, the
markets were driven by essentially thirty large cap names in
the US or the mag seven, another ten ten tech names,
plus Walmart, cost Go, etc. But aside from these thirty names,
like nobody had any interest in basically anything else and
(24:10):
everything else did nothing for ten years, and now it's
starting to show signs of life. So there's lots of
places to invest. I think financials are super interesting. Most
countries are seeing their financials outperform. You're seeing steeper yield
curves everywhere, improving then interest margins. I think emerging markets
are super interesting. I mean, commodity space is interesting, depending
on your risk profiles and your willingness to to take
(24:33):
on short term volatility. There's things to do.
Speaker 1 (24:37):
Okay, So in terms of I'm going back to China,
if you're a retail investor, is it a reason why
I did simply buy a Chinese fund? Yes, I fund
investing in Chinese actualities across the board or an ETF.
Speaker 3 (24:50):
Few people realized this last year, but so if you
take the biggest Chinese ETF, which is FXI in the US,
last year, it was pretty much the only major country
to have perform the US. Nobody realizes this. This year
it's outperforming again, but yet it's really seen no inflows whatsoever.
The little inflows that China's had in the past sort
of six months have really gone into k Web, which
(25:12):
is the sort of tech the sort of internet platform,
sort of techy ETF in the US. I think there's
essentially three different things driving the Chinese market right now.
One of them is the revaluation of tech that got
absolutely slaughtered post Ali Baba crackdown, and it's still very cheap,
and so you've got that dynamic going. That's one dynamic.
(25:34):
You have a second dynamic, which is driven by frankly,
retail investors in China. Of them buying high dividend yielding
stocks because interest rates are zero in China, and you've
got all these companies that are giving six seventy eight
percent yields and companies that aren't going to go bust,
like you know, the Petro China's of this world or
the Bank of China, et cetera. So this domestic retail
(25:55):
that's buying this, and then there's the domestic consumer names.
As the guvernment comes and says we're going to do
more stimulus, you're starting to see life in some of
the consumer names. So there's three different themes that are unfolding,
and of course, if you buy the index, you get
all three.
Speaker 2 (26:10):
Yeah.
Speaker 1 (26:10):
Can you see the American retail investor beginning to move
out of the US? I mean, it's been interesting, hasn't
it watching them buy the Great single dip? And it's
hard to see the American retail investors suddenly saying I'm
not going to buy this passive fund into the US
market into that, I'm going to go and choose one
of Louis's favorite emerging markets. I'm going to go out
and buy Brazil or Perats, I'm going to go and
buy China or whatever.
Speaker 2 (26:30):
It is it. It's kind of tough to see, isn't it.
Speaker 3 (26:33):
Yeah, that's that's not going to happen. But no, do
you need that for China tail perform. The level of
Chinese savings is absolutely enormous. What you need in China
is for the Chinese investors to stop just leaving their
money in the bank and or buying gold, to start
buying their own stocks. You don't need the US investor.
My bigger fear actually in the US at US markets
is that the US investors are going to start selling
(26:55):
their SMP and their Max seven, et cetera, not so
much to buy something else, but to pay for their
insurance to pay for their cost of living that is
going up. You've now had four years forty eight months
in a row with inflation going up above two percent.
And remember that this occurred at a time when all
prices were essentially going down, at a time when the
(27:17):
US dollar was super strong. And now you're moving forward
to a time when US dollars trying to go down
or you're going to have these huge tariffs that are
going to be a big inflationary shock, and an inflationary
shock not just on oh the stuff I buy a
Walmart is more expensive. But like I said, you turn around,
your car insurance is more expensive, your home insurance is
(27:38):
more expensive, your local taxes are more expensive, and people
are going to end up having to sell stocks to
just pay the bills.
Speaker 2 (27:46):
We won't go there. Then, no investing in America, everybody.
Speaker 1 (27:49):
But one of the conversations about the Great Rotation and
is I think one that we've been having on this
podcast a lot over the last few months because we've
been telling people to rotate out to the US, but
actually for too long, As you said, we're always a
good which hasn't been us very popular. But a lot
of the conversation about the Great Rotation has been about
rotating out of the US into Europe. And we have
also been hoping for a long time that people will
(28:11):
finally start to put some money into the ridiculously cheap UK,
and in particular into UK small caps, which of course
almost insanely cheap. Do you see any reason for optimism there?
Speaker 3 (28:22):
The small caps are cheap everywhere I know there's stupid cheap.
I know they're stupid cheap. In the UK they're actually
quite cheap. In the US they're cheap, they're stupid cheap
in Japan, They're cheap everywhere, And I think this goes
to perhaps the shift in our global the way people
invest in. Increasingly they just buy the indices, and so
you're having this dislocation where if you're part of a
(28:44):
SMP five hundred or foots one, you get these passive
flows that come in, but not so much in the
small caps, like nobody buys. You know, there's no volume
in those small cap ETFs. And to the extent that
you're now in a situation where what is it in
the US, like sixty percent of the flows I'm now interpassive.
(29:05):
That essentially means it all goes into one hundred names
or five hundred of course for the SMP five hundred.
But to get super excited about small caps you, I
think the first thing you need is for the marginal
doll to just stop going into indexing, which is which
which usually we'd seen something like this in the late
nineties before and then two thousand and one to two
(29:26):
thousand and seventy hat hujab performance in small caps because
there was no flowing to an indexing following the big
bear market of two thousand and two thousand one. So
perhaps was people to get fired up about small caps again. First,
we need a bear market, a proper bear market.
Speaker 1 (29:42):
Right, so everyone moves out of index funds and has
it go inactive again.
Speaker 2 (29:46):
Okay, what about UK large cap?
Speaker 3 (29:49):
Yeah, UK large it's a tricky one because you look
at the foot see one hundred. It's not really a
UK index. It's cheap. It's super cheap because there's a
bunch of commodities in there that nobody wants to own
any more. I want it on them, but I feel
like I'm the only one.
Speaker 2 (30:04):
And no, no, lots of our listeners want to earn them.
They want to commodities. They do. But we'll come back
that in a minute.
Speaker 3 (30:10):
It's almost like the Ausie Index. It's like banks, insurance
companies and commodities, and these are the things that have
been derated the most aggressively. Now. I'm very bullish on financials,
I'm very bullish on commodities. So of course I like
the foot Sea one hundred, as you know, de facto.
And add on top of that the fact that the
pound isn't very expensive, et cetera. There's lots of reasons. Now,
(30:34):
I think in terms of international news flow, the UK
hasn't done a lot in the past ten twelve years
to get people excited to redeploy capital in the UK.
Speaker 2 (30:43):
Let's stick with commodities.
Speaker 1 (30:45):
We talked a little bit about why you are bullish
on commodities week dollar etc.
Speaker 3 (30:49):
It is there are Yeah, Look again, we're all the
fruits of our own experiences in my career. Each time
you've had a week dollar in China stimulating, commodities have
done well. Now I take it, you could say this
time it's different because either we have all this success
supply of oiled option on. You could say this time
it's different because China stimulus is going to go more
(31:10):
into consumption and infrastructure spending or real estate. There's lots
of reasons why it could be different. Having said that,
I'm looking at assets that are trading. If I'm looking
at the commodity producers, a lot of them are trading
at record low valuations. And people always tell you when
things are trading at very high valuations. I either dot
(31:31):
Com in nineteen ninety nine or AI up until ten
minutes ago. People tell you this time it's different on
the way up. But people also tell you this time
it's different on the way down. You could have record
low valuations and people tell you, yeah, don't worry about
these valuations. They make sense because that place is condemned.
And this time it's different, and you'll never get off
the floor of these valuations, even as people implement the
(31:54):
very policies that are going to get you off the floor.
And so I think you've had the This time it's
different argument for AI and it hasn't been true. People
are still holding on to the This time it's different
for commodities, and I don't think you'll be true either.
Speaker 1 (32:08):
What is the this time it's a different argument for
commodities staying on sort slow valuations.
Speaker 3 (32:13):
That China is is you know, kind of structurally screwed,
and that you have excess supply on oil. That a
lot of the old producers, because some of the cheapest
starks are of course the energy producers. That essentially it's
trapped assets because in the next ten years will all
be driven around in self drive cars, that it will
all be electric and that will all go two thousand
(32:35):
kilometers on five minute charge. Yeah, you know, all that good.
Speaker 2 (32:40):
Stuff, but that electricity still has to come from somewhere.
Speaker 3 (32:44):
Yeah, you don't have to you don't have to convince me.
Speaker 2 (32:46):
I have to convince you that much.
Speaker 3 (32:48):
I believe it's you asked me what this time? A
different argument. I don't buy that this time it's a
different argument, But you asked me what it was.
Speaker 1 (32:54):
No, I just wanted to get that out of there.
But I think we entirely agree on this one. What
about gold, I mean one of the Maya's hair. As
you say, it's been the central banks, but retail investors
have been coming in recently. The central banks are still buying.
Is that a bull market that's barely begun or is
it peaking?
Speaker 3 (33:11):
So it's a bit tough one as well, going back
to that. This time it's different, Yeah, because if you
look on the valuation basis, gold is now one ounce
of gold is forty five barrels of oil. Historically it's
about twenty To buy an ounce of gold takes three
weeks of US wages. Historically it's about one and a
half weeks.
Speaker 4 (33:28):
If you look at gold relative to the US house prices,
if you look at gold relative to copper to silver, like,
gold is expensive on any kind of historical matrix that
you care to look at.
Speaker 2 (33:39):
Ah, but this time is different.
Speaker 3 (33:41):
Boom exactly. This time it's different. You do have a
shift in the global dollar standard that we discussed. Look,
you've entered the sort of blow off phase on gold.
You can't short it. You might not even want to
sell your gold until it rolls over and it crosses
under the TUNA day moving average or something like this.
Like because these ball markets once get going, they can
really rip. So you don't want to be offside on this,
(34:03):
especially when you consider I look at the landscape and
I know there's there's obvious buyers such as the Saudi
Central Bank and the Chinese Central Bank. If you know,
if I'm Pangongchang, if I'm the governor of the PBOC
and cgmpin tells me you're buying gold, then I'm buying gold,
you know. And just like these guys were buying bond
bonds with negative yields and didn't care about the evaluation.
(34:26):
Now they're buying gold instead. So that can last for
a long time. And yes, retail has just started going.
And you know in recent years we knew there was
one big seller, the big seller with the ETFs. Actually
you look at the JAILDTF, the share count camp thrinking
now the share count is expanding again, so you have
to wonder who's going to be the seller. You could
say the gold miners sell, but they haven't found a
(34:48):
lot of gold in the past ten years, so they
don't have a ton of gold to sell. So then
you're like, Okay, who's going to be the big seller here?
Deep down, I think at some point to what we're
going to see is that these guys the central banks China, Saudi,
et cetera, and say, you know what, let's start buying gold.
Now we're buying copper, and now we're buying silver, and
now we're buying Obviously, if you're setting you're not buying oil.
But if you're China, let's buy more oil. Let's build
(35:09):
up commodity reserves and all the more. So if you're
a rich country like China, you buy gold because it's
a way to store wealth that doesn't cost anything. You
just put it in a safe Storing oil costs money,
Storing copper costs money, storing or storing soybeans, all these
things cost money. But if you're China, you can actually
afford it. And so I think at some point in
(35:31):
the next six months you're going to see a lot
of these guys start to rip from saying okay, in
start of being a marginal buyer of gold, let's be
a martial buyer of the other commodities and just store
those instead.
Speaker 2 (35:43):
Now lit a lok before I get you, let you go.
Speaker 1 (35:45):
One thing we briefly mentioned, or you briefly mentioned that
you've written quite a lot of books. Which one would
you like to recommend to our listeners today as being
the most relevant to the current situation.
Speaker 3 (35:55):
Obviously, My most recent one, personally was was a called
Avoiding the Punch, which was really about the clash between
China and the US that's been unfolding. I wrote it
back in twenty twenty one, but it was a follow
up on a book that I'd written in twenty nineteen
called Clash of Vampires, so they sort of it. It's
(36:15):
like a two part book really, and I like it.
I think it's a good read. Our most recent book
is published by gaff cal It's a book called The
General Theory of Portfolio Construction. It's really a booklet. It's
like eighty pages, but it's essentially back on this idea
using a rugby team as to build your portfolio is
how do you build yourself a well diversified portfolio. And
(36:36):
it's a very easy read. If you want the printed copy,
you've got to order it to our website. But if
you go to our website, you can download a free
E copy, so there you go. Well, total bargain exactly.
Thank you at that price, it's a bargain.
Speaker 2 (36:49):
Absolutely absolutely.
Speaker 1 (36:51):
Thank you very much for that recommendation, and thank you
so much for coming on.
Speaker 2 (36:54):
I really appreciate.
Speaker 3 (36:55):
It, pleasure. Thank you very much for robbing me.
Speaker 1 (37:04):
Thanks for listening to this week's Maren Talks Money. If
you like us, show, rate, review, and subscribe wherever you
listen to podcasts and keep sending questions or comments to
Merron Money at Bloomberg dot net. You can also follow
me in John on Twitter or x I'm at marinersw
and John is Underscore Stepic. You can also find us
on Blue Sky or Threads if those are the places
where you spend your time. This episode was hosted by
(37:25):
me Maren Zumset Web. It was produced by Someersadi Moses
and Amantala Amadi. Sound designed by Blake Maples and special
thanks of course to Louis Vincent gab
Bloomberg Audio Studios, podcasts, radio news.
Speaker 2 (00:08):
Hey Maren Talks Money listeners.
Speaker 1 (00:09):
We are doing things slightly differently this week as things
are moving so fast. We recorded this week's main INFI
on Friday, but we wanted to get it out to
you right away before things change, because boy do they
change a lot.
Speaker 2 (00:21):
So here it is.
Speaker 1 (00:23):
You will still hear later in the week the next
one in our housing series, which is about freehold versus leasehold.
I think some of you know what I think about
that already, and post the Bank of England. Later in
the week you will get our usual round up from
me and John chatting about all sorts of things. But
for now, onto our interview. Welcome to Marin Talks Money,
(00:46):
the podcast in which people who know the markets explain
the markets. I'm Maren Somerset Web. This week we are
talking a little bit more about the end of US exceptionalism.
It's been exceptional for decades. You've had the dollar as
the dominant global currency, You've had treasuries as a dominant
reserve asset, you've had persistent current accunt officits, and of
course you've had the US providing a global security umbrella
(01:07):
to everybody. Those days appeared to be gone, Have they
really gone? What might happen next, Who's going to take over?
How much longer will the trade wark keep going? And
what is going to happen to markets? So for all this,
I'm joined by the perfect person with me today is
Louis Vincent Gaff, founding partner and.
Speaker 2 (01:25):
Chief executive of gavcal.
Speaker 1 (01:27):
Louis careersmans from serving in the French Army to working
as an equity research analyst at Parabout, where I also
worked once upon a time, by the way. In nineteen
ninety eight, he co founded Gavcall in London with his father,
Charles Gaff, and economist journalist Anatol Kolatsky, acknowledging.
Speaker 2 (01:41):
Asia's growing role in the global economy.
Speaker 1 (01:43):
In two thousand and two, he moved the firm's headquarters
to Hong Kong.
Speaker 2 (01:47):
Louis, it's great to have you here, thanks for coming on.
Speaker 3 (01:50):
Thank you so much for I'm to be delighted to
be here.
Speaker 1 (01:52):
So I want to start with the US and US exceptionalism.
Your fan recently put out a chart book and the
title Global Strategy Investing After Exceptionalism. So before we move
on to after Exceptionalism, I wanted to just ask you,
are you sure the idea of US exceptionalism has come
to an end.
Speaker 3 (02:13):
I think it's come to an end for now. I
think you always go through different waves in the markets.
We've gone through a period essentially of fifteen years where
US markets where the US dollar itself outperformed pretty much
everything else out there and behind. And this corresponded to
genuine realities. I think you had two massive events in
(02:35):
the US over the past fifteen years. One of them
that's not talked about enough was the US shel Revolution.
In the course of roughly eight or nine years, the
US added to Saudi Arabia. It added eight and a
half million barrels per day to its all production. Now
it's unprecedented, huge productivity gain. All of a sudden, the
US had a cheaper cost of energy than anybody else, etc.
(02:55):
And that was a huge pillar to the growth story
of the US for the past fifteen years. At the
same time, while the US was basically more productive on
energy than anybody else, you had the birth of the
whole smartphone ecosystem. Apple launched the iPhone and the broader
smartphone ecosystem from Google to Apple to Facebook. It was
(03:16):
essentially controlled by the US. Now, both of these huge
events started to run out of gas a few years ago,
but I think there was another wind to US exceptionalism
thanks to all the excitement surrounding AI. There was all
of a sudden AI was going to be the new
golden goose, and Nvidia went through the roof, and Microsoft
(03:38):
went through the roof, and this was also proceeding swimmingly along,
and the market essentially developed this belief that in order
to participate in this new golden goose, she needed to
do fifty billion of capex every quarter, and there were
only a handful of companies in the world that could
do that, and they all happened to be in the US.
(03:58):
And this whole belief in AI is the golden Goose
was essentially shut through the heart in January when China
released Deep Seek and then followed up with Ali Baba's
L and M model and Buy Dance and Baidu, and
before you know it, it seems that every other week
we had another Chinese company also entering the AI space
and doing it at a fraction of the cost of
(04:19):
the Americans. And so all of a sudden, this belief
that was out there that AI was going to be.
This golden goose was no longer there because I think
anybody who's been involved in the markets for the past
twenty five years knows that when China enters a room,
profits walk out. The idea that you can make money
while competing with a Chinese company is ludicrous. So this
(04:42):
is where we are today. You've had US companies that
have essentially poured hundreds of billions into AI solution, and
China comes along and says, hey, I've done this with
a piece of gum and two pieces of strain. And
so now you look at these companies and think, okay,
where's the golden goose? How are these guys going to
generate outsized profits from here on out? Now? Throwing on
(05:03):
top of that all the political uncertainty of the past
six weeks or two months, all of a sudden, this
belief that just like any typical emerging market policy in
the US has made off the cuff with no predictability whatsoever,
no really any kind of process. And then, all of
a sudden, I think most people start to take a
(05:25):
sit back and say, hold on, the US is seventy
percent of global marketcap. It's added twenty trillion in market
cap in the past three years. To put in perspective,
the total market cap of Japan is seven trillion. The
total market cap of Europe is six trillion. So the
US has added more than the whole market cap of
Europe and Japan together in the past three years. So
(05:47):
you take a step back and you think, hold on
the US is twenty three to twenty four percent of
global GDP, at seventy percent of global market cap, it's
got uncertain political leadership. What I thought was going to
be the golden goose ism there, and yeah, and capital
is starting to look for opportunities elsewhere.
Speaker 1 (06:03):
But if you look at it like that in terms
of the US as a percentage of global GDP and
then as a percentage of global market cap, and you
think maybe those two numbers should match up a little
more than they do, then you're looking at US markets
falling by a phenomenal amount. What you've seen over the
last the volatility of the last few months, it's nothing
relative to what that might mean.
Speaker 3 (06:24):
Well, look, if a proper bear market usually wipes out
two or three years worth of gains in inequity market,
and that would be a twenty trailing wipeout. To have
a proper bear market, usually you need a recession, and
then you get to the question of are we heading
towards a recession in the United States? And to your
point on US exceptionalism, if you look at the past
fifteen years, we've had fifteen years in the US where
(06:47):
almost year in year out, US economic growth not only
surprise on the upside relative to expectations, but also outperformed
everybody else that I've performed Japan, it outperformed Europe, it
performed essentially China that kept disappointing over at that time period.
As you look forward to twenty twenty five, this might
be the first year in quite a while where actually
(07:11):
the US is going to end up with the weakest
growth around. Why well, because if you look at recent years,
what was really pushing US growth faster than everywhere else.
One of them was massive fiscal easing that's now gone.
The second thing was very strong capital spending in technology,
mostly in AI that's now mostly gone or at least
(07:34):
it's rolling over. And the third was outsized spending by
higher end consumers who were making lots of money on stocks,
making lots of money on crypto and therefore spending more.
And today the US equity markets are actually under performing
the other markets. So you're now left with the countrary
of you're seeing fiscal stimulus in China, you're seeing fiscal
(07:57):
stimulus in Europe, and you're seeing fys cool and monetary
policy contraction in the US, who've got a tighter FED.
They're still doing quantitative tightening. You have on the fiscal side,
you've got doge and the effort to cut spending down.
But even though they're both tightening, they're also pointing the
finger at each other. And here I'll just disclose something
(08:18):
were all the fruits of our own experiences. I moved
to Asia in the mid nineties, and I witnessed firsthand
a train wreck that was Japan through the nineties and
nearly two thousands, and part of the zoo are you were.
Speaker 2 (08:33):
A japan all the way through the nineties, witnessing first had.
Speaker 3 (08:37):
And one of the things, so you'll remember that one
of the characteristics of that period was the bog and
mf kept pointing the finger at each other. The Bank
of Japan and the Ministry of Finance in Japan kept
pointing the finger at each other and blaming each other
for the unfolding slow down and not really tackling the problem,
which was, Okay, our banks or boss, we need to
recapitalize them, et cetera. Well, fast forward to today, and
(09:00):
you have exactly the same set up in the US.
You have the Fed and the Treasury pointing the finger
at each other as the economy is slowing down. And
again we're all the fruits of our experiences. Maybe I
have PTSD from that period and I'm still licking my
wound from the amount of money I've lost in Japan
over the years. But I look at this and I'm saying, Okay,
I've seen this movie before. It feels somewhat similar in
(09:23):
the US to me today.
Speaker 1 (09:25):
Slight tangent. But the one thing that the US does
have that certainly most of Europe, for example, doesn't have
the UKA in particular, is cheap energy. And if we
think of economic activity as energy transformed, obviously, as you say,
then the US does still have that massive advantage over
most of the rest of the Western world.
Speaker 3 (09:44):
Absolutely that it does. But having said that, markets are
made at the margin, and I think the coming years,
a couple things are going to happen when it comes
to Europe. We three years ago, following Russia's invasion in Ukraine,
we told Katar, look, will fund your new gas terminals.
And in the next year you're actually going to see
a lot more gas coming out of the Middle East
(10:05):
and going into Europe. This is all the more so
if the pipeline finally does get built through Syria and
into Turkey and from there and from there onwards. So
I'm not saying that Europe is going to have all
of a sudden the same cheap cross of gas as
the United States. But we're not going to be in
the same shortage situation as we've been in recent years.
And price could very well be lowered now. To your point,
(10:27):
and this is an important point, and economic activity is
energy transformed. And today, wherever you care to look in
the world, energy costs are lower than they were a
year ago. All prices are like sixty bucks. All prices
is super cheap. If you'd think back a year ago,
two years ago, the US was the only place that
had cheap energy. It really was. It was the only
place that had cheap energy. And that made the US exception.
(10:51):
Today essentially everybody's got cheap energy now. Now Granted, you
could say that's not going to stay this way, but
my view on this, at Europe, you might very well
have a natural gas glood coming in. That's number one.
Number two. Today, everybody's very excited that the fiscal stimulus
that Europe is starting to implement is all going to
(11:12):
go into weapons. So everybody turns around and buys Ryan
Mettal and buys Taless in France and all sorts of
weapons producers. Personally, I struggled to buy that argument. I
started to buy that argument because we don't even have
armies anymore. So it's like, why are we going to
buy tanks? We don't even have guys to drive the tanks.
And if you look across Europe, the reality is France
has somewhat as a little bit of an army, the
(11:33):
UK barely has one, and Poland has one, and that's it.
Like nobody else has an army.
Speaker 1 (11:38):
And it's also tor I suppose that the nature of
war has changed, and if there's anything that the Ukraine
Russia war has shown us is that the old weapons,
the tanks, etc. Maybe useless, possibly worse than useless in
future grand wars, should future ground wars even exist?
Speaker 2 (11:52):
Under the circumstances.
Speaker 3 (11:54):
Yeah, absolutely rights. And on this I really recommend to
your listeners by Eric Prince. Blackwater, the world's biggest mercenary army,
essentially equivalent to the US of Bargner Group. Eric Prince
gave a speech in February at Hillsdale College in the
Future of Warfare and essentially the lessons from the Ukraine War,
and it is fascinating. It's well worth an hour. But
coming back to your point, I don't think we're going
(12:15):
to spend a ton on weapons, but in Europe we're
going to spend a ton on our energy grid. Because
if you take a step back, the US essentially guaranteed
two things for Europe. One of them was the security umbrella,
no doubt, and the other was the guarantee that whatever happens,
we'll be there to deliver energy to you. And we
saw this during the Ukraine War. You know, when the
North Stream pipeline very mysteriously blew up, the US at
(12:39):
least had the courtesy to turn around and say, you
know what, will empty our strategic petroleum reserves and we'll
provide you with a bunch of cheap energy. And essentially
that brought the price of energy back down and allowed
Europe to have a decent winter. So I highlight all
this because you know, for me, the trend of the
coming few years in Europe is, yes, we're to have
(13:00):
fiscal stimulus. No, it's not going to go in the army.
It's going to go into the other thing that the
Americans were providing for us, which was energy security. And
that means that I'd rather own Siemens than Ryan Mittau.
Speaker 1 (13:12):
And that's something's definitely highlighted by the blackout in Spain
and Portugal.
Speaker 3 (13:15):
Exactly, you've got this huge blackout. It shows that we
are far off where we need to be. So all
this to say that you're absolutely right, the US still
have a huge comparative advantage on energy, but that was
the big story of US exceptionalism. Do we think that
comparative advantage grows from here or do we think of shrinks?
The direction of travel matters tremendously, and with Europe, I
(13:40):
think realizing that we need to invest across our grid,
whether it be in nuclear, whether it be in LNG terminals,
whether it be in more solar panels where well.
Speaker 1 (13:50):
Isn't of a couple of weeks ago that maybe the
last thing we need to invest in is more solar panels.
Speaker 3 (13:55):
Yes, the first thing we need to do. The reality
is there's a short term solution and that's more LNG
because energ doesn't pollude very much. And there's a long
term solution, which is more nuclear. That's essentially it. And
if you have the political willingness, and I think in
Europe's increasingly the political willingness to do both, then Europe
is in a better place.
Speaker 2 (14:16):
Yeah.
Speaker 1 (14:16):
Okay, let's go back briefly to the US and it's exceptionalism.
The dollar been dominant for so long. There's a lot
of discussion about dedollarization, and that bey one of the
last nails in the coffin of US exceptionalism. If the
dollar is no longer the most dominant global currency, how
do you see that panning out?
Speaker 3 (14:34):
For me, I'll go back to this Eric Prince video
because for me, it's a super important to understand Donald
Trump's world view today because Eric Hunce happens to be
very close to Donald Trump. The message of that video
on YouTube is essentially, the primacy of US weapons on
the battlefield is over. Now. We can debate this all day,
et cetera. But what matters is Eric Prince is close
(14:55):
to Donald Trump, so he tells him this. And the
way that Donald Trump reacts to this is to say,
you know what, I'm going to fold back onto the Americas.
Like Europe can sort itself out, Asia can sort itself out.
America's is mine. And so you know, essentially that goes
back to JD Vance's speech in Munich. That was a
(15:15):
breakup speech. And so now if you're Europe again, you know,
for years, the US has run massive twin deficits. And
by the way, say if you're Indonesia, same if you're Thailand,
same if you're any anybody in the greater US orbit.
The US has run these huge twin deficits. And you
got these dollars, and you thought, Okay, what do I
do with these dollars? The default mode was I'll buy
(15:36):
US treasuries, partly because if anything goes wrong, if Russia
invades Ukraine, if I need to buy energy, if there's
a tsunami, you know whatever. If I need to buy weapons,
I can count on the US Navy delivering those. Now,
the new reality of the world that we're in is
you have a US administration today that is extremely predatory foreigners.
(16:01):
Everything they're doing is trying to make foreigners pay for
their mistakes of the past. So the US is thirty
seven trillion dollars. It's like, got we're going to fill
that hole with tariffs. We're going to fill that hole
by selling five million gold cards to the richest foreigners
who are going to come here and pay taxes here.
We're going to fill that hole by charging higher capital
gains and higher income taxes on people who invest in
(16:23):
the US and so on and so forth. So now
if I'm a foreigner, I think, well, do I want
to keep buying US treasuries on the premise that if
I go wrong, the US will backstop me. To be honest,
if I live in the Americas, yes, because the America's
Trump has made very clear he's building Fortress America. He's
not going to put tariffs on the Latin Americans. He's not.
(16:43):
He's going to do more trade with them. So if
you're in Latin America, you're fine. But if you're Europe,
if you're Asian, I think you start thinking, well, instead
of buying treasuries, I'm going to use these dollars. Right now,
all they're doing is buying gold. My point is at
some point they'll say, you know what, I'm going to
build my own strategic petroleum reserve. I'm going to build
(17:03):
my own strategic copper reserve, nicole, because it just makes
more sense than owning treasuries. I was buying treasuries in
case I needed these commodities in the future. I'll just
stop bother the true And you could say, well, there's
a cost to start puling the treasure the commodities, for sure,
but you now know that in a crisis you have them,
you have them, while in a crisis you don't know
(17:25):
if you can count on the US anymore.
Speaker 2 (17:27):
Yeah.
Speaker 3 (17:28):
So, yeah, we're entering a very different phase of the
dollar global standard, absolutely, one in which I think commodities
are going to reraiate massively.
Speaker 1 (17:37):
So it sounds like you would expect the trade war
to just keep going. This is not something that's going
to end quickly, and the relationship between China and the
US to continue to break down and possibly at a
long term division between East and West and a shift
of economic activity to the East.
Speaker 3 (17:53):
So look, there's short term and there's long term. So
to answer your question, short term, like I think things
are as bad as they can be short term. So
short term, it's pretty obvious that that Trump is desperately
looking to walk back some of the China tariffs because
if he doesn't, by the time the summer rolls around,
(18:13):
there'll be no fireworks at the fourth of July. They
will be empty shelves at Walmart. And what was it
two days ago? Trump came out and said, maybe instead
of having thirty dollars, girls can just have two or
three dolls. And I listened to this and I thought,
is there anything more on American than this? The idea
that you do with less seems to me completely anathema
(18:35):
to what everything the US believes in the last time,
the last guy who tried that was Jimmy Carter and
that didn't work out for So in the short term,
he's gonna need a deal with China. Now. The problem
he has is when you need a deal real bad,
you get a real bad deal. And she jimpings stimulating
his own economy to compensate for the loss of the
(18:57):
US export markets. But essentially there's a power play unfolding
right and cgmping. He's out there trying to show Trump
that China has no pushover and domestically the positions are
now completely opposite, and that the longer the trade war lasts,
(19:18):
the less the popularity of Trump because the worst thing
for any elected official is to get involved in the
war that your people don't want. And there isn't real
no indication that Americans have any interest in this trade war.
So the longer it lasts, the stronger CG and PING
gets in, the weaker Trump gets. So what's the incentive
for cgmpin to come to the table. At some point
(19:42):
he will because you know, you do want those manufacturing
jumps back, but it might take a few months. We
might be in for a tough summer.
Speaker 2 (19:52):
It wouldn't expect more blinking from Trump. You just expect
a tough summer standoff.
Speaker 3 (19:56):
I think the seas have already been planted for a
tough summer. We've got everything now. You know, you've got
all the ism surveys, that all the soft data is collapsing.
I think you've got a lot of anecdotal evidence of
supply chain dislocation starting in the construction sector. Projects starting
to get canceled, workers trying to get to get fired.
(20:17):
Like anything where you have a bit of a supply
chain complication. People pulling back. You're starting to see insurance
rates for car insurance and home insurance starting to go
up on the premise that replacement costs are going to
be much higher because you've got all the dislocations. It's
going to be like COVID all over again. So insurance
rates are going up, which in turn is going to
(20:40):
squeeze consumer disposable income. Now against that, you could say, well, yeah,
but energy prices are low, food prices are low, so
that's going to keep money in the consumer's pockets. And
that's true. That's the sort of silver lining to what
I think is a pretty dark cloud showing up for
the US economy.
Speaker 2 (20:57):
Okay, well that doesn't sound great. It's entirely what I expected.
Entirely what I expected.
Speaker 1 (21:04):
Let's talk a little bit about where people might invest.
Speaker 2 (21:10):
Where they might invest.
Speaker 3 (21:11):
Now you mentioned lots, of.
Speaker 2 (21:13):
Course there are there always are that loads of places
to invest.
Speaker 1 (21:15):
And if America was exceptionally expensive, then a lot of
the world was exceptionally cheap. If we're looking at equities, right, absolutely,
now your area of expertise, but you have every area
of expertise, but you know, an awful lot more about
China than most people, and that market, as you've written yourself,
was until relatively recently considered by most institutional investors or
many institutional investors, to be uninvestable.
Speaker 2 (21:36):
But that's not the case anymore. Right, they're coming around.
Speaker 3 (21:39):
It depends where they're from, to be honest, it really
depends where they're from. I think if you were from
the Middle East, you never considered China investible to begin with,
and you're more than your probably your eagerness to invest
there continues to grow. Europe is slowly starting to change
its stripes, I think the China, but the US it's
still a very dirty word. China sover dirty word. Having
(22:01):
said this, and to your point of there's many places
to invest, we take a step back and we think, Okay,
we're now entering a period where I think it's very
likely that the US dollar goes down from here as
foreigners as you know, the trend that we've started to
see of foreigners leaving China leaving the US, that's you know,
these things unfold over time. It's a new trend, it's
(22:22):
going to be a trend for years to come. So
if we're starting a phase of structurally weaker US dollar
number one, while at the same time China is stepping
on the gas big time, both through fiscal and monetary
policy and putting pressure on banks to lend more aggressively.
And at the same time, energy prices are low, and
at the same time food prices are low. On the
(22:45):
liberation day of the announcements of the teriff, I was
in Latin America. Imagine you're Latin America's central banker. Are
you the central banker of Peru or Chile or Columbia wherever?
And you now have an environment where old prices are low,
US dollars going down, the prices are cheap, and China stimulating.
That is literally like you couldn't asked for more for
(23:06):
Christmas and so and you don't even need to believe
in Santa It's just been delivered to you. So it's
for most emerging markets, whether you're called India, whether you're
called Indonesia, whether you called China, an environment of falling
dollar week oil, China stimulating. It's a bonanza. It's as
boad as good as it gets. And now this is
(23:26):
unfolding out of time when a lot of these assets,
perhaps not India but you look at Brazil, you look
at Colombia, you look at China, you look at Indonesia.
A lot of these assets are about as cheap as
they've ever been, or at least as they've ever been
in the past ten years. Perhaps they were cheaper post
as crisis, but that was a lifetime ago anyways, So
it's I think there's a lot to be done, and
(23:47):
there's a lot of exciting stories out there, and then
a lot of things that are completely under owned. The
reality is that for the past five six years, the
markets were driven by essentially thirty large cap names in
the US or the mag seven, another ten ten tech names,
plus Walmart, cost Go, etc. But aside from these thirty names,
like nobody had any interest in basically anything else and
(24:10):
everything else did nothing for ten years, and now it's
starting to show signs of life. So there's lots of
places to invest. I think financials are super interesting. Most
countries are seeing their financials outperform. You're seeing steeper yield
curves everywhere, improving then interest margins. I think emerging markets
are super interesting. I mean, commodity space is interesting, depending
on your risk profiles and your willingness to to take
(24:33):
on short term volatility. There's things to do.
Speaker 1 (24:37):
Okay, So in terms of I'm going back to China,
if you're a retail investor, is it a reason why
I did simply buy a Chinese fund? Yes, I fund
investing in Chinese actualities across the board or an ETF.
Speaker 3 (24:50):
Few people realized this last year, but so if you
take the biggest Chinese ETF, which is FXI in the US,
last year, it was pretty much the only major country
to have perform the US. Nobody realizes this. This year
it's outperforming again, but yet it's really seen no inflows whatsoever.
The little inflows that China's had in the past sort
of six months have really gone into k Web, which
(25:12):
is the sort of tech the sort of internet platform,
sort of techy ETF in the US. I think there's
essentially three different things driving the Chinese market right now.
One of them is the revaluation of tech that got
absolutely slaughtered post Ali Baba crackdown, and it's still very cheap,
and so you've got that dynamic going. That's one dynamic.
(25:34):
You have a second dynamic, which is driven by frankly,
retail investors in China. Of them buying high dividend yielding
stocks because interest rates are zero in China, and you've
got all these companies that are giving six seventy eight
percent yields and companies that aren't going to go bust,
like you know, the Petro China's of this world or
the Bank of China, et cetera. So this domestic retail
(25:55):
that's buying this, and then there's the domestic consumer names.
As the guvernment comes and says we're going to do
more stimulus, you're starting to see life in some of
the consumer names. So there's three different themes that are unfolding,
and of course, if you buy the index, you get
all three.
Speaker 2 (26:10):
Yeah.
Speaker 1 (26:10):
Can you see the American retail investor beginning to move
out of the US? I mean, it's been interesting, hasn't
it watching them buy the Great single dip? And it's
hard to see the American retail investors suddenly saying I'm
not going to buy this passive fund into the US
market into that, I'm going to go and choose one
of Louis's favorite emerging markets. I'm going to go out
and buy Brazil or Perats, I'm going to go and
buy China or whatever.
Speaker 2 (26:30):
It is it. It's kind of tough to see, isn't it.
Speaker 3 (26:33):
Yeah, that's that's not going to happen. But no, do
you need that for China tail perform. The level of
Chinese savings is absolutely enormous. What you need in China
is for the Chinese investors to stop just leaving their
money in the bank and or buying gold, to start
buying their own stocks. You don't need the US investor.
My bigger fear actually in the US at US markets
is that the US investors are going to start selling
(26:55):
their SMP and their Max seven, et cetera, not so
much to buy something else, but to pay for their
insurance to pay for their cost of living that is
going up. You've now had four years forty eight months
in a row with inflation going up above two percent.
And remember that this occurred at a time when all
prices were essentially going down, at a time when the
(27:17):
US dollar was super strong. And now you're moving forward
to a time when US dollars trying to go down
or you're going to have these huge tariffs that are
going to be a big inflationary shock, and an inflationary
shock not just on oh the stuff I buy a
Walmart is more expensive. But like I said, you turn around,
your car insurance is more expensive, your home insurance is
(27:38):
more expensive, your local taxes are more expensive, and people
are going to end up having to sell stocks to
just pay the bills.
Speaker 2 (27:46):
We won't go there. Then, no investing in America, everybody.
Speaker 1 (27:49):
But one of the conversations about the Great Rotation and
is I think one that we've been having on this
podcast a lot over the last few months because we've
been telling people to rotate out to the US, but
actually for too long, As you said, we're always a
good which hasn't been us very popular. But a lot
of the conversation about the Great Rotation has been about
rotating out of the US into Europe. And we have
also been hoping for a long time that people will
(28:11):
finally start to put some money into the ridiculously cheap UK,
and in particular into UK small caps, which of course
almost insanely cheap. Do you see any reason for optimism there?
Speaker 3 (28:22):
The small caps are cheap everywhere I know there's stupid cheap.
I know they're stupid cheap. In the UK they're actually
quite cheap. In the US they're cheap, they're stupid cheap
in Japan, They're cheap everywhere, And I think this goes
to perhaps the shift in our global the way people
invest in. Increasingly they just buy the indices, and so
you're having this dislocation where if you're part of a
(28:44):
SMP five hundred or foots one, you get these passive
flows that come in, but not so much in the
small caps, like nobody buys. You know, there's no volume
in those small cap ETFs. And to the extent that
you're now in a situation where what is it in
the US, like sixty percent of the flows I'm now interpassive.
(29:05):
That essentially means it all goes into one hundred names
or five hundred of course for the SMP five hundred.
But to get super excited about small caps you, I
think the first thing you need is for the marginal
doll to just stop going into indexing, which is which
which usually we'd seen something like this in the late
nineties before and then two thousand and one to two
(29:26):
thousand and seventy hat hujab performance in small caps because
there was no flowing to an indexing following the big
bear market of two thousand and two thousand one. So
perhaps was people to get fired up about small caps again. First,
we need a bear market, a proper bear market.
Speaker 1 (29:42):
Right, so everyone moves out of index funds and has
it go inactive again.
Speaker 2 (29:46):
Okay, what about UK large cap?
Speaker 3 (29:49):
Yeah, UK large it's a tricky one because you look
at the foot see one hundred. It's not really a
UK index. It's cheap. It's super cheap because there's a
bunch of commodities in there that nobody wants to own
any more. I want it on them, but I feel
like I'm the only one.
Speaker 2 (30:04):
And no, no, lots of our listeners want to earn them.
They want to commodities. They do. But we'll come back
that in a minute.
Speaker 3 (30:10):
It's almost like the Ausie Index. It's like banks, insurance
companies and commodities, and these are the things that have
been derated the most aggressively. Now. I'm very bullish on financials,
I'm very bullish on commodities. So of course I like
the foot Sea one hundred, as you know, de facto.
And add on top of that the fact that the
pound isn't very expensive, et cetera. There's lots of reasons. Now,
(30:34):
I think in terms of international news flow, the UK
hasn't done a lot in the past ten twelve years
to get people excited to redeploy capital in the UK.
Speaker 2 (30:43):
Let's stick with commodities.
Speaker 1 (30:45):
We talked a little bit about why you are bullish
on commodities week dollar etc.
Speaker 3 (30:49):
It is there are Yeah, Look again, we're all the
fruits of our own experiences in my career. Each time
you've had a week dollar in China stimulating, commodities have
done well. Now I take it, you could say this
time it's different because either we have all this success
supply of oiled option on. You could say this time
it's different because China stimulus is going to go more
(31:10):
into consumption and infrastructure spending or real estate. There's lots
of reasons why it could be different. Having said that,
I'm looking at assets that are trading. If I'm looking
at the commodity producers, a lot of them are trading
at record low valuations. And people always tell you when
things are trading at very high valuations. I either dot
(31:31):
Com in nineteen ninety nine or AI up until ten
minutes ago. People tell you this time it's different on
the way up. But people also tell you this time
it's different on the way down. You could have record
low valuations and people tell you, yeah, don't worry about
these valuations. They make sense because that place is condemned.
And this time it's different, and you'll never get off
the floor of these valuations, even as people implement the
(31:54):
very policies that are going to get you off the floor.
And so I think you've had the This time it's
different argument for AI and it hasn't been true. People
are still holding on to the This time it's different
for commodities, and I don't think you'll be true either.
Speaker 1 (32:08):
What is the this time it's a different argument for
commodities staying on sort slow valuations.
Speaker 3 (32:13):
That China is is you know, kind of structurally screwed,
and that you have excess supply on oil. That a
lot of the old producers, because some of the cheapest
starks are of course the energy producers. That essentially it's
trapped assets because in the next ten years will all
be driven around in self drive cars, that it will
all be electric and that will all go two thousand
(32:35):
kilometers on five minute charge. Yeah, you know, all that good.
Speaker 2 (32:40):
Stuff, but that electricity still has to come from somewhere.
Speaker 3 (32:44):
Yeah, you don't have to you don't have to convince me.
Speaker 2 (32:46):
I have to convince you that much.
Speaker 3 (32:48):
I believe it's you asked me what this time? A
different argument. I don't buy that this time it's a
different argument, But you asked me what it was.
Speaker 1 (32:54):
No, I just wanted to get that out of there.
But I think we entirely agree on this one. What
about gold, I mean one of the Maya's hair. As
you say, it's been the central banks, but retail investors
have been coming in recently. The central banks are still buying.
Is that a bull market that's barely begun or is
it peaking?
Speaker 3 (33:11):
So it's a bit tough one as well, going back
to that. This time it's different, Yeah, because if you
look on the valuation basis, gold is now one ounce
of gold is forty five barrels of oil. Historically it's
about twenty To buy an ounce of gold takes three
weeks of US wages. Historically it's about one and a
half weeks.
Speaker 4 (33:28):
If you look at gold relative to the US house prices,
if you look at gold relative to copper to silver, like,
gold is expensive on any kind of historical matrix that
you care to look at.
Speaker 2 (33:39):
Ah, but this time is different.
Speaker 3 (33:41):
Boom exactly. This time it's different. You do have a
shift in the global dollar standard that we discussed. Look,
you've entered the sort of blow off phase on gold.
You can't short it. You might not even want to
sell your gold until it rolls over and it crosses
under the TUNA day moving average or something like this.
Like because these ball markets once get going, they can
really rip. So you don't want to be offside on this,
(34:03):
especially when you consider I look at the landscape and
I know there's there's obvious buyers such as the Saudi
Central Bank and the Chinese Central Bank. If you know,
if I'm Pangongchang, if I'm the governor of the PBOC
and cgmpin tells me you're buying gold, then I'm buying gold,
you know. And just like these guys were buying bond
bonds with negative yields and didn't care about the evaluation.
(34:26):
Now they're buying gold instead. So that can last for
a long time. And yes, retail has just started going.
And you know in recent years we knew there was
one big seller, the big seller with the ETFs. Actually
you look at the JAILDTF, the share count camp thrinking
now the share count is expanding again, so you have
to wonder who's going to be the seller. You could
say the gold miners sell, but they haven't found a
(34:48):
lot of gold in the past ten years, so they
don't have a ton of gold to sell. So then
you're like, Okay, who's going to be the big seller here?
Deep down, I think at some point to what we're
going to see is that these guys the central banks China, Saudi,
et cetera, and say, you know what, let's start buying gold.
Now we're buying copper, and now we're buying silver, and
now we're buying Obviously, if you're setting you're not buying oil.
But if you're China, let's buy more oil. Let's build
(35:09):
up commodity reserves and all the more. So if you're
a rich country like China, you buy gold because it's
a way to store wealth that doesn't cost anything. You
just put it in a safe Storing oil costs money,
Storing copper costs money, storing or storing soybeans, all these
things cost money. But if you're China, you can actually
afford it. And so I think at some point in
(35:31):
the next six months you're going to see a lot
of these guys start to rip from saying okay, in
start of being a marginal buyer of gold, let's be
a martial buyer of the other commodities and just store
those instead.
Speaker 2 (35:43):
Now lit a lok before I get you, let you go.
Speaker 1 (35:45):
One thing we briefly mentioned, or you briefly mentioned that
you've written quite a lot of books. Which one would
you like to recommend to our listeners today as being
the most relevant to the current situation.
Speaker 3 (35:55):
Obviously, My most recent one, personally was was a called
Avoiding the Punch, which was really about the clash between
China and the US that's been unfolding. I wrote it
back in twenty twenty one, but it was a follow
up on a book that I'd written in twenty nineteen
called Clash of Vampires, so they sort of it. It's
(36:15):
like a two part book really, and I like it.
I think it's a good read. Our most recent book
is published by gaff cal It's a book called The
General Theory of Portfolio Construction. It's really a booklet. It's
like eighty pages, but it's essentially back on this idea
using a rugby team as to build your portfolio is
how do you build yourself a well diversified portfolio. And
(36:36):
it's a very easy read. If you want the printed copy,
you've got to order it to our website. But if
you go to our website, you can download a free
E copy, so there you go. Well, total bargain exactly.
Thank you at that price, it's a bargain.
Speaker 2 (36:49):
Absolutely absolutely.
Speaker 1 (36:51):
Thank you very much for that recommendation, and thank you
so much for coming on.
Speaker 2 (36:54):
I really appreciate.
Speaker 3 (36:55):
It, pleasure. Thank you very much for robbing me.
Speaker 1 (37:04):
Thanks for listening to this week's Maren Talks Money. If
you like us, show, rate, review, and subscribe wherever you
listen to podcasts and keep sending questions or comments to
Merron Money at Bloomberg dot net. You can also follow
me in John on Twitter or x I'm at marinersw
and John is Underscore Stepic. You can also find us
on Blue Sky or Threads if those are the places
where you spend your time. This episode was hosted by
(37:25):
me Maren Zumset Web. It was produced by Someersadi Moses
and Amantala Amadi. Sound designed by Blake Maples and special
thanks of course to Louis Vincent gab
Host
Merryn Somerset Webb
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