December 5, 2024 • 45 mins
For years, investors have relied on the classic 60/40 portfolio of stocks and bonds. The idea behind this was simple: bonds tend to go up when stocks go down, so the two things should act as a natural hedge. But when inflation spiked in 2022 and 2023, the 60/40 portfolio performed terribly and bonds failed to act as a safety cushion. In this episode, we speak with Nouriel Roubini, chief economist and portfolio manager of the new Atlas America Fund, an ETF that is trying to create a new type of safe asset that can withstand big risks, including stagflation, deficits, and de-dollarization. We also talk about the outlook for the US economy in 2025, and the big risks that the chief economist and portfolio manager of the Atlas America Fund sees on the horizon.
Read more: Roubini Launches Treasury-Alternative ETF to Ride Trump-Era Risk
Crypto Critic Nouriel Roubini Is Working on a Tokenized Dollar Replacement
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Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Speaker 1 (00:03):
Bloomberg Audio Studios, Podcasts, Radio News. Hello and welcome to
another episode of The Bots podcast.
Speaker 2 (00:23):
I'm Tracy Allaway.
Speaker 3 (00:25):
And I'm Joe Wisenthal.
Speaker 2 (00:26):
Joe, do you remember, I think it was in twenty
twenty two everyone was talking about stagflation.
Speaker 3 (00:34):
Yes, of course, because we had it right, because we
had markets were low, so people were talking about recession.
The FED was hiking interest rates aggressively, and inflation in
twenty twenty two was peaking. So it certainly seemed like
we could have had the combo right then for essentially
elevated inflation and some kind of recession.
Speaker 2 (00:56):
Yes, And in fact, before we recorded this episode, I
went back and I looked at a Google trends chart
for the word stagflation, and like, the peak in twenty
twenty two is just amazing. And then it sort of
fell off because we definitely had inflation, we didn't necessarily
have lower economic growth. But I think now at the
tail end of twenty twenty four, some of that stagflation
(01:19):
talk is beginning to creep back into I guess the
economic discourse.
Speaker 3 (01:25):
Yeah, a little bit. I mean what I would say
is I would agree with you. There seems to be
a couple things going on that are very confusing, to
say the least. But one is the sort of I
don't know if it's acceptance or reality that like inflation
has come down quite a bit, but maybe it's going
to keep bumping up against the ceiling, or maybe it's
(01:46):
going to keep like bouncing off the floor, so to speak.
Speaker 2 (01:48):
Yeah, that last mile is going to be difficult still.
Speaker 3 (01:51):
And then on some measures, the economy still seems good,
but you look at some of the pmiyes, issms, other
industrial measures, labor market measures, some seem to be slowing down.
So like, I still think this idea of like I
don't know if it's called stagflation, but this sort of
unpleasant combination of not great growth, not great real real growth,
(02:15):
and inflation that's still like at the higher end of
what people are comfortable with, feels like something that could
very plausibly be the case for a while.
Speaker 2 (02:23):
It's definitely in the air. So we need to dig
into this particular argument. And who better to speak to
than Neuriel Rubini. He is, of course, the chief economist
and portfolio manager of the Atlas America Fund, which is
a new ETF that has just launched and He is
also the chairman and CEO of Rubini Macro Associates. Really
(02:44):
the perfect guest to do this type of macro with us. So, Nuriel,
welcome back to the show.
Speaker 4 (02:49):
Good being with you today, see and Zoe.
Speaker 2 (02:51):
Do you get the same sense that the the risk
of stagflation is starting to pick up again?
Speaker 4 (02:58):
Certainly is one of the risks that have to consider.
And I think that the question and everybody is man
of course, is what would be the economic policies of
Trump and the impact on growth and inflation. If I
have to look ahead, I would say that some of
his policies actually could increase growth and reduce inflation, being
(03:20):
pro business in general, making those tax cut permanent, having
government efficiency, deregulating the economy, maybe even increasing the production
of fossil fuel, reducing the price of energy. Those go
in the direction of policies actually increase growth and reduce inflation.
(03:40):
But on the other side, there's a long list of
other policy that could be implemented. First of them, of course,
tariff protectionism, an economic war with China. Secondly draconia, restriction
to migration, if not mass deportation. Three unfunded tax cuts
and run away fiscal deficits for potentially in attempt to
(04:04):
weekend the dollar in a disorderly way. Five maybe trying
to interfere with the independence of the FAD. Now, if
the second set of policy were to be implemented, their
impact will be higher inflation over the time and lower
economic growth. So those sets of policy will be definitely
in the stockflationary direction.
Speaker 3 (04:25):
There was an amazing summary by the way of the
two ways of thinking about paths, And I guess what's
striking listening to you sort of list off the two
columns is within trump Ism or within the Trump administration.
It feels like there are several competing camps so to speak,
and we don't really know how it's going to resolve.
But there are a lot of internal contradictions, whether on
(04:47):
personnel or ideology, and to some extent you just laid
out are sort of I don't know, maybe the fork
in the road, so to speak, of how things could go.
Speaker 4 (04:55):
Yeah, you're absolutely right. There is a spectrum of positions
on the variety of economic issues. Some are truly protectionist,
Others like Scott bass And says we want to escalate
as a way of de escalating, and we're not going
to know until after, of course, inauguration, in which direction
the economic policy will go. I would say, however, the
(05:18):
following observation. I think that the potentially more stackflationary policy
will be constrained by several factors. One, of course, is
the choice of some of the economic advisors like Scot
Bass and understand markets and in as that if you
do things that are radically stackflationary, it will be bad
for the economy and bad for the market, so you're
(05:40):
going to try to push down against those. Secondly, I
think there'll be also significant impact of market discipline. If
you have run away budget deficits, migration restrictions, and tire
if that increase inflation, then the bond market digilant is
going to wake up expect that inflation will be higher,
rates will be higher, and then rising in bond deal
(06:03):
could lead to a correctional stock market. And if there's
one thing that Trump cares about is one the stock market.
We also cares about the bond market because high bond
deals imply high cost of borrowing and that's going to
be hurting the economy. I think the other constraint is
going to be, of course, the fact that the Fed
is still independent. If some of these policies were to
(06:24):
be pursued, the FED will likely cut next week in December,
may not cut again, or may cut much less than
the market are expecting next year. In an extreme scenario
in which inflation goes much higher, they could even increase
interest rates. And that's going to be So there is
both a market discipline and there's also FED discipline that
(06:47):
my constraint to some extent those stock preationary.
Speaker 2 (06:51):
Policies, setting aside the Trump administration and what they might do,
and I realized that that's a big thing to set
aside right now. But the path of inflation, it has
come down from the peaks that we saw in twenty
twenty two. As Joe was talking about why did that happen?
In your opinion, because one of the you were one
of the few voices I remember in early twenty twenty
(07:14):
when the pandemic was just unfolding, that predicted inflation, and
you know it happened. But since then it has petered
out a little bit.
Speaker 4 (07:25):
Yes, I mean, the reason why we had this burst
of inflation during and after COVID were both bad policies.
The amount of monetary, fiscal and credit zing exposts that
turned out to be way excessive given the size of
the economic shock, that was relatively temporary. But second there
was so bad luck. There were three negative aggregate supply
(07:47):
shocks that essentially reduced growth and increased inflation. One was
the impact of course of COVID on the supply of
labor and production of goods and on global supply chains.
The second was the impact of the brutal rush invasion
of Ukraine on commodity prices entry the kind of a
zero COVID policy of China that further restricted global supply chain.
(08:10):
So why inflation fell in part was, of course central
bank gave up on quantity easy normalized policy rates. But
if that was the case, we should have seen inflation
falling dramatically, but probably a much stronger slow down of
economic growth, maybe a recession the way most economist thought
(08:30):
about it. And instead we got the reduction inflation. But growth,
say in US as remain robust above potential twenty a
half percent in the last couple of years. So I
think in part we also got lucky, and lack was
the distree negative aggregate suppli show got reversed. First, we
had the end of COVID, so supply of libor increased,
we started producing goods and services. Supply chains got at
(08:53):
lays say, unstuck. The impact on commodity prices of the
invasion of Ukraine became ready US because there were new
sources of energy coming from Middle least US and so
on that went to Europe. And finally China gave up
on a zero COVID policy, so we got luck. And
on top of it, there was another set of actors
(09:14):
at least for the US that maintained growth strong. One
was that we had significant amount of migration documented or
otherwise people estimated maybe up to ten million people entered
in the United States in the last four years. That
increased the label supply, increase growth, and reduce some pressures
on wage inflation. Definitely right now. Politically, of course, migration
(09:38):
is a hot topic, but from economic point of view,
it increased growth and reduced inflation. And we had also
other physical stimulus that helped the growth from the Infrastructure Act,
the IRA and the Chips Act, and then we had
got Also of course AI revolution has led to significant
increasing capecs. So least for the United States, that think
was a combination of active factors that implied that inflation
(10:02):
file and growth remained robust, not so in other parts
of the world.
Speaker 3 (10:23):
I want to talk a little bit more about the dollar,
and there are so many different ways that you can
begin a conversation or about thinking about the role of
the US dollar. You can think about the effects that
tariffs will have on inflation or the strength of the
US dollar relative to other currencies. You can think about
the central role that the government that the US dollar
(10:45):
plays in global trade and finance, and whether there are
possible rivals that are emerging. One of the things that
we saw recently from President Trump was a threat that
he put on his Truth Social Account against any of terror,
against any country that would attempt to form a rival
currency block, and the specifically mentioned the Bricks. I don't
(11:08):
know if the Bricks is a real thing or not.
It sometimes seems like a meme to me, but there
is an organization called the Bricks, and sometimes you see
headlines about dollar alternatives in the short to medium term.
Is there a real prospect of some other currency, the
Chinese un perhaps taking sizeable market share and global trade
(11:28):
from the US dollar.
Speaker 4 (11:29):
Well, I would say for now, not yet. But the
dollarization process that could occur over time, and what could
trigger it was, of course, that we have rightly or
wrongly weaponized the dollar in the last few years for
national and security and foreign policy purposes, imposing a variety
of sanctions against a variety of strategic rivals of the
(11:54):
United States and the West. This isue about finding an alternative.
The dollar is complicated because you cannot essentially replace something
with nothing, and the question is what's the alternative to
US dollar for US actor treasure there Summers once jokingly said,
people don't like the dollar, but you know, Europe is
(12:17):
a museum, China as a prison, Japan is a nursing home,
and bitcoin so for now is an experiment. So there
is something of an happiness with the US dollar. But
for the time being, I would say the US dollar
is still dominant. And by the way, I would probably
argue that the Trump police is regarding the dollar a
(12:40):
little bit confused, because on one side, there is this
concern that a strong dollar has led to the industrialization,
loss of competitiveness, large trade, current account deficits people free
riding on the US So there is a sense I
would like a weaker dollar. But if you think about
policy and economic fundamentalals, tariffs will strengthen the dollar, and
(13:03):
threads of tariffs have led since selection to the dollar
becoming stronger. Trump says, I don't want other country to
unquote the dollar rise, and I'm going to impose tarif
on them if they do so. He wants to maintain
the role of the dollars a major global reserve currency.
If that's the case, demand for dollar ass remain high,
the dollar remains strong in terms of relative growth. The
(13:25):
US is doing stronger than Europe and other advanced economies
that just strengthen the dollar in terms of relative monetary
Police is probably given these differentials in growth and inflation,
the US or the FED is going to cut rate
less than other countries. Well, in Europe, the colomies we
can there'll be more cuts. And overall, given the productive
(13:47):
growth of the US, the boom of new technologies, AI,
you name it, capital flows are going into the United States.
So I think there is this dilemma that fundamentals and
police would suggest that the dollar is going to become stronger,
but than that objective of trying to reduce the trade
imbalance of the US to a weaker dollar unless you
(14:08):
have a big agreement on currency, is hard to fathom
how you're going to do it. There are some ideas
along those lines. Is going to be, to say, challenging.
Speaker 2 (14:18):
This is something I completely agree with, and I think
I've said on the podcast before that it feels like
Trump doesn't know what type of dollar he wants because instinctively,
I think there's a sense that he wants to say
the dollar is strong. It sounds good when you can
say those types of things, and generally it means that
the US economy is doing well relative to others. But
(14:40):
if he's serious about boosting manufacturing and exports, then he
needs the weaker dollar. There's also that tension between decoupling
the US economy from the rest of the world, maybe
becoming more self reliant, and also wanting the dollar to
be at the center of a globalized financial se Are
(15:01):
there ways that the Trump administration could like kind of
thread the needle between those two different objectives.
Speaker 4 (15:08):
No, it's not going to be easy because either you want,
you know, a weeker dollar to try to improve competitiveness,
reduce the trade balances and so on, but then the
dollar will left weaken. Or instead, if you want to
maintain the globals or currency roll of the dollar, then
(15:29):
the dollar is going to remain strong. And by the way,
the risk of doing an agreement to try to weaken
the dollar is that that could occur in a disorderly
way because if you do another people talking now about
a Mara lagoa agreement, because in the past agreements to
moved currencies were always in resorts like Breton Woods, Plaza,
over Come, David, you name it. So people think about
(15:52):
maybe getting together all major economies in mar Lago and
finding an agreement where europe Asian allies and others let
their currency appreciate the dollar weekend. But you know, if
people expect that from happening, then capital is going to
suddenly move out of the US because you're going to
have a massive capital loss time fifteen to twenty percent
(16:13):
on your dollar assets, and then you could have a
spike in long rates or you could have a correction
in US ecuity. So how do you engineer an orderly
weakening of the dollar without causing significant tightening of financial
condition that's also problematic. It's not going to be very
easy to be done. The other trade off that I
think it's complicated it's not just a weak or strong
(16:36):
dollars a currency role, but also your tariff policies, because
on one side, if you impose the tariffs, the dollar
is going to strengthen. And on the other side, also
if you're going to raise tariffs, you need revenues. But
raising tariffs, if it's very significant, it's going to be
highly inflationary. Now, some people within the Trump come say, well,
(17:00):
in twenty eighteen nineteen, when we increase the tariffs on China,
there was not significant increase in inflation because the RMB
depreciated and therefore import prices did not increase very much.
But suppose that you impose the tariffs and the currencies
of all your trading partners weekend, then you might not
get the inflationary burst of the tariff. That's correct, but
(17:23):
then you're not going to have an improvement of the
competitiveness of the United States, and therefore inflation is not
going to rise, but your trade deficit is going to
remain very large. Vice versa. If tarif are imposed and
the dollar does not strength another currency weekend, you might
get actually some improvement of your trade balance, but then
(17:44):
you'll have some inflational impact of this, so in all
these cases, there is not really a free lunch.
Speaker 1 (17:51):
Yeah.
Speaker 3 (17:51):
I want to actually dive further into this because a
lot of times when tariffs come up, one thing people
say is that, Okay, well it's a one off.
Speaker 5 (17:59):
It's a one right.
Speaker 3 (18:00):
The prices may go up at some point, but that
doesn't necessarily represent a new inflationary trend that say, the
FED would have to worry about. And perhaps that's true,
But it also occurs to me that if part of
the impulse here is to be less reliant on global
trading partners for say, various manufactured goods, and to have
more domestic building, et cetera of various things, this is
(18:22):
happening at a time of still high resource utilization already,
So the unemployment rate is at four point one percent,
There are already a lot there are shortages of industrial parts.
Yesterday we're recording this December third, by the way, yesterday
we got the ISM Manufacturing and it showed that electrical
components have now been in shortage for fifty straight months,
(18:44):
so over four years. So it seems to me that
regardless of you know, if you have this impulse to
build more here, et cetera, you're coming at it at
a time in which resources remain quite constrained.
Speaker 4 (18:58):
I think your point is very correct and valid in
some sense. Actually, the US economy right now it's not
in a soft landing, maybe in a no landing zone
because growth has remained above potential and inflation has fallen.
But you know, core PC this year probably going to
be two point eightyve and two point nine percent, and
(19:19):
next year may still remain elevated, especially next year if
you impost tariff, if you do significant draconia restriction to migration,
if you have run away physical deficits, that's stimulate further demand.
And if you have, you know, a policy of trying
to weekend the dollar. So yeah, we live in an
(19:39):
economy is already no landing where resource constraints are significant.
Libor market is significantly tight, Goods market are also tight.
Imports can help you, But then if you're gonna restrict
the libor supply to migration restriction, you're gonna weaken the dollars.
You're going to impose tariff, You're gonna make those inflationtionary
(20:00):
pressure going higher, and then make trigger the fad than
having to act and stop cutting rates or maybe even
increase them over time.
Speaker 2 (20:10):
I mean, the counter argument to the no landing idea
is that we have seen some signs as Joe mentioned
in the intro of the labor market softening, and even yesterday,
you know we already mentioned the ism, but we had
PMIS as well that also looked kind of sluggish. Is
there a possibility that the economy weaken significantly into twenty
(20:32):
twenty five?
Speaker 4 (20:34):
Well, I would say that the risk of economy weakening
significant twenty twenty five will be one in which those
sets of staculationary policy are followed. If you really impose
massive tariffs, if you deport millions of people, if you
try the weekend the dollar, if you have a massive
physical deficit then lead to bond hills rising, crowding out
(20:57):
economic growth. You could be in a situation which growth
significantly slow downs and inflation goes higher. I think that's
definitely a risk. As I pointed out at the beginning, However,
there are sets of policies of trumpet are actually positive
for economic growth, and some of those policies will be implemented.
Speaker 5 (21:15):
So if you had to.
Speaker 2 (21:17):
Choose from like column A or column B, what would
be like the higher probability.
Speaker 4 (21:22):
As of now, I would say that the impact on
growth for next year is going to be a wash
because on one side, definitely is pro business is going
to deregulate, There'll be some increase in capital spending, stock
market is strong, financial conditioner easy, So those are positive
(21:43):
for increasing growth. But then some of the other polices,
especially on labor market and tariff and protection is when
some increase in long rate are going to weaken economic growth.
So I think that the impact for growth next year
is that if this year we're growing, say two point
eight percent, next year we're going to still grow about
potential but less maybe two point four. But I don't
(22:05):
think there's going to be a massive slowdown unless it
goes really radical with the stackpreationary policies. However, on net
in an economy is already in a sight resource constraint
labor goods market otherwise that is more in a low
landing zone, where even before Trump was elected, the FED
was started to say, wait a moment, should we really
(22:27):
cut right as much as we promise? Given that growth
it seems to remain robust, that inflation remains more sticky
that in that world. In my view, inflation is going
to be on net staying high rather than going towards
the two percent targets. So I would say the net
impact on growth for the time being is a wash,
(22:47):
but the impact on inflation will probably be the inflation
is somehow higher, and that's going to impose something of
a dilemma for the FAT. Of course, there is a
tail risk that it goes fully stackflationary. But as I point,
are two major constraint. One is really market discipline. The
market would punish those policies and will have to reverse.
(23:07):
I mean, take an example in the UK, because there
was a physical STEAMUS was excessive. Then suddenly the pound collapse,
bond deals when higher, the pension crisis, and least trusts
Prime minister lost power in forty four days. Now that's
not going to happen in the United States. But I
think that people should not underestimate how market discipline can
(23:27):
really punish even a country like the United States. So
between the constrain of the FED being still independent and
the market discipline probably excessively stack, treasury policy would be
constrained next year.
Speaker 3 (23:58):
So a mirror all of the extraordinary uncertainty you recently
at the end of November announced you have a new ETF,
the Atlas America Fund, and it looks very interesting. You know,
I think, like I want to get into what it is.
But I think, you know, when people think about, say
like a well diversified or all weather portfolio, and it
(24:19):
sounds like we all want all weather portfolio because there's
just so much uncertainty right now, as you've been talking
about for the last several minutes, something that would thrive
and be stable amid all this uncertainty. You know, for
years people talked about the sixty forty portfolio, and it
had a certain I guess I would say intellectual elegance
to it, because the two legs of it generally produced
(24:40):
positive real returns, but also they had a sort of
natural hedging component against each other, and so usually if
stocks were going up at bonds were doing a little worse,
and then when your stocks would go down and the
boons were going up, work very beautifully for several years,
basically until twenty twenty one. And now I'm not sure
if people feel confident at all to go back into that,
and people come up with reasons why it's very there's
(25:04):
a lot of distrust about using bonds or a heavy
allocation of bonds as a good ballast for a portfolio.
What is the sort of before we get into the
specifics per se, what do you talk about sort of
like the intellectual or conceptual framework, but behind your approach,
which is to come up with a new sort of
diversification strategy that can work across cycles.
Speaker 4 (25:26):
Yeah, the logic is as follows. I wrote the whole
book title Mega Threads where I argue that the air
of the Great Moderation where we had low growth and
low inflation, is over. Even the air of the cyclist
technotion that followed the past GFC period, where again growth
(25:46):
was law and there were these inflationary forces, is over.
And there are a variety of forces are going to
lead to stack inflationary pressures in the global economy, both
on the supply side and a demand on the supply side.
That I consider ten factors from geopolitical fragmentation to the globalization, protectionism,
(26:08):
French shoring, reshoring to agingle population restriction to migration, global
climate change, pandemics, cyber warfare, backlash against liberal democracy and
proliber fiscal policies, and potential gradual dedollarization. Now, all these
factors gradually over time reduce growth and increase inflation. And
(26:32):
on the demand side, we live in a world of
very larger private and public debts are going to become larger.
We're going to spend more on defence all over the world.
We're going to spend more on dealing with climate change.
We're going to spend more to deal with pandemics. We're
going to spend more because there's going to be a
disruption coming from AI robotic automation. We're going to spend
(26:53):
more because there are many people left behind. We need
the bigger social safety nets, so we spend more. We
have limits so much we can raise avenues, so structural
budget death is going to rise, and therefore they're being
incentive to wipe out the real value of nominal long
duration that through unexpected inflation. Now I'm not talking about
hyper inflation or even high inflation, not even double digits.
(27:16):
Let's assume for a moment that this supply and these
the main forces imply that over this decade inflation is
not a tool. Let's say five six percent, it is
very reasonable. We were at nine just two years ago.
And I think these forces over time are going to
essentially materialize, and the policies of Trump, some of them
(27:36):
exactly go along the same tackflationary direction of lower growth
and higher inflation that we described. So in that world,
think of it this way. Bond yial is ten years
right now aband four percent, but if inflation was six,
bond yills have to be at least eight six percent
for expected inflation and two for the real because in
(27:58):
the world of high debt and that it's the equlibrium
relong rate is not zero anymore, it's closer to two.
Suppose the bond yills go gradually from four to eight percent,
then a tenured treasury is going to lose thirty forty
percent of its value over time. And we saw what
happened in twenty twenty two. In twenty twenty two, sixty
(28:20):
forty did not work. It did not work because sixty
forty assumes that there is a negative correlation between the
price of stocks and the price of bonds. Risk one
and growth equity to well. Bond bills are higher, the
price is lower, so you make money on equities, you
lose money on bonds. Risk of recession. Equities go down,
(28:42):
bond bills fall, the price goes up, you make money
on the bond part of your portfolio. You lose on equity.
But that negative correlation assumes that inflation is low and stable.
When inflation is not low and stable is rising, then
what happens. Bond bills are higher and you lose money
on the bond component. And like to happening in twenty two,
(29:03):
and happened again even last year. When bond yials are
significantly higher, stock prices correct, and therefore you get a
positive correlation between bond prices and equity prices. Paradoxically, actually,
in twenty twenty two, a sm PIFA boundred fell by
fifteen percent, but the price of tenure treasury fell more
(29:24):
fell by twenty percent as tenure treasure yield went from
one to three and a half. So in a world
in which bond yields gradually could go from four to eight,
the traditional defensive asset in a sixty to forty portfolio,
this long duration treasury doesn't work anymore, and therefore this
is not an old weather portfolio. ATTF is something of
(29:47):
an alternative to the traditional defensive assets, and alternity to
the forty percent of the sixty forty is not the
sixty part.
Speaker 3 (29:55):
So we're just working the four here, we're.
Speaker 4 (29:57):
Working mostly on the forty. And the point is that
if you do believe the story, or even if you
assign a meaningful probability that inflation is going to be
gradually higher and nominal long bondials is got to be higher,
you have essentially twenty three million dollars of long duration
fixed income, mostly treasury, but also high grade high yield
(30:18):
or em THATTA is dominated dollars, and its significant gradual
rights in those bond yields is going to imply that
your defensive asset actually loses as much, if not more
than equities. So then you have to think in a
world of gradually higher inflation, which are the other alternative
asset that provide a hedge against inflation, against the basement
(30:41):
of your currency, against disuization, against the geopolitical risk, against
financial crisis, and against climate change. And the range of
assets that we have chosen for this ETF is one
that provides you a better hedge against those still risks
than traditional defensive masses like tenure treasury, and that's the
(31:03):
idea behind this new ETF.
Speaker 2 (31:05):
Yeah, I find this ETF fascinating because it touches on
so many different themes. You know, obviously there's the macro
and the risk of inflation. There's portfolio construction in the
form of sixty forty, which you just discussed. But there's
also this idea of maybe creating a sort of like
dollar or US treasury alternative that is backed by real assets.
(31:29):
So you mentioned, you know, the stuff that could do
well in an inflationary environment and withstand some of those
big risks, stuff like gold, US property that is somewhat
climate resilient. So I guess in the northeast and short
term US treasuries where the rates will more or less
follow inflation. And one of the other interesting things about
(31:50):
this whole project is Atlas itself is based out of Dubai,
where there are you know, it's very close to some
very large pools of capital that have been investing in treasuries.
Talk to us more about that angle, this idea that
you could pitch it as a sort of treasury alternative
for some big investors.
Speaker 4 (32:09):
Well, as I pointed out, any investor starting from institutional
investor large sobein well fund, private and public pension funds,
endowment foundations, let alone retail investors hold a sum allocation
of their portfolio in long term treasuries, and that's because
(32:31):
has been traditionally the safe defensive asset. Speaking about literally
twenty threellion dollar plus of debt and in the world
that I describe right now, the losses that occurred in
twenty twenty two or summer of last year when again
there was a spike in bond hills to five percent,
there was a correction equity will occur, So you're going
(32:53):
to lose money on the equity and on the bond
side of portfolio. That's why, by the way, even fancy
models like risparity, there are glorified versions of sixty forty
seventy thirty have not done very well. And therefore I
think there is a nervousness around the world. The large
pools of money that I have. The allocation to long
(33:14):
duration treasury is their concern about a variety of the
risks that I described, and they're thinking about alternative and
as you pointed out, the combination of the assets is
one exactly that does reasonably well actually in normal times
and is a convexity. So if some of these tailies
(33:36):
were to materialize, of course the return is going to
be much higher. So for example, you want to stay
completely away from long duration treasuries and instead you want
to be in short duration treasury whisually goes higher and
under the same price correction. If bond deals are going
to be higher, you want to be into tips that
(33:57):
of course are going to do well if there are
increases in an expected inflation. The allocation to gold is
a hedge bought against inflation and the basement of yet currency,
but there's also a hedge against potential di dollarization. If
you think about the only liquid foreign reserve acid that
(34:18):
cannot be seized. The last few years in Russia, in Iran,
North Korea, we've had massive sanctional financial and seize their
foreign assets. The only liquid acid that cannot be seized
not euros, not dollars. It's not the end. All of
those have been seased. There's going to be gold bullion.
If you old gold bullion, you're going to go and
(34:39):
be safe. And that's why for example, significant central banks,
not only of the strategic ralvas of the US, but
even of the fer enemies of the US. I've gone
into gold this year. The surge over forty percent in
gold prices is significantly driven by that geopolitical risk of
didollarization and diversification. You want to be in some allocation
(35:02):
for commodities, especially a commodity is because in the world
of climate change, the demand is going to be there,
but there'll be supply disruption. We have seen spikes in
commodity prices driven by climate change. And real estate traditionally
is a good hedge against moderate increases in inflation because
rents and other things can go higher, and in the
(35:25):
short run, real estate is a fixed supply. But because
of climate change, of course, lots of parts of North
America are going to have significant problems and asset dials
are going to be reduced. I mean many parts of Florida, Louisiana,
California not even a more insurable in terms of home insurance.
People have to move, and as they move, prices are
(35:46):
going to fall in the region where you have climate change,
and they're going to increase where you are having better climate.
And therefore some location is in real estate. But we
have data at the zip level for every zip level
county of the United States, and we look at each
one of the riads in North America. We see what's
(36:06):
our allocation two different region with a whole global climate
change map based on big data that allows us to
go into the reads that are going to be benefiting
from climate change as opposed to those who are going
to be hurt by climate change. So the combination of
assets that provides you know, solid returns with very low volatility,
and it's an alternative to the traditional defensive act.
Speaker 3 (36:29):
Yeah, just looking through the holding of gold and short
term treasuries and tips and a short twenty year were
betting against the twenty year treasury and equinics and American Tower.
Interesting mix, right, I have one last question. Yeah, I'm
not going to ask you the obvious question. And one
thing I noticed in here there's no bitcoin ETF. But
I don't want to religate a bitcoin conversation because it's
(36:52):
the end and I don't want to have that. But
I do want to ask an adjacent question today, which
is that when you talk to overseas investors and talk
to people with high amounts of ultra high networth people
today in twenty twenty four, when you talk to them,
how seriously do they view setting aside your own views?
How seriously do they view bitcoin or crypto? Is some
(37:15):
component of the portfolio that they want to have.
Speaker 4 (37:18):
You know, some people are opening up to the idea
of all the crypto acids, but those investors that are
looking safe for a safe aset that does well given
this tail risk, are not going to look at the
crypto acids. When the paradox of crypto acids is that
(37:38):
they were doing actually quite poorly when inflation was rising
and the fat was tightening, and they're doing better when
inflation is falling and the fat is easy. They're not
negatively correlated with equities actually that are kind of like
exactly exactly. So if you want if you want something
(38:00):
a substitute for the forty component, I would say the
combination of assets that we have considered and willok them
carefully gives you stable returns and reasonably high turns. If
you add any crypto asset, you add a huge amount
of volatility, and there's a wide range of investors that
don't want that type of volatility.
Speaker 2 (38:22):
When we were first talking about the ETF, there was
some early discussion of maybe tokenizing it in some way.
Is that still a possibility.
Speaker 5 (38:30):
Yes, it is.
Speaker 4 (38:32):
The idea is that I do believe that actually tokeonization
of real and financial asset as some validity as opposed
to crypto assets are back by nothing vaporware, and I
think that the process of some degree of tachonization is
going to occur, and the benefit of tokenization will be
(38:53):
that these types of liquid acid ETF is not widely
available in aver of jurisdiction, especially in parts of the
world like the Global South where there is significant inflation.
The basement of FIAD currency, you could have something that
would actually have a stable store of value, still dollar rinked,
but gives you positive return, and it's going to be
(39:17):
a good hedg against some of those theories that are
facing So it'll be a way of eventually making it
available to many investors all over the world. But that'd
be stage two organization, not for the time makes the ATF.
Speaker 2 (39:31):
Yes, So I have just one more question. And every
once in a while I get the urge to start
an ETF of some sort, maybe the odd thoughts ETF
that is full of like thematic related assets to the
stuff that we talk about on the podcast, and then
I never do it for obvious reasons. But what has
(39:52):
been the most challenging or unexpected part of launching this ETF.
Speaker 4 (40:00):
You know, it takes a lot of work. You know,
you have to build a team, collaboration with Goldman Sacks.
Speaker 2 (40:06):
Oh yeah, because this one's actively managed as well.
Speaker 4 (40:09):
Yeah yeah, So you know, one thing is to write
about money, another thing is to manage it. You have
ideally P and L. But for me, it's a new
and interesting challenge. I've been an advisor to many financial
decisions over time. There's a big picture of view here
is that Seculuss technician is over Secluss technilious, inflation is rising.
(40:33):
So it's not just a little twist on a new idea,
but says there is a big asset class. It's the
defensive one. There's not going to be this safe acet
anymore in a world in which will be a variety
of new tail risks. We have to find a hedge
against it. So I think that is is going to
take time. It's not something's going to happen overnight. Is
a medium, long term story. But I do believe that
(40:55):
investors are getting nervous about the whole speries of things,
and I have to think about an alternative to traditional
But you know, making the idea design and get implementing
convincing people that that's the right thing to do takes
a lot of time and effort. Is hard work, all right.
Speaker 2 (41:11):
Neurial Rubini truly the perfect guest to talk about stagflation
and some of the other big risks out there.
Speaker 5 (41:17):
Thank you so much the great having me. Thanks so much, Joe.
Speaker 2 (41:34):
It's always fun to catch up with Nuriel and see
how his thinking is kind of evolving and also how
he's putting some of the big picture like theories into
practice with the new et.
Speaker 5 (41:45):
I love that chet.
Speaker 3 (41:45):
I thought there was a fantastic chat with Muriel, and
I thought, a he does a really good job of
laying out what is very clearly the sort of for
better worse. Look, all presidents come in and have different factions, right,
that's not weird. Coalitions are coalitions and what they are,
and there's always tensions. But there do seem to be
(42:06):
some very interesting sharp divides within the broader tent of
trump Ism. There's this sort of traditional Wall Street quote
pro business unquote view, and then there is the sort
of much more nationalistic, anti immigration, anti free trade, stagflationary view,
and it's very unclear who what mix will win out.
Speaker 2 (42:27):
You know, the other thing I like about Muriel is
he kind of like self catalogs. Yeah, wellness speaks like
number one, number two, number three, number four. The other
thing I was thinking, Okay, this has been emerging as
like a big talking point in a variety of our
conversations on the podcast now, and also you've written about it.
I've written about it to some extent, but the idea
(42:48):
of the market as a limiting factor on what's possible,
and part of me is a little bit nervous about
that one because it seems like maybe a big ask
for the market to police the new administration. But the
other thing I was thinking about was the importance.
Speaker 5 (43:05):
Of growth in all of this.
Speaker 2 (43:07):
Yeah, and like what becomes possible if the economy continues
to grow, Maybe that enables like some of the more
I don't want to say radical, but like creative ideas
from the administration.
Speaker 3 (43:20):
Yeah, adventurism and heterodox and sort of yeah, for sure,
you know. I think also I really enjoyed hearing his
theory of a new safe haven because you do see
this like a lot of people's big holdings to bonds
got blown up over the last few years, and you think, okay, well, now,
they're yielding like I don't know, a few percent. Maybe
they it's a good time to step back in.
Speaker 2 (43:40):
But the short end is already has made like a
little bit of a comeback recently.
Speaker 3 (43:44):
A little bit. But like you know, there's a lot
of people who saying, why am I buying the twenty
year when the short end is yielding more or is
yielding about the same with much less duration. And so
that and then gold has obviously done phenomenally well the
last couple of years thinking about what makes real estate
a safe haven in the specific properties of like climate,
(44:05):
et cetera. Just some very interesting ideas. There are many
ETFs get that get launched all the time. Most of
them just sort of disappear. This will be one I
at least pay attention to.
Speaker 2 (44:15):
Yeah, and the ticker I just realized is USAF, which
is kind of funny.
Speaker 5 (44:20):
Yeah.
Speaker 2 (44:20):
Anyway, shall we leave it there.
Speaker 3 (44:21):
Let's leave it there.
Speaker 2 (44:22):
This has been another episode of the Authlots podcast. I'm
Tracy Alloway. You can follow me at Tracy Alloway.
Speaker 3 (44:28):
I'm Joe Wisenthal. You could follow me at the Stalwart.
Follow Nurial Rubini at Nuriel. Follow our producers Carmen Rodriguez
at Carman armand dash Ol Bennett at Dashbot and cal
Brooks at cal Brooks. Thank you to our producer Moses Onam.
From our odd Lags content, go to Bloomberg dot com
slash odd Lots, where we have transcripts, a blog and
a newsletter and you can chat about all of these
(44:49):
topics twenty four to seven in our discord with fellow
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Speaker 2 (44:55):
Out Lots and if you enjoy odd Lots, if you
like it when we catch up with Nurial Rubini, then
please leave us a positive review on your favorite podcast platform.
And remember, if you are a Bloomberg subscriber, in addition
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(45:18):
To do that, just find the Bloomberg channel on Apple
Podcasts and follow the instructions there.
Speaker 5 (45:23):
Thanks for listening
Bloomberg Audio Studios, Podcasts, Radio News. Hello and welcome to
another episode of The Bots podcast.
Speaker 2 (00:23):
I'm Tracy Allaway.
Speaker 3 (00:25):
And I'm Joe Wisenthal.
Speaker 2 (00:26):
Joe, do you remember, I think it was in twenty
twenty two everyone was talking about stagflation.
Speaker 3 (00:34):
Yes, of course, because we had it right, because we
had markets were low, so people were talking about recession.
The FED was hiking interest rates aggressively, and inflation in
twenty twenty two was peaking. So it certainly seemed like
we could have had the combo right then for essentially
elevated inflation and some kind of recession.
Speaker 2 (00:56):
Yes, And in fact, before we recorded this episode, I
went back and I looked at a Google trends chart
for the word stagflation, and like, the peak in twenty
twenty two is just amazing. And then it sort of
fell off because we definitely had inflation, we didn't necessarily
have lower economic growth. But I think now at the
tail end of twenty twenty four, some of that stagflation
(01:19):
talk is beginning to creep back into I guess the
economic discourse.
Speaker 3 (01:25):
Yeah, a little bit. I mean what I would say
is I would agree with you. There seems to be
a couple things going on that are very confusing, to
say the least. But one is the sort of I
don't know if it's acceptance or reality that like inflation
has come down quite a bit, but maybe it's going
to keep bumping up against the ceiling, or maybe it's
(01:46):
going to keep like bouncing off the floor, so to speak.
Speaker 2 (01:48):
Yeah, that last mile is going to be difficult still.
Speaker 3 (01:51):
And then on some measures, the economy still seems good,
but you look at some of the pmiyes, issms, other
industrial measures, labor market measures, some seem to be slowing down.
So like, I still think this idea of like I
don't know if it's called stagflation, but this sort of
unpleasant combination of not great growth, not great real real growth,
(02:15):
and inflation that's still like at the higher end of
what people are comfortable with, feels like something that could
very plausibly be the case for a while.
Speaker 2 (02:23):
It's definitely in the air. So we need to dig
into this particular argument. And who better to speak to
than Neuriel Rubini. He is, of course, the chief economist
and portfolio manager of the Atlas America Fund, which is
a new ETF that has just launched and He is
also the chairman and CEO of Rubini Macro Associates. Really
(02:44):
the perfect guest to do this type of macro with us. So, Nuriel,
welcome back to the show.
Speaker 4 (02:49):
Good being with you today, see and Zoe.
Speaker 2 (02:51):
Do you get the same sense that the the risk
of stagflation is starting to pick up again?
Speaker 4 (02:58):
Certainly is one of the risks that have to consider.
And I think that the question and everybody is man
of course, is what would be the economic policies of
Trump and the impact on growth and inflation. If I
have to look ahead, I would say that some of
his policies actually could increase growth and reduce inflation, being
(03:20):
pro business in general, making those tax cut permanent, having
government efficiency, deregulating the economy, maybe even increasing the production
of fossil fuel, reducing the price of energy. Those go
in the direction of policies actually increase growth and reduce inflation.
(03:40):
But on the other side, there's a long list of
other policy that could be implemented. First of them, of course,
tariff protectionism, an economic war with China. Secondly draconia, restriction
to migration, if not mass deportation. Three unfunded tax cuts
and run away fiscal deficits for potentially in attempt to
(04:04):
weekend the dollar in a disorderly way. Five maybe trying
to interfere with the independence of the FAD. Now, if
the second set of policy were to be implemented, their
impact will be higher inflation over the time and lower
economic growth. So those sets of policy will be definitely
in the stockflationary direction.
Speaker 3 (04:25):
There was an amazing summary by the way of the
two ways of thinking about paths, And I guess what's
striking listening to you sort of list off the two
columns is within trump Ism or within the Trump administration.
It feels like there are several competing camps so to speak,
and we don't really know how it's going to resolve.
But there are a lot of internal contradictions, whether on
(04:47):
personnel or ideology, and to some extent you just laid
out are sort of I don't know, maybe the fork
in the road, so to speak, of how things could go.
Speaker 4 (04:55):
Yeah, you're absolutely right. There is a spectrum of positions
on the variety of economic issues. Some are truly protectionist,
Others like Scott bass And says we want to escalate
as a way of de escalating, and we're not going
to know until after, of course, inauguration, in which direction
the economic policy will go. I would say, however, the
(05:18):
following observation. I think that the potentially more stackflationary policy
will be constrained by several factors. One, of course, is
the choice of some of the economic advisors like Scot
Bass and understand markets and in as that if you
do things that are radically stackflationary, it will be bad
for the economy and bad for the market, so you're
(05:40):
going to try to push down against those. Secondly, I
think there'll be also significant impact of market discipline. If
you have run away budget deficits, migration restrictions, and tire
if that increase inflation, then the bond market digilant is
going to wake up expect that inflation will be higher,
rates will be higher, and then rising in bond deal
(06:03):
could lead to a correctional stock market. And if there's
one thing that Trump cares about is one the stock market.
We also cares about the bond market because high bond
deals imply high cost of borrowing and that's going to
be hurting the economy. I think the other constraint is
going to be, of course, the fact that the Fed
is still independent. If some of these policies were to
(06:24):
be pursued, the FED will likely cut next week in December,
may not cut again, or may cut much less than
the market are expecting next year. In an extreme scenario
in which inflation goes much higher, they could even increase
interest rates. And that's going to be So there is
both a market discipline and there's also FED discipline that
(06:47):
my constraint to some extent those stock preationary.
Speaker 2 (06:51):
Policies, setting aside the Trump administration and what they might do,
and I realized that that's a big thing to set
aside right now. But the path of inflation, it has
come down from the peaks that we saw in twenty
twenty two. As Joe was talking about why did that happen?
In your opinion, because one of the you were one
of the few voices I remember in early twenty twenty
(07:14):
when the pandemic was just unfolding, that predicted inflation, and
you know it happened. But since then it has petered
out a little bit.
Speaker 4 (07:25):
Yes, I mean, the reason why we had this burst
of inflation during and after COVID were both bad policies.
The amount of monetary, fiscal and credit zing exposts that
turned out to be way excessive given the size of
the economic shock, that was relatively temporary. But second there
was so bad luck. There were three negative aggregate supply
(07:47):
shocks that essentially reduced growth and increased inflation. One was
the impact of course of COVID on the supply of
labor and production of goods and on global supply chains.
The second was the impact of the brutal rush invasion
of Ukraine on commodity prices entry the kind of a
zero COVID policy of China that further restricted global supply chain.
(08:10):
So why inflation fell in part was, of course central
bank gave up on quantity easy normalized policy rates. But
if that was the case, we should have seen inflation
falling dramatically, but probably a much stronger slow down of
economic growth, maybe a recession the way most economist thought
(08:30):
about it. And instead we got the reduction inflation. But growth,
say in US as remain robust above potential twenty a
half percent in the last couple of years. So I
think in part we also got lucky, and lack was
the distree negative aggregate suppli show got reversed. First, we
had the end of COVID, so supply of libor increased,
we started producing goods and services. Supply chains got at
(08:53):
lays say, unstuck. The impact on commodity prices of the
invasion of Ukraine became ready US because there were new
sources of energy coming from Middle least US and so
on that went to Europe. And finally China gave up
on a zero COVID policy, so we got luck. And
on top of it, there was another set of actors
(09:14):
at least for the US that maintained growth strong. One
was that we had significant amount of migration documented or
otherwise people estimated maybe up to ten million people entered
in the United States in the last four years. That
increased the label supply, increase growth, and reduce some pressures
on wage inflation. Definitely right now. Politically, of course, migration
(09:38):
is a hot topic, but from economic point of view,
it increased growth and reduced inflation. And we had also
other physical stimulus that helped the growth from the Infrastructure Act,
the IRA and the Chips Act, and then we had
got Also of course AI revolution has led to significant
increasing capecs. So least for the United States, that think
was a combination of active factors that implied that inflation
(10:02):
file and growth remained robust, not so in other parts
of the world.
Speaker 3 (10:23):
I want to talk a little bit more about the dollar,
and there are so many different ways that you can
begin a conversation or about thinking about the role of
the US dollar. You can think about the effects that
tariffs will have on inflation or the strength of the
US dollar relative to other currencies. You can think about
the central role that the government that the US dollar
(10:45):
plays in global trade and finance, and whether there are
possible rivals that are emerging. One of the things that
we saw recently from President Trump was a threat that
he put on his Truth Social Account against any of terror,
against any country that would attempt to form a rival
currency block, and the specifically mentioned the Bricks. I don't
(11:08):
know if the Bricks is a real thing or not.
It sometimes seems like a meme to me, but there
is an organization called the Bricks, and sometimes you see
headlines about dollar alternatives in the short to medium term.
Is there a real prospect of some other currency, the
Chinese un perhaps taking sizeable market share and global trade
(11:28):
from the US dollar.
Speaker 4 (11:29):
Well, I would say for now, not yet. But the
dollarization process that could occur over time, and what could
trigger it was, of course, that we have rightly or
wrongly weaponized the dollar in the last few years for
national and security and foreign policy purposes, imposing a variety
of sanctions against a variety of strategic rivals of the
(11:54):
United States and the West. This isue about finding an alternative.
The dollar is complicated because you cannot essentially replace something
with nothing, and the question is what's the alternative to
US dollar for US actor treasure there Summers once jokingly said,
people don't like the dollar, but you know, Europe is
(12:17):
a museum, China as a prison, Japan is a nursing home,
and bitcoin so for now is an experiment. So there
is something of an happiness with the US dollar. But
for the time being, I would say the US dollar
is still dominant. And by the way, I would probably
argue that the Trump police is regarding the dollar a
(12:40):
little bit confused, because on one side, there is this
concern that a strong dollar has led to the industrialization,
loss of competitiveness, large trade, current account deficits people free
riding on the US So there is a sense I
would like a weaker dollar. But if you think about
policy and economic fundamentalals, tariffs will strengthen the dollar, and
(13:03):
threads of tariffs have led since selection to the dollar
becoming stronger. Trump says, I don't want other country to
unquote the dollar rise, and I'm going to impose tarif
on them if they do so. He wants to maintain
the role of the dollars a major global reserve currency.
If that's the case, demand for dollar ass remain high,
the dollar remains strong in terms of relative growth. The
(13:25):
US is doing stronger than Europe and other advanced economies
that just strengthen the dollar in terms of relative monetary
Police is probably given these differentials in growth and inflation,
the US or the FED is going to cut rate
less than other countries. Well, in Europe, the colomies we
can there'll be more cuts. And overall, given the productive
(13:47):
growth of the US, the boom of new technologies, AI,
you name it, capital flows are going into the United States.
So I think there is this dilemma that fundamentals and
police would suggest that the dollar is going to become stronger,
but than that objective of trying to reduce the trade
imbalance of the US to a weaker dollar unless you
(14:08):
have a big agreement on currency, is hard to fathom
how you're going to do it. There are some ideas
along those lines. Is going to be, to say, challenging.
Speaker 2 (14:18):
This is something I completely agree with, and I think
I've said on the podcast before that it feels like
Trump doesn't know what type of dollar he wants because instinctively,
I think there's a sense that he wants to say
the dollar is strong. It sounds good when you can
say those types of things, and generally it means that
the US economy is doing well relative to others. But
(14:40):
if he's serious about boosting manufacturing and exports, then he
needs the weaker dollar. There's also that tension between decoupling
the US economy from the rest of the world, maybe
becoming more self reliant, and also wanting the dollar to
be at the center of a globalized financial se Are
(15:01):
there ways that the Trump administration could like kind of
thread the needle between those two different objectives.
Speaker 4 (15:08):
No, it's not going to be easy because either you want,
you know, a weeker dollar to try to improve competitiveness,
reduce the trade balances and so on, but then the
dollar will left weaken. Or instead, if you want to
maintain the globals or currency roll of the dollar, then
(15:29):
the dollar is going to remain strong. And by the way,
the risk of doing an agreement to try to weaken
the dollar is that that could occur in a disorderly
way because if you do another people talking now about
a Mara lagoa agreement, because in the past agreements to
moved currencies were always in resorts like Breton Woods, Plaza,
over Come, David, you name it. So people think about
(15:52):
maybe getting together all major economies in mar Lago and
finding an agreement where europe Asian allies and others let
their currency appreciate the dollar weekend. But you know, if
people expect that from happening, then capital is going to
suddenly move out of the US because you're going to
have a massive capital loss time fifteen to twenty percent
(16:13):
on your dollar assets, and then you could have a
spike in long rates or you could have a correction
in US ecuity. So how do you engineer an orderly
weakening of the dollar without causing significant tightening of financial
condition that's also problematic. It's not going to be very
easy to be done. The other trade off that I
think it's complicated it's not just a weak or strong
(16:36):
dollars a currency role, but also your tariff policies, because
on one side, if you impose the tariffs, the dollar
is going to strengthen. And on the other side, also
if you're going to raise tariffs, you need revenues. But
raising tariffs, if it's very significant, it's going to be
highly inflationary. Now, some people within the Trump come say, well,
(17:00):
in twenty eighteen nineteen, when we increase the tariffs on China,
there was not significant increase in inflation because the RMB
depreciated and therefore import prices did not increase very much.
But suppose that you impose the tariffs and the currencies
of all your trading partners weekend, then you might not
get the inflationary burst of the tariff. That's correct, but
(17:23):
then you're not going to have an improvement of the
competitiveness of the United States, and therefore inflation is not
going to rise, but your trade deficit is going to
remain very large. Vice versa. If tarif are imposed and
the dollar does not strength another currency weekend, you might
get actually some improvement of your trade balance, but then
(17:44):
you'll have some inflational impact of this, so in all
these cases, there is not really a free lunch.
Speaker 1 (17:51):
Yeah.
Speaker 3 (17:51):
I want to actually dive further into this because a
lot of times when tariffs come up, one thing people
say is that, Okay, well it's a one off.
Speaker 5 (17:59):
It's a one right.
Speaker 3 (18:00):
The prices may go up at some point, but that
doesn't necessarily represent a new inflationary trend that say, the
FED would have to worry about. And perhaps that's true,
But it also occurs to me that if part of
the impulse here is to be less reliant on global
trading partners for say, various manufactured goods, and to have
more domestic building, et cetera of various things, this is
(18:22):
happening at a time of still high resource utilization already,
So the unemployment rate is at four point one percent,
There are already a lot there are shortages of industrial parts.
Yesterday we're recording this December third, by the way, yesterday
we got the ISM Manufacturing and it showed that electrical
components have now been in shortage for fifty straight months,
(18:44):
so over four years. So it seems to me that
regardless of you know, if you have this impulse to
build more here, et cetera, you're coming at it at
a time in which resources remain quite constrained.
Speaker 4 (18:58):
I think your point is very correct and valid in
some sense. Actually, the US economy right now it's not
in a soft landing, maybe in a no landing zone
because growth has remained above potential and inflation has fallen.
But you know, core PC this year probably going to
be two point eightyve and two point nine percent, and
(19:19):
next year may still remain elevated, especially next year if
you impost tariff, if you do significant draconia restriction to migration,
if you have run away physical deficits, that's stimulate further demand.
And if you have, you know, a policy of trying
to weekend the dollar. So yeah, we live in an
(19:39):
economy is already no landing where resource constraints are significant.
Libor market is significantly tight, Goods market are also tight.
Imports can help you, But then if you're gonna restrict
the libor supply to migration restriction, you're gonna weaken the dollars.
You're going to impose tariff, You're gonna make those inflationtionary
(20:00):
pressure going higher, and then make trigger the fad than
having to act and stop cutting rates or maybe even
increase them over time.
Speaker 2 (20:10):
I mean, the counter argument to the no landing idea
is that we have seen some signs as Joe mentioned
in the intro of the labor market softening, and even yesterday,
you know we already mentioned the ism, but we had
PMIS as well that also looked kind of sluggish. Is
there a possibility that the economy weaken significantly into twenty
(20:32):
twenty five?
Speaker 4 (20:34):
Well, I would say that the risk of economy weakening
significant twenty twenty five will be one in which those
sets of staculationary policy are followed. If you really impose
massive tariffs, if you deport millions of people, if you
try the weekend the dollar, if you have a massive
physical deficit then lead to bond hills rising, crowding out
(20:57):
economic growth. You could be in a situation which growth
significantly slow downs and inflation goes higher. I think that's
definitely a risk. As I pointed out at the beginning, However,
there are sets of policies of trumpet are actually positive
for economic growth, and some of those policies will be implemented.
Speaker 5 (21:15):
So if you had to.
Speaker 2 (21:17):
Choose from like column A or column B, what would
be like the higher probability.
Speaker 4 (21:22):
As of now, I would say that the impact on
growth for next year is going to be a wash
because on one side, definitely is pro business is going
to deregulate, There'll be some increase in capital spending, stock
market is strong, financial conditioner easy, So those are positive
(21:43):
for increasing growth. But then some of the other polices,
especially on labor market and tariff and protection is when
some increase in long rate are going to weaken economic growth.
So I think that the impact for growth next year
is that if this year we're growing, say two point
eight percent, next year we're going to still grow about
potential but less maybe two point four. But I don't
(22:05):
think there's going to be a massive slowdown unless it
goes really radical with the stackpreationary policies. However, on net
in an economy is already in a sight resource constraint
labor goods market otherwise that is more in a low
landing zone, where even before Trump was elected, the FED
was started to say, wait a moment, should we really
(22:27):
cut right as much as we promise? Given that growth
it seems to remain robust, that inflation remains more sticky
that in that world. In my view, inflation is going
to be on net staying high rather than going towards
the two percent targets. So I would say the net
impact on growth for the time being is a wash,
(22:47):
but the impact on inflation will probably be the inflation
is somehow higher, and that's going to impose something of
a dilemma for the FAT. Of course, there is a
tail risk that it goes fully stackflationary. But as I point,
are two major constraint. One is really market discipline. The
market would punish those policies and will have to reverse.
(23:07):
I mean, take an example in the UK, because there
was a physical STEAMUS was excessive. Then suddenly the pound collapse,
bond deals when higher, the pension crisis, and least trusts
Prime minister lost power in forty four days. Now that's
not going to happen in the United States. But I
think that people should not underestimate how market discipline can
(23:27):
really punish even a country like the United States. So
between the constrain of the FED being still independent and
the market discipline probably excessively stack, treasury policy would be
constrained next year.
Speaker 3 (23:58):
So a mirror all of the extraordinary uncertainty you recently
at the end of November announced you have a new ETF,
the Atlas America Fund, and it looks very interesting. You know,
I think, like I want to get into what it is.
But I think, you know, when people think about, say
like a well diversified or all weather portfolio, and it
(24:19):
sounds like we all want all weather portfolio because there's
just so much uncertainty right now, as you've been talking
about for the last several minutes, something that would thrive
and be stable amid all this uncertainty. You know, for
years people talked about the sixty forty portfolio, and it
had a certain I guess I would say intellectual elegance
to it, because the two legs of it generally produced
(24:40):
positive real returns, but also they had a sort of
natural hedging component against each other, and so usually if
stocks were going up at bonds were doing a little worse,
and then when your stocks would go down and the
boons were going up, work very beautifully for several years,
basically until twenty twenty one. And now I'm not sure
if people feel confident at all to go back into that,
and people come up with reasons why it's very there's
(25:04):
a lot of distrust about using bonds or a heavy
allocation of bonds as a good ballast for a portfolio.
What is the sort of before we get into the
specifics per se, what do you talk about sort of
like the intellectual or conceptual framework, but behind your approach,
which is to come up with a new sort of
diversification strategy that can work across cycles.
Speaker 4 (25:26):
Yeah, the logic is as follows. I wrote the whole
book title Mega Threads where I argue that the air
of the Great Moderation where we had low growth and
low inflation, is over. Even the air of the cyclist
technotion that followed the past GFC period, where again growth
(25:46):
was law and there were these inflationary forces, is over.
And there are a variety of forces are going to
lead to stack inflationary pressures in the global economy, both
on the supply side and a demand on the supply side.
That I consider ten factors from geopolitical fragmentation to the globalization, protectionism,
(26:08):
French shoring, reshoring to agingle population restriction to migration, global
climate change, pandemics, cyber warfare, backlash against liberal democracy and
proliber fiscal policies, and potential gradual dedollarization. Now, all these
factors gradually over time reduce growth and increase inflation. And
(26:32):
on the demand side, we live in a world of
very larger private and public debts are going to become larger.
We're going to spend more on defence all over the world.
We're going to spend more on dealing with climate change.
We're going to spend more to deal with pandemics. We're
going to spend more because there's going to be a
disruption coming from AI robotic automation. We're going to spend
(26:53):
more because there are many people left behind. We need
the bigger social safety nets, so we spend more. We
have limits so much we can raise avenues, so structural
budget death is going to rise, and therefore they're being
incentive to wipe out the real value of nominal long
duration that through unexpected inflation. Now I'm not talking about
hyper inflation or even high inflation, not even double digits.
(27:16):
Let's assume for a moment that this supply and these
the main forces imply that over this decade inflation is
not a tool. Let's say five six percent, it is
very reasonable. We were at nine just two years ago.
And I think these forces over time are going to
essentially materialize, and the policies of Trump, some of them
(27:36):
exactly go along the same tackflationary direction of lower growth
and higher inflation that we described. So in that world,
think of it this way. Bond yial is ten years
right now aband four percent, but if inflation was six,
bond yills have to be at least eight six percent
for expected inflation and two for the real because in
(27:58):
the world of high debt and that it's the equlibrium
relong rate is not zero anymore, it's closer to two.
Suppose the bond yills go gradually from four to eight percent,
then a tenured treasury is going to lose thirty forty
percent of its value over time. And we saw what
happened in twenty twenty two. In twenty twenty two, sixty
(28:20):
forty did not work. It did not work because sixty
forty assumes that there is a negative correlation between the
price of stocks and the price of bonds. Risk one
and growth equity to well. Bond bills are higher, the
price is lower, so you make money on equities, you
lose money on bonds. Risk of recession. Equities go down,
(28:42):
bond bills fall, the price goes up, you make money
on the bond part of your portfolio. You lose on equity.
But that negative correlation assumes that inflation is low and stable.
When inflation is not low and stable is rising, then
what happens. Bond bills are higher and you lose money
on the bond component. And like to happening in twenty two,
(29:03):
and happened again even last year. When bond yials are
significantly higher, stock prices correct, and therefore you get a
positive correlation between bond prices and equity prices. Paradoxically, actually,
in twenty twenty two, a sm PIFA boundred fell by
fifteen percent, but the price of tenure treasury fell more
(29:24):
fell by twenty percent as tenure treasure yield went from
one to three and a half. So in a world
in which bond yields gradually could go from four to eight,
the traditional defensive asset in a sixty to forty portfolio,
this long duration treasury doesn't work anymore, and therefore this
is not an old weather portfolio. ATTF is something of
(29:47):
an alternative to the traditional defensive assets, and alternity to
the forty percent of the sixty forty is not the
sixty part.
Speaker 3 (29:55):
So we're just working the four here, we're.
Speaker 4 (29:57):
Working mostly on the forty. And the point is that
if you do believe the story, or even if you
assign a meaningful probability that inflation is going to be
gradually higher and nominal long bondials is got to be higher,
you have essentially twenty three million dollars of long duration
fixed income, mostly treasury, but also high grade high yield
(30:18):
or em THATTA is dominated dollars, and its significant gradual
rights in those bond yields is going to imply that
your defensive asset actually loses as much, if not more
than equities. So then you have to think in a
world of gradually higher inflation, which are the other alternative
asset that provide a hedge against inflation, against the basement
(30:41):
of your currency, against disuization, against the geopolitical risk, against
financial crisis, and against climate change. And the range of
assets that we have chosen for this ETF is one
that provides you a better hedge against those still risks
than traditional defensive masses like tenure treasury, and that's the
(31:03):
idea behind this new ETF.
Speaker 2 (31:05):
Yeah, I find this ETF fascinating because it touches on
so many different themes. You know, obviously there's the macro
and the risk of inflation. There's portfolio construction in the
form of sixty forty, which you just discussed. But there's
also this idea of maybe creating a sort of like
dollar or US treasury alternative that is backed by real assets.
(31:29):
So you mentioned, you know, the stuff that could do
well in an inflationary environment and withstand some of those
big risks, stuff like gold, US property that is somewhat
climate resilient. So I guess in the northeast and short
term US treasuries where the rates will more or less
follow inflation. And one of the other interesting things about
(31:50):
this whole project is Atlas itself is based out of Dubai,
where there are you know, it's very close to some
very large pools of capital that have been investing in treasuries.
Talk to us more about that angle, this idea that
you could pitch it as a sort of treasury alternative
for some big investors.
Speaker 4 (32:09):
Well, as I pointed out, any investor starting from institutional
investor large sobein well fund, private and public pension funds,
endowment foundations, let alone retail investors hold a sum allocation
of their portfolio in long term treasuries, and that's because
(32:31):
has been traditionally the safe defensive asset. Speaking about literally
twenty threellion dollar plus of debt and in the world
that I describe right now, the losses that occurred in
twenty twenty two or summer of last year when again
there was a spike in bond hills to five percent,
there was a correction equity will occur, So you're going
(32:53):
to lose money on the equity and on the bond
side of portfolio. That's why, by the way, even fancy
models like risparity, there are glorified versions of sixty forty
seventy thirty have not done very well. And therefore I
think there is a nervousness around the world. The large
pools of money that I have. The allocation to long
(33:14):
duration treasury is their concern about a variety of the
risks that I described, and they're thinking about alternative and
as you pointed out, the combination of the assets is
one exactly that does reasonably well actually in normal times
and is a convexity. So if some of these tailies
(33:36):
were to materialize, of course the return is going to
be much higher. So for example, you want to stay
completely away from long duration treasuries and instead you want
to be in short duration treasury whisually goes higher and
under the same price correction. If bond deals are going
to be higher, you want to be into tips that
(33:57):
of course are going to do well if there are
increases in an expected inflation. The allocation to gold is
a hedge bought against inflation and the basement of yet currency,
but there's also a hedge against potential di dollarization. If
you think about the only liquid foreign reserve acid that
(34:18):
cannot be seized. The last few years in Russia, in Iran,
North Korea, we've had massive sanctional financial and seize their
foreign assets. The only liquid acid that cannot be seized
not euros, not dollars. It's not the end. All of
those have been seased. There's going to be gold bullion.
If you old gold bullion, you're going to go and
(34:39):
be safe. And that's why for example, significant central banks,
not only of the strategic ralvas of the US, but
even of the fer enemies of the US. I've gone
into gold this year. The surge over forty percent in
gold prices is significantly driven by that geopolitical risk of
didollarization and diversification. You want to be in some allocation
(35:02):
for commodities, especially a commodity is because in the world
of climate change, the demand is going to be there,
but there'll be supply disruption. We have seen spikes in
commodity prices driven by climate change. And real estate traditionally
is a good hedge against moderate increases in inflation because
rents and other things can go higher, and in the
(35:25):
short run, real estate is a fixed supply. But because
of climate change, of course, lots of parts of North
America are going to have significant problems and asset dials
are going to be reduced. I mean many parts of Florida, Louisiana,
California not even a more insurable in terms of home insurance.
People have to move, and as they move, prices are
(35:46):
going to fall in the region where you have climate change,
and they're going to increase where you are having better climate.
And therefore some location is in real estate. But we
have data at the zip level for every zip level
county of the United States, and we look at each
one of the riads in North America. We see what's
(36:06):
our allocation two different region with a whole global climate
change map based on big data that allows us to
go into the reads that are going to be benefiting
from climate change as opposed to those who are going
to be hurt by climate change. So the combination of
assets that provides you know, solid returns with very low volatility,
and it's an alternative to the traditional defensive act.
Speaker 3 (36:29):
Yeah, just looking through the holding of gold and short
term treasuries and tips and a short twenty year were
betting against the twenty year treasury and equinics and American Tower.
Interesting mix, right, I have one last question. Yeah, I'm
not going to ask you the obvious question. And one
thing I noticed in here there's no bitcoin ETF. But
I don't want to religate a bitcoin conversation because it's
(36:52):
the end and I don't want to have that. But
I do want to ask an adjacent question today, which
is that when you talk to overseas investors and talk
to people with high amounts of ultra high networth people
today in twenty twenty four, when you talk to them,
how seriously do they view setting aside your own views?
How seriously do they view bitcoin or crypto? Is some
(37:15):
component of the portfolio that they want to have.
Speaker 4 (37:18):
You know, some people are opening up to the idea
of all the crypto acids, but those investors that are
looking safe for a safe aset that does well given
this tail risk, are not going to look at the
crypto acids. When the paradox of crypto acids is that
(37:38):
they were doing actually quite poorly when inflation was rising
and the fat was tightening, and they're doing better when
inflation is falling and the fat is easy. They're not
negatively correlated with equities actually that are kind of like
exactly exactly. So if you want if you want something
(38:00):
a substitute for the forty component, I would say the
combination of assets that we have considered and willok them
carefully gives you stable returns and reasonably high turns. If
you add any crypto asset, you add a huge amount
of volatility, and there's a wide range of investors that
don't want that type of volatility.
Speaker 2 (38:22):
When we were first talking about the ETF, there was
some early discussion of maybe tokenizing it in some way.
Is that still a possibility.
Speaker 5 (38:30):
Yes, it is.
Speaker 4 (38:32):
The idea is that I do believe that actually tokeonization
of real and financial asset as some validity as opposed
to crypto assets are back by nothing vaporware, and I
think that the process of some degree of tachonization is
going to occur, and the benefit of tokenization will be
(38:53):
that these types of liquid acid ETF is not widely
available in aver of jurisdiction, especially in parts of the
world like the Global South where there is significant inflation.
The basement of FIAD currency, you could have something that
would actually have a stable store of value, still dollar rinked,
but gives you positive return, and it's going to be
(39:17):
a good hedg against some of those theories that are
facing So it'll be a way of eventually making it
available to many investors all over the world. But that'd
be stage two organization, not for the time makes the ATF.
Speaker 2 (39:31):
Yes, So I have just one more question. And every
once in a while I get the urge to start
an ETF of some sort, maybe the odd thoughts ETF
that is full of like thematic related assets to the
stuff that we talk about on the podcast, and then
I never do it for obvious reasons. But what has
(39:52):
been the most challenging or unexpected part of launching this ETF.
Speaker 4 (40:00):
You know, it takes a lot of work. You know,
you have to build a team, collaboration with Goldman Sacks.
Speaker 2 (40:06):
Oh yeah, because this one's actively managed as well.
Speaker 4 (40:09):
Yeah yeah, So you know, one thing is to write
about money, another thing is to manage it. You have
ideally P and L. But for me, it's a new
and interesting challenge. I've been an advisor to many financial
decisions over time. There's a big picture of view here
is that Seculuss technician is over Secluss technilious, inflation is rising.
(40:33):
So it's not just a little twist on a new idea,
but says there is a big asset class. It's the
defensive one. There's not going to be this safe acet
anymore in a world in which will be a variety
of new tail risks. We have to find a hedge
against it. So I think that is is going to
take time. It's not something's going to happen overnight. Is
a medium, long term story. But I do believe that
(40:55):
investors are getting nervous about the whole speries of things,
and I have to think about an alternative to traditional
But you know, making the idea design and get implementing
convincing people that that's the right thing to do takes
a lot of time and effort. Is hard work, all right.
Speaker 2 (41:11):
Neurial Rubini truly the perfect guest to talk about stagflation
and some of the other big risks out there.
Speaker 5 (41:17):
Thank you so much the great having me. Thanks so much, Joe.
Speaker 2 (41:34):
It's always fun to catch up with Nuriel and see
how his thinking is kind of evolving and also how
he's putting some of the big picture like theories into
practice with the new et.
Speaker 5 (41:45):
I love that chet.
Speaker 3 (41:45):
I thought there was a fantastic chat with Muriel, and
I thought, a he does a really good job of
laying out what is very clearly the sort of for
better worse. Look, all presidents come in and have different factions, right,
that's not weird. Coalitions are coalitions and what they are,
and there's always tensions. But there do seem to be
(42:06):
some very interesting sharp divides within the broader tent of
trump Ism. There's this sort of traditional Wall Street quote
pro business unquote view, and then there is the sort
of much more nationalistic, anti immigration, anti free trade, stagflationary view,
and it's very unclear who what mix will win out.
Speaker 2 (42:27):
You know, the other thing I like about Muriel is
he kind of like self catalogs. Yeah, wellness speaks like
number one, number two, number three, number four. The other
thing I was thinking, Okay, this has been emerging as
like a big talking point in a variety of our
conversations on the podcast now, and also you've written about it.
I've written about it to some extent, but the idea
(42:48):
of the market as a limiting factor on what's possible,
and part of me is a little bit nervous about
that one because it seems like maybe a big ask
for the market to police the new administration. But the
other thing I was thinking about was the importance.
Speaker 5 (43:05):
Of growth in all of this.
Speaker 2 (43:07):
Yeah, and like what becomes possible if the economy continues
to grow, Maybe that enables like some of the more
I don't want to say radical, but like creative ideas
from the administration.
Speaker 3 (43:20):
Yeah, adventurism and heterodox and sort of yeah, for sure,
you know. I think also I really enjoyed hearing his
theory of a new safe haven because you do see
this like a lot of people's big holdings to bonds
got blown up over the last few years, and you think, okay, well, now,
they're yielding like I don't know, a few percent. Maybe
they it's a good time to step back in.
Speaker 2 (43:40):
But the short end is already has made like a
little bit of a comeback recently.
Speaker 3 (43:44):
A little bit. But like you know, there's a lot
of people who saying, why am I buying the twenty
year when the short end is yielding more or is
yielding about the same with much less duration. And so
that and then gold has obviously done phenomenally well the
last couple of years thinking about what makes real estate
a safe haven in the specific properties of like climate,
(44:05):
et cetera. Just some very interesting ideas. There are many
ETFs get that get launched all the time. Most of
them just sort of disappear. This will be one I
at least pay attention to.
Speaker 2 (44:15):
Yeah, and the ticker I just realized is USAF, which
is kind of funny.
Speaker 5 (44:20):
Yeah.
Speaker 2 (44:20):
Anyway, shall we leave it there.
Speaker 3 (44:21):
Let's leave it there.
Speaker 2 (44:22):
This has been another episode of the Authlots podcast. I'm
Tracy Alloway. You can follow me at Tracy Alloway.
Speaker 3 (44:28):
I'm Joe Wisenthal. You could follow me at the Stalwart.
Follow Nurial Rubini at Nuriel. Follow our producers Carmen Rodriguez
at Carman armand dash Ol Bennett at Dashbot and cal
Brooks at cal Brooks. Thank you to our producer Moses Onam.
From our odd Lags content, go to Bloomberg dot com
slash odd Lots, where we have transcripts, a blog and
a newsletter and you can chat about all of these
(44:49):
topics twenty four to seven in our discord with fellow
listeners Discord dot gg slash.
Speaker 2 (44:55):
Out Lots and if you enjoy odd Lots, if you
like it when we catch up with Nurial Rubini, then
please leave us a positive review on your favorite podcast platform.
And remember, if you are a Bloomberg subscriber, in addition
to getting our new daily newsletter, you can also listen
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(45:18):
To do that, just find the Bloomberg channel on Apple
Podcasts and follow the instructions there.
Speaker 5 (45:23):
Thanks for listening
Hosts And Creators
Joe Weisenthal
Tracy Alloway
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