Mauldin Louis Gave interview (8.2022)

Louis Gave:

Look, what Europe will need to do—Europe’s saving grace in all of this, like, the silver lining—is that the oil price is actually not so high, right?

The oil price is 95 bucks. Right now, if you look at the electricity cost in Europe in sort of oil equivalent, it’s $1,000 a barrel; if you look at the natural gas price in Europe in oil equivalent, it’s $600 a barrel. So what Europe can do this winter is just buy very large, copious amounts of  oil from the Middle East, from Iran, from the US, from Canada, from anybody who’ll sell it to them. Sell oil, and burn it for energy, which is of course polluting and a stupid way to produce energy, but that’s the situation we’ve left ourselves in.

 Louis Gave https://youtu.be/Lh6Y94FI2yY Louis Gave (outtake): The reality is, we’re ending up at the gates of hell. We have fiscal policy that is increasingly constrained, and we have energy policies that have been so dumb—I mean, so stupidly dumb... *** Ed D’Agostino: Welcome to another edition of Global Macro Update. I’m Ed D’Agostino from Mauldin Economics, and I am so pleased to be bringing to you today Louis Gave from Gavekal Research. Louis is my number one favorite person to go to when thinking about all things global macro and how they relate to investors and investing. We are going to cover inflation, interest rates, China, Europe—and at the end of the video, we’re going to talk about specific things that investors can do to protect their portfolio today and beyond. I hope you’ll enjoy my discussion with Louis Gave of Gavekal Research. Louis Gave, it’s great to see you. Thanks for joining us today. I’ve been looking forward to this conversation all week. Louis Gave: Thanks; well, thanks for having me. I’ve been looking forward to it as well, and now that you’ve said all these kind words, I think I should stop right here. I can only disappoint after this. But thank you very much for having me. Ed D’Agostino: You know, there’s not much to talk about on a weekly Global Macro Update in this environment. And I say that completely in jest because it’s such a complex environment... I wanted to chat with you first about, maybe, what isn’t being reported as much in the financial media. Everyone is talking about interest rates and Fed policy with regard to interest rates— where are interest rates going, how far will the Fed go, will they pivot... But there’s another side of the Fed’s activity that I don’t think is getting a lot of attention; I rarely hear it mentioned. And that is the acceleration of QT, or quantitative tightening, the Fed letting their balance sheet roll off. I’m wondering what your thoughts are on QT—when it ramps up to its full level, the impact of it, how far the Fed will be able to go on that side because of, you know, the increasing cost of financing the US government’s debt... What kind of impact do you think QT has on their overall goals and the economy? Louis Gave: Well, first, again, great to catch up. And I think there’s a pretty good reason we haven’t been hearing about QT is that it hasn’t been happening. You know, for all the talk about how the Fed is going to shrink its balance sheets, the reality is, this has not happened. You know, I think if you go back to when inflation really started to break out on the upside, which is really in March 2021—that’s the first time it starts to break out above 2%, and from there on out, sort of month in, month out, inflation comes out either higher or much higher than expected. And throughout, from March 2021 to May 2022, the Fed actually continues to expand its balance sheet. It continues with quantitative easing in the face of 3% inflation prints and 4% and 5% and 6%, and so on. And only starting in May 2022 does the Fed stop expanding its balance sheet. Now, since then, I don’t think you can qualify what’s occurred since May 2022 as QT because the Fed balance sheet is, you know, roughly sidelined. Sure, there’s been a little bit of shrinkage, but very, very marginal. You know, so far, we haven’t seen any quantitative tightening, and the question is, why not? Why is the Fed balance sheet not shrinking in the face of 8.5% inflation rates? And I think you put your finger on it. The answer is pretty simple, and that is that the central banks of the world need to be there to help the vast amounts of debt that governments need to roll over. You know, the big difference this time around—compared to last time when inflation was 8.5% of GDP, in the 1970s—is that in the 1970s, debt to GDP in most Western nations was anywhere from 30–60% of GDP. Today, you’d be hard pressed to find a country that has a debt-to-GDP level that’s lower than 100%... and sometimes 120, 130. And so, all these central banks, I think, are sort of stuck, in that if they stopped rolling over the government debt, you could easily have a debt crisis. And you know, on this... I think looking at the Bank of Japan and what the Bank of Japan has been doing, is full of messages. Because the Bank of Japan—what was it, four or five months ago—came out and said, “You know what, we’re embracing yield curve controls. We know that our government will be in trouble if bond yields go above 25 basis points, so we’re just going to go ahead and just buy a limitless number of bonds... as, you know... if ever the yields start approaching 25 bps.” Now, everybody today is looking at the Bank of Japan thinking, “Well, that’s crazy. Let’s sell the yen and sell the JGBs because at some point, that won’t work.” But you know, in my career—you know I’m just a tad younger than you are, we’ve just established—but throughout my career, I’ve seen the Bank of Japan be a sort of trailblazer for other central banks. The Bank of Japan was the first central bank to go to zero interest rates. And at the time, everybody thought, “That’s stupid. Zero interest rates, that makes no sense; that can’t work.” And two years later, everybody had zero interest rates. And then it was the first one to do quantitative easing. And when it did quantitative easing, everybody’s like, “Well, that’s stupid.” And then everybody did quantitative easing. And now that the Bank of Japan is doing yield curve controls, everybody’s saying, “Ah, that’s stupid.” But how long until the Fed is openly doing yield curve controls? How long until the ECB is openly doing... well, you know for all intents and purposes, the ECB is trying to do spread curve control. Ed D’Agostino: Right. We’ll get to that. Louis Gave: But all this to say that, you know, for all the talk about quantitative tightening, we’re not seeing it. Now, I’m happy to change my mind when the facts change. Once the Fed starts to do quantitative tightening—sure, they’ll have a market impact, and I think the market impact will be broadly negative for asset prices around the world. But for now, let’s not kid ourselves that the Fed is withdrawing liquidity out there—it’s not. Ed D’Agostino: So, the Fed’s Atlanta division, they’re the Bank of Atlanta... There was a paper issued in July talking about how, if they let $2.5 trillion roll off the balance sheet over a few years, that it would be equivalent to approximately a 75-basis-point rate hike. Which seems like a big underestimation. I mean, I don’t know. Louis Gave: I would say so. $2.5 trillion is, what, 10% of US GDP? Ed D’Agostino: Right. Louis Gave: That seems... you know, 10% of 75 basis points... I didn’t graduate in math, but it seems not the same. Ed D’Agostino: So, you brought up Bank of Japan. How do you see inflation in Japan relative to the US and maybe Europe? Is it drastically higher in Japan right now? Louis Gave: Oh no, not at all. Inflation, you would think it would be, right? It’s because of the VPN. Because, you know, they have to import all their energy, unlike in the US. That’s mostly... you guys are give or take energy self-sufficient. Japan has none of these advantages. But the inflation rate in Japan is, what, 2%, 2.5%. Ed D’Agostino: It makes no sense, does it? Does it make sense to anyone? Does it make sense to you? Louis Gave: It does, it does; to the extent... And, you know, there’s also no inflation in China. And there’s no inflation in most Asian countries. Well, I’m sorry, not no inflation; there’s obviously inflation in energy, there’s obviously inflation in food prices... But I think it comes down to, what do you think is behind today’s inflation, right? Do you think it’s all caused by the supply chain dislocations linked to COVID? That’s the story that we were sold by the central bank six or nine months ago. Or do you think that it’s linked to de-globalization? Or do you think that it’s linked to the crazy fiscal and monetary policies that a number of countries adopted during the COVID period? I mean, look, for two years, broad US monetary aggregates grew by over 20%, which they’ve never done in their whole history. And so, today’s inflation rate, what’s behind it? If you’re like me, you think it’s 1. deglobalization; 2. the fact that we’re in an energy crisis; 3. the fact that we followed crazy monetary and fiscal policies during COVID. If you look at places like Japan... you know, Japan isn’t really embracing de-globalization like the Western world. They’re not actively picking fights with China; they’re not actively picking fights with Russia. I mean, case in point: Initially Japan said, “Yeah, yeah, like the rest of the world, we’re going to block Russia because they’re bad guys,” and in the past six weeks, Japanese energy imports from Russia have quietly gone out and just ramped up massively. So they’re a little bit like, you know, discretion’s the better part of valor, and quietly they’re doing deals on the back end... and reimporting the gas, reimporting the coal, reimporting the [unintelligible]. So you’ve got that part. And then, in Japan during COVID, they didn’t follow crazy monetary and fiscal policies in the way we did. They just didn’t. They didn’t turn around and say, “Oh, you know what, we’ll pay everybody 2,000 bucks to stay at home and play Nintendo.” And so today, we’re paying the price of that. So again, if you think that the inflation rate is just a consequence of the supply chain dislocations, then indeed you might look at Japan and China and wonder, “How come these guys aren’t suffering?” But if you think, “No, no, no—today’s inflation rate is the price we pay for the crazy policies of two years ago. It’s the price we pay for actively embracing deglobalization and shutting out China and shutting out Russia.” Which politically is maybe something we want to do, but let’s not kid ourselves it doesn’t have a cost, you know. Ed D’Agostino: Sure. Louis Gave: It’s... Thomas Sowell says there’s no free ride, there’s only policy choices. And so we choose to block out China, we choose to block out Russia, that’s fine... the price we pay is inflation. And let’s be honest about this: It’s a policy choice, and today, the cost is inflation. Ed D’Agostino: So, clearly, there’s deglobalization when it comes to Europe and the US versus Russia. What about with China? I mean, we are seeing steps: the CHIPS Act, other policy moves to break away. But at the corporate level, at the industrial level, where the rubber meets the road, is there deglobalization happening at a meaningful scale and pace right now? Louis Gave: I think there is. And I think it predates this Russia-Ukraine invasion. I think, to be honest, it all started in 2018, when the Trump administration decided to weaponize the semiconductor industry. If you go back to 2018, what happened was, the Trump administration said, “Okay, no more semiconductors for Huawei, no more semiconductors for ZTE.” That was a massive shock for China. You know, as they looked at it, Huawei was their national champion. This was their industrial jewel. This was the first time they had managed to build a global brand from scratch, and one that was gaining market share—the very pinnacle of technology. Now, we can debate, of course, that they did this by stealing patents and by stealing foreign technology, etc., but from a Chinese point of view, all of a sudden, it felt like, “We’ve got a winning company, and the US just sent their goons to take it out at the knees and basically crush this thing. Hence, we must become independent of the US on the semiconductor front, we must become independent on the energy front, we must become independent on the currency front.” So, de-globalization really kicked into gear massively in 2018. And I think that... Ed D’Agostino: Would you say that China realized they needed to become independent was because of the actions of the Trump administration, or do you think that was their plan all along? And the reason I ask is... Louis Gave: Yeah, it was part of their plan, right? It was the sort of “China 2025” agenda... there was a lot of that, no doubt. Having said that, I think the weaponization of the semiconductor industry highlighted for China a massive weakness that they had—and that perhaps they didn’t realize they had. Which was their dependence on foreign semiconductors. But that weakness and dependency was always there; I’m not sure they realized it. And following that, China turns around and says, “Okay, we’re going to spend hundreds of billions building our own semiconductor industry. We’re going to go to Taiwan and lift entire teams from TSMC or UMC, and we’re going to try to build this from scratch.” Now, you know, this is an extremely challenging endeavor, if only because you don’t have the proper machine tools; those are made by ASML in the Netherlands. It’s an extremely challenging tool to begin from scratch. But, having said that, imagine you’re Samsung Electronics; imagine you’re TSMC or whoever else. And now you’ve got China saying, “I’m going to spend hundreds of billions to become a competitor to you.” You’re probably thinking, “Well, I’m dead; I’m not going to do any capital spending. I’m going to hold back on my capex.” And that’s how you grew into the shortage that we saw in 2020/2021. Because everybody... 2019 was the first year in, like, 20 years since the Asian crisis where TSMC’s capex actually fell. Because, again, you’re seeing this, you see this trend of China’s going to spend all this money... because building those fabs now is tens of billions of dollars. So, if you get your timing wrong, or if China undercuts you... it’s a different proposition. So, the bottom line is, you had an industry that was working perfectly well—the semiconductor industry. Of course, it had its boom-and-bust cycles, etc. And then you throw government intervention on top of it, from the US and from China, which creates massive uncertainty if you’re a businessman. And most businessmen with uncertainty tend to hold back. It’s like, “Oh, not sure; don’t want to do anything stupid.” And so that’s where we were, and from there—from all this negative feeling, uncertainty, etc.— the message was very clearly sent to every producer out there, “Look, if you can move your production away from China, right...” And so you see this, Apple saying, “Look, we’re going to do more in India,” but they find it challenging to do. “We’re going to do more in Vietnam,” but they find it challenging to do. But the desire very much is there to move, and anybody who can move from China is moving from China. Now, the reality is, if they hadn’t moved before, it’s because China was a better price point, right. Ed D’Agostino: Right. Louis Gave: If producing out of Vietnam or India was a better proposition, you would already done this. You’re shifting your production, not because of cost reasons but because of political reasons. Because of the political risk that now comes with producing in China. And so that comes at a cost, and so you end up with the supply chain dislocations that we’ve seen... or just higher cost of productions. It’s happening. Ed D’Agostino: So, do you believe that this trend, this deglobalization trend, between China and the West is going to continue? And if so, is this going to be one of the main drivers of a higher baseline level of inflation? Where maybe in years past, we’re used to 1.5% inflation and a Fed talking about we want to get it to 2[%], and now it’s going to be kind of stuck at 4% or so? Is that a scenario that you see feasible and probable? Louis Gave: I see it not only as feasible and probable, I see it as extremely likely. First, I see no reason to think that the US and China are going to sit down and have a big Kumbaya moment. If anything, every month that goes by, they seem to be getting further apart. Last month, Nancy Pelosi visiting Taiwan. And they don’t seem to be playing nice and playing friendly—far from it. As for the 4% inflation, let me put it to you this way. You know my core belief, and I’ve argued this at the SIC conferences for the past few years, etc.: Inflation today—it’s not a bug, it’s a feature. Policy makers wanted to get us here. I mean, look, the Fed employs more than 400 PhDs, right? Out of 400 PhDs, do you think not a single one would have said, “Hold on, wait—if we grow broad money supply in the US by over 20% for two consecutive years, we’re going to end up with inflation”? Out of 400 PhDs, you don’t think it occurred to one of them? Did none of them take Econ 101? You know when you’re running... you know 12 months ago, 18 months ago, they were telling us they wanted inflation. They were actively saying, the ECB, the Fed, etc. Now, I think there was a little bit of hubris with them where they thought, “You know what, ideally, we get 3.5%, 4% inflation; and we get that inflation rate there, and it stays there, and that deals with the debt problem, and over time, the debt gets eaten away by the high inflation rates, like it happened in the 1950s and 1960s.” Except we now live in an accelerated world. You don’t have any more capital controls; you live in a much more globalized economy. And so, your inflation rate—it goes to 4[%], it goes to 5[%], it goes to 6[%], and all of a sudden, it starts getting uncomfortable. 4% isn’t that big a deal. 6[%] starts getting uncomfortable. 8[%] is a downright political issue. More importantly, as my friend Vincent Deluard often says, “Inflation is inflationary.” It changes... just like deflation is deflationary. It changes people’s psychology, etc. So does inflation. Inflation starts picking up, so now people ask for higher wages, which... then fees, and we’re there. We are now in the phase where inflation has become inflationary. And so, if you look at, again, my friend Vincent did this great study looking at all the countries around the world since 1945 where inflation moved above 5%. Once inflation moved above 5%—and you had hundreds of cases, in Argentina and Brazil and South Africa, sure, in the US— lots of lots of different examples. And you look at the number of times where 12 months later, it’s below 2%; 12 months later, it’s between 2[%] and 5[%]. 12 months later, it’s between 5[%] and 10[%]. And 12 months later, it’s over 10[%]. The reality is, 1.6% of the time, it goes to below 2%. 1.6% of the time. And right now, that’s what the market is pricing in. Out of hundreds of examples since World War II, we’re saying, “Oh, it’ll be fine. It’ll be below 2% in a year’s time.” So, you’re betting on the 1.6% odds. Meanwhile, 20% of the time, it’s above 10%. And 20% of the time, it’s between 5 and 10[%]. And that’s... and those examples include when central banks really crank up the level to get things under control, i.e., shrink their balance sheets, etc. All the things that the central banks today aren’t doing. So, you know when you look at inflation today—I don’t want to answer your question with another question, but do you think energy prices are lower in a year’s time? Ed D’Agostino: No. Louis Gave: I don’t. I think we’re in a massive energy crisis. And today’s prices reflect a level of underinvestment for the past 10 years. So, do you think energy prices are lower? Do you think food prices are lower? I don’t, again. Under-investment, problems with fertilizers; lots of issues. Ed D’Agostino: Food prices won’t go down unless energy prices go down. Louis Gave: Right. They’re very tight. Do you think the Fed brings interest rates above the rate of inflation, which historically is what’s needed for inflation to roll over? I think no way. Absolutely no way. If they wanted to do that, they would have done it when inflation was at 4[%]. They wouldn’t have waited till inflation was 8.5[%]. So, all this to say... it’s like, okay, why would you think inflation would be below 2%? I think, to be honest, the onus is on people who think inflation is going to be below 2% in a year’s time. to argue why that is; right now, it’s going completely the other way. Ed D’Agostino: So, let’s make a pivot. We’ll come back to inflation, but before we do—because I want to tie everything together for investors—before we do that, let’s talk a little bit about Europe and the challenges that they face heading into fall and winter, with being very dependent on Russia. Russia is going to have so much leverage over Europe heading into the cold season; how do you see that playing out? Louis Gave: Like, I think the only good news about Europe at this point is that everybody knows all the bad news. That’s pretty much the only positive thing you can say. Because the bad news is downright horrible. Now, whether that bad news is all priced in, is a debate we can have. But yes, to your point, Europe’s heading into a massive energy crisis; I think Europe’s heading into a political crisis. Because if you go back 20 years or 25 years, the bargain... do you remember that old Ben Franklin quote, if you give up liberty for security, you end up having neither? Ed D’Agostino: Yes. Louis Gave: And in Europe, we were told, “Give up your freedom on monetary policy, give up your freedom on fiscal policy, give up your freedom on energy policy, and you’ll end up with more prosperity.” And that was the bargain—that was the European Union bargain that was pushed hard on populations 25 years ago. It’s like, you know, if you give up your rights to have your own currency, your own fiscal policy, your own energy policy, you’ll end up in a better place in 20 years’ time. The reality is, we’re ending up at the gates of hell—where we’ve lost control of monetary policy, and we have an inflation rate such as hasn’t been seen in generations. We have fiscal policy that is increasingly constrained, and we have energy policies that have been so dumb—I mean, so stupidly dumb—that, you know, you put it all together, and the risk is of a significant political crisis, and big strikes, riots... Look, this winter in Europe, you will have energy shortages, you will have energy rationing. Which, by the way, going back to our question on inflation, if you think we can have massive energy shortages in Europe and not have supply chain dislocations for the whole world... like, you know, that’s another inflationary thing. Think of the auto industry. So many auto parts are still manufactured in Europe. Now, you know the old story, if a car takes about 1,500 different parts, and if you have 1,499 parts, you’ve got an expensive paperweight. And this is where we’re heading. If you have energy shortages, you’re going to have auto parts shortages; you’re going to have... and it’s not “if”; we are going to have these energy shortages. So no, Europe is in a tough bind, and it’s going to be both a hit for global growth in the coming six months and potentially another boost to inflation at the same time. Which is quite a feat—to both hurt growth and boost inflation. um but it’s very possibly... Ed D’Agostino: The ECB... essentially, can the ECB do anything to mitigate the inflation situation—because of the debt load of the periphery countries? Louis Gave: Look, what Europe will need to do—Europe’s saving grace in all of this, like, the silver lining—is that the oil price is actually not so high, right? The oil price is 95 bucks. Right now, if you look at the electricity cost in Europe in sort of oil equivalent, it’s $1,000 a barrel; if you look at the natural gas price in Europe in oil equivalent, it’s $600 a barrel. So what Europe can do this winter is just buy very large, copious amounts of oil from the Middle East, from Iran, from the US, from Canada, from anybody who’ll sell it to them. Sell oil, and burn it for energy, which is of course polluting and a stupid way to produce energy, but that’s the situation we’ve left ourselves in. Ed D’Agostino: Sure. Louis Gave: And so the saving grace for Europe is that oil is still not too expensive, one, and two that moving oil around is actually pretty easy. It’s much easier than moving natural gas. You put it on boats; you put it on trucks; you can move the oil around. So, Europe this winter is going to have no choice but to buy copious amounts of oil, which is very bullish oil, of course, and pretty bearish the euro because they’re going to have to pay for that oil in US dollars. So, they have to sell euros, buy US dollars to buy all the oil they need. So, all that is... as far as the ECB is concerned, that will make for higher inflation rates—you know, weaker euro, higher oil... The inflation rate in Europe isn’t done falling. So, what can the ECB do in the face of this? I don’t know. Jim Grant always says, what would you do if you were chairman of the Fed, and he always says, “Resign.” That’s what I would do if I was chairman of the ECB. Ed D’Agostino: So, we’ve covered a lot of ground. Let’s wrap this up by talking about what would you recommend to an investor in terms of positioning. You know, a world where baseline inflation is going to be higher than we’ve experienced for decades; interest rates are going to be higher than we’ve been used to for certainly the last decade; energy constraints... what is an investor to do? Louis Gave: I think the first thing to acknowledge is that building a good portfolio—and I know I’ve talked about this at SIC conferences in the past—but building a good portfolio is like building an American football team, right? When you put your American football team on the field, you need players to do different things. If you had a team with 11 John Elways or 11 Dan Marinos... Ed D’Agostino: Sure. Louis Gave: ...you’d get pummeled every day of the week. So your offensive linemen do a job, and your running-backs do a job and your quarterbacks do a job... and the same is true of a portfolio. Now, the big challenge for investors today is that for the past 30 years, the offensive line, i.e., the anti-fragile part of your portfolio—the part of your portfolio that protected everybody else—used to be government bonds. It used to be US Treasuries or German Bunds... and so that was your offensive line. And that offensive line no longer works. And you’ve seen this very clearly in the past year, right? In the past year, in the first six months of this year, S&P 500 goes down 20%, and the TLT, the longdated US Treasury ETF, also went down 20%. And it was like one for one. It was providing no diversification, no protection. So it’s a little bit like you send off your offensive line on holiday, and they came back, and they all weighed 120 pounds. They all went on massive diets, and they all became cross-country runners. Which is great if you want to win a cross-country competition; not so great if you need an offensive line. So, the first thing to acknowledge is that bonds no longer do the job in portfolios that you want them to do. So you need to sub them out. If you have an offensive lineman who is not doing the job, you need to take him off the pitch and put somebody else. Now, what is the new anti-fragile asset today? What is the asset that basically behaves with a negative correlation to everything else? I think there’s really two of them left: the first is energy. I’m sure you’ll have noticed that all year long, days where the market is up, energy is sort of struggling; days when the market is down, energy is doing well. So, energy, which makes sense in an inflationary environment, right? Because today, the risk as an investor... I know we’re all focusing—and I am as well—on how, is Powell going to be hawkish at Jackson Hole? Is he going to be dovish? Ooh... is it going to be 50 basis points, is it going to be 70 basis points, 75 basis points? Forget it. Like, in 10 years’ time, in five years’ time, this won’t matter. What matters is, is oil going, in the next six months, is oil going to 150 bucks or to 50 bucks? I mean, that’s it. That’s what matters, and if oil goes to 150 bucks, the rest of your portfolio is destroyed. And that’s the simple reality. So, the first thing to acknowledge is that, today, your new offensive line, your new anti-fragile building block—the thing that protects the rest of your portfolio—is energy. And there’s lots of different ways you can put that in. You can say, “Oh, you know what, I want it the high beta way—I’m going to go and buy coal mines.” You can say, “You know what, I’m going to do it in a conservative way and buy MLPs.” Lots of different ways to play this, but... Or I can buy uranium, or I can buy oil refiners... There’s different ways. But by and large, you need a big energy position. Now, the interesting thing is, if your benchmark energy is, what, 4% of your benchmark... really, it should be 25% of your portfolio. Because... Ed D’Agostino: Wow. Louis Gave: ...it is now a big, separate... you know, it behaves like no other asset. And so, again, it’s the 300- pound lineman that you just need. So that’s the first asset that’s anti-fragile. The second asset, I think, that’s anti-fragile—and here this might surprise you—but I think it’s emerging market bonds. Let me... Ed D’Agostino: EM bonds?! Wow. Louis Gave: Let me explain. If a year ago, I had told you, “Hey, Ed, over the next year, inflation is going to be much higher than expected; the Fed is going to have to sound much more hawkish than anybody expects; US Treasuries are going to move from 1% to 3% yields; the S&P’s down 20% from its highs... oh, and by the way, load up on Brazilian bonds, load up on Chinese government notes, load up on Indian bonds, load up on Indonesian bonds, load up on South African bonds, you’d have said, “Louis, you’re the stupidest person I know. You’ve been doing emerging markets for 25 years, and don’t you know that when you get into a Fed tightening cycle, emerging markets blow up?” Emerging markets underperform. The last thing you do is add risk in emerging markets in a Fed tightening cycle. That’s like... every emerging market investor knows that. Except look at this year. Amidst a massive under-performance of both US equities and US Treasuries, Brazilian bonds are up for the year. Chinese bond yields have gone from 3% to 2.75% or 2.70% this year—just as US bond yields have gone from 1.5% to 3%. Indonesian bonds are up for the year, and they’re behaving in a way that’s completely counterintuitive to what you would expect. And I think that’s... when things in the market don’t behave as you would expect, for me, that’s a strong signal. It means there’s something going on there. And I think what’s going on there is that big parts of the world are actually quietly de-dollarizing. If you look at—I think it was five or six weeks ago—China did its first deal with BHP for iron ore priced in renminbi. And so now all of a sudden, BHP is selling iron ore to China no longer in US dollars but in renminbi. This is a huge deal for you... Ed D’Agostino: That’s a big deal. Louis Gave: ...because now China can turn to Rio Tinto, it can turn to Valet, it can turn to a lot of places and say, “Well, look, I’d love to do business with you, but unless you make it in renminbi, I’m just going to deal with BHP.” And so, all of a sudden, China’s need for US dollars goes down, right? And so, as... now, China’s been trying to do this for 12 years, I think this is just—and you know I’ve talked about it at your conferences many times... The impetus is the sanctions we’ve put on Russia. For 10 years, China was turning to Russia saying, “Hey Russia, let’s trade in renminbi instead of US dollars. By trading in US dollars, we’re... instead of having a better relationship, we’re in this sort of menage-a-trois here with the US Treasury in between us. Let’s stop doing that.” And Russia was never that keen. But now Russia doesn’t have a choice. Like, Russia can’t use US dollars anymore; they can’t use euros. So now Russia is telling China, “Yeah, I’ll sell oil to you in renminbi, I’ll sell natural gas to you in renminbi, I’ll sell iron ore, I’ll sell coal. I’ll sell whatever you want in renminbi.” So, now China can turn to Indonesia and say, “Hey, Indonesia, I love your coal. It’s so much better than that Russian crap. But I’m only going to buy your coal if it’s priced in renminbi.” So all this to say that, yes, we’re in a Fed tightening cycle, and yes, we’re in an energy crisis, which usually means that it triggers a shortage of dollars in the system... but at the same time, the world’s biggest commodity exporter, namely Russia, and the world’s biggest commodity importer, namely China, are moving their trade away from the US dollar. So, that potentially reduces the need for US dollars. So, this to me explains why perhaps emerging markets are not doing that badly amidst this unfolding US dollar liquidity squeeze. Ed D’Agostino: Ramifications for the dollar near term? Not going to be as strong as everyone thinks? Louis Gave: Well, it depends against who, right, because when we talk about the dollar, you got to talk about who’s on the other side. Ed D’Agostino: Sure. Louis Gave: So, if you look at the DXY... the DXY is really a euro proxy because it’s euro, a little bit of sterling, a little bit, again, it’s pretty hard. The only positive case you can make for the euro is everyone’s bearish. I mean, that’s it—everything else on the euro looks absolutely horrible. It looks horrible technically—the inflation is skyrocketing. You got an energy crisis, a political crisis upcoming, it’s like, why would you want to own this, right? So if you think, “US dollar/euro,” sure, you’re going to be US dollar. But against the yen... the yen is undervalued; the yen has tons of assets abroad. They’ve quietly started to do business with Russia again. They’re restoring their nuclear... to deal with the energy crisis. So against the yen, yeah, it’d be bullish yen. Against all the emerging market currencies or all the big ones— you know, your Indian rupees, your South African rands, your Canadian dollar... all the EMs. I’d be bullish those. Ed D’Agostino: Louis, I’m going to restrain myself. Now, I have about 14 more questions I’d like to ask you, but I think this is a good place to wrap up. I can’t tell you how much I enjoy these conversations and your worldview and your intellect. Thank you so much for sharing some of your time with us today. It’s great to see you. Louis Gave: Absolutely. My pleasure. Great to see you, Ed, always. Cheers. Ed D’Agostino: I hope you enjoyed the interview. If you did, please take a moment to drop a comment below and subscribe to our YouTube channel. I’m Ed D’Agostino; thanks for watching.