← Bankless
Bankless
Why Recessions Are Dead & How to Invest in The Debasement Era | Macro Investor Vincent Deluard
Loading summary
Transcript100 lines
- [00:00]
Vincent Delewarde
If you think of recession as a 2009 like event where we'll see, you know, sub 1% inflation, print, massive job losses, 10% apartment rate, I really don't think it's going to happen. Right. We had this kind of hyperactive policymaking where, where the Fed cuts just because inflation might slow below the 2% target in 12 months based on some, you know, number that, you know, they made up.
- [00:26]
Ryan Sean Adams
Welcome to Bankless where we explore the frontier of Internet money and Internet finance. Just me today. David's out, so I'm here to help you become more bankless. I came into this episode with I think one question. What is the ultimate portfolio for the debasement era? Aside from crypto, of course. Vincent Delewarde is a macro investor. He's the guest today. He advises the big big money, the sovereign wealth funds, the pension funds, on what to buy and how to weather these storms. I think he shares a similar thesis to many of us in crypto, but he comes to a different conclusion on what to buy. A few things. We discuss persistent inflation, the 15 year dominance of US capital markets and why he thinks that's peaked investing in China and India and why that's a good idea. Fiscal dominance, why recessions are dead, the meg7 concentration, AI bubbles, gold, all time highs. And of course we discuss crypto. Stay tuned to the end for his takes on the debasement resistant portfolio. Let's get to the episode but before we do, I want to thank the sponsors that made this possible.
- [01:32]
Sponsor/Advertisement Voice
Imagine a world where traditional finance meets the power of blockchain seamlessly. That's what Mantle is pioneering with Blockchain for Banking, a revolutionary new category at the intersection of TradFi and Web3. At the heart is UR, the world's first money app. Built fully on chain, it gives you a Swiss IBAN account blending fiat currencies like the Euro, the Swiss Franc, the United States Dollar or the Renminbi with crypto all in one place, enjoy real world usability and blockchain's trust and programmability transactions. Post directly to the blockchain. Compatible with Tradfi Rails and packed with integrated DEFI futures. UR transforms Mantle Network into the ultimate platform for on chain financial services unifying payments, trading and assets like the MI4. The Meath Protocol and functions FBTC backed by developer grants, ecosystem incentives and top distribution through the UR app, reward stations and Bybit launch pool for MNT holders. Every economic activity in UR drives value back to you embodying the entire stack and future growth of this super app ecosystem. Follow Mantle on X at Mantel Underscore Official for the latest updates on blockchain for banking. That's x.com/mantle underscore official Degen started as a tight knit community on Farcaster and organically grew into one of the top meme coins on base. What began as a simple idea tip anyone who joins the fund sparked an economy that turned into a movement. The community runs the show from the logo and the lore to funding and building ambitious ideas. Together, over 1 million degens now power each other with their generosity, creativity and ability to get things done. At the center is the Degen token. It rewards engagement, fuels tipping and drives the marketplace for builders and fans. That same energy gave rise to Degen Chain, a fast, low cost layer three for new projects. And now the Degen app. The easiest way to connect, earn and participate in decentralized social media. With a built in wallet and real token utility in Degen, the hat stays on. Join Degen and get on the app waitlist at www.degen.tips Bankless Nation.
- [03:24]
Ryan Sean Adams
Vincent Delaward is a macro strategist and he's an investor over at Stonex Group. Vincent, welcome to Bankless.
- [03:30]
Vincent Delewarde
Very happy to be here.
- [03:31]
Ryan Sean Adams
So Vincent, you know what we're trying to do over here is we're trying to make sense of the next 10 years in investing, in life in general. And I always enjoy picking the brains of somebody who is studied in macro because I feel like that the discipline of macro causes you to look at this cross section of all of the different areas from geopolitical to investing to monetary policy and macro guys always give me the most comprehensive, interesting picture of the world. So that's why you're invited on this episode. We're hopeful you can help us out with that.
- [04:09]
Vincent Delewarde
Oh, you just raised the bar. I mean, all I can say is I'm going to try because that's. Yeah, indeed, that is the job. Especially in my case because I work a lot with, with pension funds and you know, they're often derided as a slow money. Right. The exciting guy, the guys who make a lot of commissions are typically the, the pot shops, not, not, not the pension funds. But for the pension funds, yeah, it is questions such as, you know, in the next 10 years, what is the expected rate and return on equities? What is the expected correlation between stocks and bonds? And even a small, a small number. I mean that's the power of compounding, right? A very small change consistently apply over time leads you to very different outcomes. So and I think it's the right period, to be honest. I mean, investing is one of these things where it's almost the opposite of eyesight, right? Eyesight, you see better, what's closer. And the third is the harder it is to see, especially now given, you know, the, let's call it, unusual political situation we have in the U.S. it's, it's very hard day to day. I mean, what's going to happen to. I have no clue, you know, whatever, right. But like, if you give me five, 10 years, like, yeah, I think it gets clearer and clearer because these trends have been building on, I would argue, since early 2000s. I mean, much of the themes that people know me for on podcasts, things like secular inflation, things like the end of recession and things like fiscal dominance, really the seeds were planted, I would argue, even before COVID and they've been growing very steadily and.
- [05:42]
Ryan Sean Adams
Yeah, well, that's what we're hopeful to get is like the next five, 10 years and kind of what that outlook is and how we can basically prepare for that. I am curious though, since you talk to pension funds all the time, what's on the mind of a pension fund manager at this point in history? What keeps them up at night?
- [05:58]
Vincent Delewarde
There is the job answer and the marketing answer. And I'm going to solve the job answer because at the end of the day, that's the one that matters, keeps a pension fund manager, an insurance manager up at night is I don't want to get fired. That's the first thing. That is the, the supreme constraint on the investor. At the end of the day, decisions about capital market allocation and are made by people who don't want to get fired. The second part to this is I don't want to get in trouble with my regulator. And that supersedes any sort of, you know, kind of capital market concern. And that really informs their behavior. Like you, you, I think, you know, we kind of had this almost mechanistic view of, of markets as some sort of an impersonal machine, which was kind of the way economists model it. Right? Efficient market hypothesis, you know, it's, it's kind of this godlike machine and it, it's not, I mean, at the end of the day, decisions about capital markets are made by humans who have very human constraints. They have mortgages to pay, they have private school to send their kids to do. They have bills to pay and boss bosses to answer to and regulators. And these people may not be rational. The people themselves and the people they answer to may not be Very rational. So that's the first one on not turning to. I think what you are asking me about. I think that right now the biggest question, especially the ones I talk to, because I tend to speak mostly to pension funds in Latin America, Canada and Europe is really the question about the U.S. hmm. Most people who are running portfolios today are running portfolios because they have been riding that max seven US wave. You know, if you did anything else, no matter how good you were, and then trust me, I mean for 15 years before I was covering Europe and mostly European banks and you know, I was super happy to get, generally I got the best bank. I was only down 10% a year. You know, so no matter what you did before, you probably underperformed if you were not at least market weight US and, and if you are still have a drop today, it's because you've been overweight US and the big question now is what do I do with this?
- [08:12]
Ryan Sean Adams
Can we talk about that? Actually there's so many different directions I, I want to pull this conversation in, but maybe we'll, we'll, we'll start there. Which is just the last 10 to 15 years in America's capital markets have been fairly historic, actually. You tell me. So most of what we do on bankless is like we touch macro, but we also, we're laser focused on crypto. So most of the time we're looking at like crypto price charts, not necessarily how equities are doing, but as I understand the dominance of the S and P&US capital markets right now, maybe they're not all time historic, but they have certainly grown over the last 10 to 15 years. Can you provide some like data on that? Like, so what's the American capital markets dominance right now and what's been that story over the past 10 to 15 years? Why are all the pension funds, why is everybody allocated to the US and why did you call this overweight?
- [09:06]
Vincent Delewarde
So to start with numbers and let, let, let's, let's do annual, annual. So we cut off on basically when, when Trump enters the White House because I, I do believe this year is, is a break in that pattern. And I think that's the end of the cycle. But yeah, pretty much since 2008 if you went long, the MSCI US index, which is kind of like the S&P 500 if you want and sure, the same thing X US you would have made about 8% a year with almost no volatility. This is like line goes up chart perfect.
- [09:40]
Ryan Sean Adams
Wow. And so that means the U.S. basically outperformed all the other markets by 8% per year since 2008.
- [09:46]
Vincent Delewarde
Yeah. And they were like regional exceptions. For example, Chinese stocks had a weird spike in 2015 that was briefly reversed. They were at times Europe kind of tried to recover. Latam had a couple, three, four months bad bouts over from it. If you look at the world in general, it's just relentless outperformance of US assets which is unprecedented in size I think, but not necessarily in its occurrence. These type of cycles are actually, if you look at that, US versus X US short over long periods of time. It works almost clockwise by very long decades. I mean so if we start, let's start in the 70s, right. And the 70s is the opposite, right. It's a period when the dollar is being debased. We have stagflation in the US we end the decade with 16% 10 year yield. We started with these very high multiples on nifty 50s. We end up with the S and P traded at like 10 times earnings. @ the same time we are seeing massive outperformance by emerging markets. At the time it's really Europe and Japan especially emerging markets are not really a thing yet. I mean you still have a, you know, Soviet Union, Communist China. But yeah, we have massive appreciation. I mean the Swiss franc, especially the deutsche mark, the Japanese yen, big currency effect and also the rise of yeah European and Japanese multinationals. So 70s is, is kind of all about, all about emerging markets. Sorry, all about international markets. And then there is a period of shorter period of US outperformance in the early 80s that ends with a. I think that's going to be relevant for the future, the Plaza Accord when basically the dollar gets too strong and we have this inter. Coordinated intervention, reinforced intervention to lower the dollar and that that kick starts another 10 year cycle of outperformance by international assets that ends in the mid-90s, mid-90s, the US takes the baton again. We have the Netscape IPO, the Internet bubble and we get to get very similar development. So for about a decade and then that gives way coming out of 9 11, 2002 recession, emerging markets really take off. We have the fancy acronym at the time is the brics. China is going to buy everything. The Brazilian real famously trade for 1.5 to the dollar. You see Brazilians all over Miami. Euro goes to 1.6. Giselle, the Brazilian top model asked to be paid in Euro. I think that was the absolute top for the euro. And then yeah, since basically 2008 we've been in this US super cycle, which again, I think is exceptional in its regularity and in its size and in terms of market cap, I think we're closest. I don't maybe may have come down a little bit, but we're close to 70% of global market.
- [12:43]
Ryan Sean Adams
70%?
- [12:44]
Vincent Delewarde
Yeah.
- [12:45]
Ryan Sean Adams
Like all capital assets basically are 70% equities.
- [12:48]
Vincent Delewarde
Equities. If you add the value of all stock indices, you get 70 US now keep in mind, we are, you know, about what, 5% of global population? I, I would think, yeah. 300 million out of.
- [13:00]
Ryan Sean Adams
Yeah.
- [13:01]
Vincent Delewarde
And 20 of GDP at best. Probably around 10 or 15 when you measure purchasing power parity. So it's somewhat, you know.
- [13:11]
Ryan Sean Adams
It is odd. I think. So. So being like, I think many of our American listeners will have just like this is sort of the, you know, the air that they breathe and the water they swim in. So they're not noticing that we've been in an American capital market super cycle since 2008 or so. And maybe they're not looking internationally. It seems very much like the S and P has become kind of the benchmark for returns in general. But like, why should that be the case? Well, it's because of this American capital markets super cycle. Why did this happen? Because you started the date for starting this super cycle in 2008, which of course that was a marquee year. It seemed at that time that, that America's financial infrastructure was crumbling, that the banks were failing, that it was the end of times. So what explains the past 15 years that we've had and the incredible like performance?
- [14:10]
Vincent Delewarde
The start date, it could even be two. I mean, so the reason why I picked 2008, because I looked at the outperformance and remember when you have a major risk off asset, you know, when the US catches a cold, the Western world catches up pneumonia. So the US actually outperformed during the subprime crisis, even though the US was the cause of the crisis. But I think this is more kind of a beta effect like that. If I were to pick a real date, I would probably start around 2010, 2011.
- [14:38]
Ryan Sean Adams
Okay.
- [14:39]
Vincent Delewarde
This is really where we saw the, the. So we had the Chinese stimulus going out of, of 2003. It pulled off the global economy in a recession. Commodity prices you know, spiked again into 2010, 2011. And then that was kind of that prior cycle, the cycle of EM commodity, China driven, I think peaks in 2010. Now what happens in the US over the same time, I would really break it down to three main macro factors and then maybe a market factor that we can talk about later. On the macro side it's really this invention of the iPhone in 2007 and the rise of these kind of what will eventually become the max 7 US dominated app based technology growth sector that really has, with the possible exception of China, that has no equivalent. And that's I think going back to this conversation about pension funds who are now trying to diversify out of the US that's still the major pain point is they want to get out of the US because they don't like what they see with Trump, they don't like what they see with the debt. But like they can't let go of Microsoft, Apple, you know, it's the YouTube songs, can't live with you, can't live without you.
- [15:57]
Ryan Sean Adams
Because there's nothing else like it.
- [15:58]
Vincent Delewarde
There's nothing else like you look at Europe like that, the best thing you got is SRP, which is kind of a boring German, you know, B2B cheapo version of Oracle. That's it, that's, that's our tech sector is Oracle.
- [16:11]
Ryan Sean Adams
But there's China.
- [16:12]
Vincent Delewarde
Yeah, but China, China is kind of its own ecosystem bubble. I mean I, I don't think it's, I think, I really think investors have exposure to it. But the consensus of course price create narrative. Right? So sure because China out of perform so long everybody a year ago everybody's like China is an investable blah blah and now but, but yeah, China is the only exception. But you go to, you go to Latam, you know there's, there's one, one company Mercado Libre and it's you know, listen to you. I mean yeah, same you go to, to Canada. I mean Canada used to have, you know there was Research in Motion and Nortel but all these things are gone. You know Europe we used to have like Nokia and Siemens but so. Okay, so let me go back to your question. So first is iPhone and everything that follows. The second is Shell. You know we went from secular decline in US conventional product or production probably around you know 4,4 million barrel a day where we were a major net energy importer. So when we net energy importer that means we're sending dollars abroad. So all else equal that, you know that, that, that reduces the value of the dollar. Right. I mean you have to, to pay to, to give money to the Saudis, the Russians and so forth and suddenly US becomes the world largest energy producer. And if you look at the entire North American continent, you can throw Canada in there and you add nat Gas. We are an energy Exporter, I mean a huge swing. If you look at the current account balance of the US I mean half of the trade deficit was energy and that, that fits into a surplus. I mean, wow, this is really a historical. And then one of the ancillary effect of the shale revolution has been a surge in the production of NAT gas. And NAT gas always a global market, right. I mean there's some tiny variations between the price of Brent and the price you'll get out of Texas or Dubai. But you know it's within dollars, right. It flows, you can send it. NAT Gas on the other hand is kind of hard to explore. You got to liquefy it, whatever. So it's a regional markets because we are, we are finding so much shale oil as a byproduct. We have too much gas that we can use it that we can't export. That causes energy costs to fall in the US especially relative to Europe. My, my good friend we gave has this saying which I love to quote. Economic activities, energy transformed. And suddenly once your cost of energy drops, you know that of your competitor. Yeah. Good things happen. And the third one on the macro side has been, I would argue a willingness and an ability to pursue much more aggressive policies than the rest of the world. When Europe went through fiscal consolidation. If you compare Germany to the U.S. we've added close to 50% of GDP over the past 10 years in deficits when the German were basically flat. So we were willing to spend more money. And you know, Canadian growth works like, I mean the government runs a big deficit, that's surplus for the private sector that goes into corporate profits. And these were the, I would, I would think the fundamental factors. Now turning to market factors, I would suggest two. One is the one that you went over with a great episode with Mike Green is the unique structure of the US stock market where effectively the stock market is in charge of the pension system, which is a very odd idea. Right. I mean if you think back, you know, we've had old people since the beginning of time and usually the way we deal with the people's, you know, when people get old, they're less able to, to take care of their needs is the young generation that takes care of them either directly in the household or you know, the government taxes the young people to give money to the old people. Somehow in the 80s 90s we did that switch in the US moving from public funded defined benefit to defined contribution is going to be okay. Just give the money to the stock market, wait 40 years, put it into an index fund and you'll be fine. So the stock market becomes the vehicle for which we do generational transfers. And once you set that up, you create massive demand for equities. I mean typically the advice four people is what you should have about what, 10% of our income in, in, in the 401k with, with a match by your, by your company. So that's, yeah, that's about 10% of all income. And most of that goes to stocks. Like if you're even I, you know, I'm now unfortunately middle aged. If I go by the, the target date fund that Vanguard recommends is going to be like 85% stocks. So we're putting 1% of our GDP into our stock market every month. And that increasingly happens in a systematic valuation agnostic, index fund driven way, which I'm not going to repeat the argument. Mike Reed makes this case better than anyone else, but it does have an impact on valuations. Even if you chose to choose to ignore his point on the mechanism. Passive. Let's forget that just the fact that we put 1% of GDP every month into the stock market is something that other countries don't do. So I think that's one reason why US valuations, the gap in valuation between us has grown and then the, the, the last market reason for this would be a change in the nature of the financial surplus of the US So we keep talking about the current account deficit, right? That's what Trump, you know, or the trade deficit. These are ripping a soft plan. Uh, it's important to understand that, you know, a balance of payment is a mirror. There is the, the, the reality, if you will, or one side of the mirror, let's just say one side of the mirror is, is the, the flows in goods and services, the trade side, and then it needs to be offset by capital, right? I mean if I, if you buy more from, if I buy more from you than I sell to you to the rest of the world, somehow I must be financing that. So either I'm borrowing the money from the rest of the world and I'm selling my house, central bank is accumulating the reserve somewhere, but at some point capital has to flow the other way because again we're paying goods, right? So if the US has a deficit on the trade side, it has a surplus on the capital side. We're importing capital from the rest of the world. And I would say for Most of the 2000s, when we had this international outperformance, we still had a big deficit. Right? The US has had a deficit since 1974 on the trade side. So we are still importing capital from the rest of the world. And it was very large. We talked about the twin deficits. That was a big thing in the first Bush terms. That was happening mostly on the fixed income side. It was the capital that China was accumulated or Saudi Arabia or Russia would end up at, at the Chinese central bank quite often or at the monetary authority of Singapore or the, the kingdom holdings in Saudi Arabia and that would go into U.S. treasuries. This was one of the reason why yields fell so much, especially the long end, is because we had this relentless bid as the rest of the world had this massive capital surplus. So sorry, trade surplus, capital deficit with the US it came back into the treasury market. And then what happened in 2014 was Russia invaded Crimea. We put sanctions on Russia, seized a couple trillions in their assets and froze them. And there was this complete break in the pattern of, okay, we're no longer going to reinvest. Because the reason they were investing in U.S. treasuries because they thought it was safe. They thought, you know, that's the only reason why you have reserves is because you, it's in the name, right? Reserve is in case you need them at an hour of need. Well, if it can be just taken away from you, that reserve is really no good. But at the same time, the US Trade deficits capital surplus remained as big. So the money kept coming. It just went into another asset. And that's where my story about the pension firm comes in. The US Equity market became the recipient of, of the, basically the US trade deficit, which is our capital surplus. And we benefited from massive purchases from foreigners that really no other market experienced like that. Like I, you know, when, whenever I visit a pension fund in Canada, in Europe and in Australia, whatever, I spend 90% of the conversation about what goes on in the U.S. now when I go to a U.S. pension fund, I don't talk about what's going on in Chile, or there may be one question about Europe making fun of them for being lazy and the French always being on strike, but that's about it.
- [25:14]
Ryan Sean Adams
I mean, no wonder Americans kind of think that they're at their center of the universe, right? The center of the world.
- [25:20]
Vincent Delewarde
Yeah, because I mean, I'm American now, so we are the center of the world. We really are.
- [25:24]
Ryan Sean Adams
Right, okay, so the reasons you gave that was like very thorough and I've never heard it laid out like this. But the reason for American capital markets over performance over the last 15 years, the reason pension funds had to have assets, had to be overallocated in the US was because of tech, tech industry like no other. Natural gas, a new energy. We basically discovered fracking and that came online very quickly. And then coordinated government spending that in combination with our stock market basically became our savings account and the US pension fund basically. And capital account surpluses led to the continuation of Treasuries being used as a world reserve asset and propped up Treasuries as a store of value. I gotta imagine strengthened the dollar on the back of that. And that accounts for the last 15 years. What's very interesting is when you were talking about the stock market, we had Michael Green on recently and he was talking about the stock market being basically how Americans save their money. It's not just Americans though. If you're telling me 70% of world equity capital is in the U.S. it's really the world's savings account, isn't it? It's the world's pension account at some level. And what's very interesting about this too is Treasuries are an American product. They're US Bonds. Aren't they the US government debt, essentially? Well, they are a world store of value. They're a world reserve asset. The dollar itself as a payment tool is a world currency. This has played out, I guess this has happened over many decades. Wasn't just the last 15 years. But it's incredible how it's strengthened over the past 15 years. At a time where I don't know that most Americans felt like America over the last 15 years like was winning. I don't know if you'd turn to most Americans and they'd feel like, oh yeah, we won the last decade. I think the average American doesn't really feel that way actually. And yet they have won the last decade. Now are you starting to see some signs of that trend reversing? You said this oscillates. Right. You Talked about the 1970s being very different than the 1990s being very different than the 2010s. So what is starting to change on this story?
- [27:36]
Vincent Delewarde
Yeah, these are all really interesting observation. I'll just gonna second what you said about the gap between perception and reality. I, you know, it's kind of one of the story where the grass is always greener and you don't feel it when you're winning, but you do feel it when you're, when you're losing. And I mean, as someone who moved from Europe to the U.S. i mean this has been really the single best decision of my life was to move to the US in 2006. And I remember in 2006 this was kind of peak Europe moment. This was not far from that Giselle branch on top of the Euro. Yeah, I mean I, I felt it. You know, I, so I, I went to, to for grad school in New York and yeah, of course it was expensive but it was manageable, you know and my, my parents are where, where teachers, you know, and it's, I mean the tuition was paid for but you know, it was manageable, which really would not be the case today. You, you can see it for example in this, that, that, that was a popular hashtag on Twitter was a Euro poor. You got all these Americans kind of making fun of the Spaniards and for being poor, you even see these revolts right in Barcelona where the local population is trying to break down Airbnb so they can't stand all these annoying bratty American tourists going on instant treating their, treating our millennial culture as their, the background for their Instagram accounts. Yeah. So yeah, if you feel the Americans feel that they haven't been winning, try, try having the same experience in, in Italy, in Germany or even worse in Colombia or, or Brazil where really, you know, the, the pain has been real.
- [29:30]
Ryan Sean Adams
I mean there's, there's almost, there's almost. Vincent, like I'm kind of curious just like emotionally and psychologically, if you, if 2006 rather for like peak Europe, does this feel a little bit like peak America? I don't want to say it but like you know, 70% of all capital markets, America's in a pretty good position. What do you go to 80% from there? Or are you more likely to go down to 60 or 50%? To what extent does this feel like peak America? And like what do you think the pendulum is going to start to shift back? And if so, how does that happen?
- [30:01]
Vincent Delewarde
Yeah, I'm going to give you another stat that I find fascinating is so the, the world largest investor is the Norwegian pension fund. So Norway is a, you know, fairly small country, fairly prosperous and they have a lot of ore in the North Sea. And in order to prevent what's called the Dutch disease, which is a tendency for countries who are blessed with natural resource to see very rapidly rising currencies and as a result lose, lose competitiveness and manufacturing output. What they do is they take the money they get from the royalty they get from the oil fields and then they invested for a government run scheme that has grown. They all was discovered in three, took off in the 50s, 60s. So it's, it's almost 70 years now of surpluses and yeah, it's the world largest investor at this point. If you add up their holding of the Max 7. Just seven stocks, right? Seven stocks. It's more than 100% on Norwegian GDP. Wow.
- [31:02]
Ryan Sean Adams
In their, their sovereign wealth fund, Norway's sovereign wealth fund has over 100% of their GDP just in the MAG7 stocks.
- [31:10]
Vincent Delewarde
I, I remember reading the headlines, you know, when we're doing the whole Greenland stuff, you know, which was really, that was a lot of fun. I don't know, we don't talk so much about Greenland these days. I, I kind of miss this, you know, cherish 51st day taking over the Panama Canal. I mean that it looks quaint now. It's like, oh my God. So you guys have you know, 100% of your GDP in seven stock of a country that's clearly talking about invading an island off your coast. I mean, wow, Mind blowing. You know. Another one for that would be the Swiss Central Bank. For somewhat similar reason the Swiss, the Swiss franc tend to appreciate because they're basically the only well run country in Europe. And Switzerland see it as a pretty big industrial base. So the central bank tries to offset that. And the way you, you prevent your currency from rising is by buying other countries assets which at this point includes pretty much everything. So they buy, you know, they buy stocks, they buy the Max 7. If you, if you go on the Bloomberg and you look at the biggest holders of, of, of the max seven stocks, you know you, you're going to see of course your BlackRock, your Vanguard and, and all pretty much for every US stock you're going to see the, the Swiss Central Bank. I'm like, why do you need hundreds of billions of dollars in US tech stocks? I mean your job is to clear the payments between Swiss private banks and maintain stable prices in Switzerland. What part of the mandate requires you to own hundreds of billions of US stocks? So long story short, all the nanodos, yes, they do tell me that it's, we had the point where it's ridiculous. I do believe that the peak US was early January when we had kind of the Rose Garden ceremony and we had this bout of triumphalism about the US it was before we had a tariff, right? Or Trump is gonna unleash the American beast. And all the CEOs were lined up and we had that last bout of foreign inflows. I do think that was the peak. And then there was the cold shower of the tariff announcements when the world realized that oh no, Trump is Not this green market benign leader, but he's kind of an aggressive nationalistic leader. And then I think a lot of the people think that bout of selling is over basically because the stock market has rallied, right? I mean we had a bear market in March, April and now we had an all time high. So the idea, yeah, okay, the foreigners did their thing, you know, they sold. But now we saw the tariffs, you know, we kind of like at a awkward truce, right? We got these, these deals with Europe and Japan. It's behind us. It's not behind us. I mean people who, who say that have never talked to a pension fund. Like pension funds, I go back to my earlier conversation are the slowest movie, slowest money on earth. And again, before they make any decision, they need to clear it with one, will I get fired if I do that? And two, what One, regulators say they, they do not like the, the stock market decline. April was basically a matter of like five days. Like no pension form changes, their asset delegation in five days. Okay. Especially in Europe, we're in vacation half of the year for example, right. So you know, you need the board, you need to talk to the politician, you need to talk to the regulator, you need to create it. So that wave of selling by foreigners I think is mostly 99% ahead of us. Maybe what we've seen has been on the currency side, I think the reaction because on the currency side these foreign managers have more leeway than the allocation. The decision how much do we hedge versus not hedge. I think because the dollar was so strong and the dollar was also nicely negatively correlated to stock prices. So typically when stock prices go down, the dollar would go up against the, the euro and other currencies. So if you're a foreign manager it was great, right? Cause you at that, that was like having a put option if you want. But now we saw the dollar fall after the tariff. So the not only the US underperformed but the do. So from the perspective of foreign managers it was, is a double hammer. I think what they started doing is started hedging the currency. That was the first thing. And that's why now it's kind of a different correlation between dollar and risk assets because foreigners are more careful when it comes to the dollar. But going back to this idea, can't live with you, can't live without you. They did not sell their Max 7.
- [35:36]
Ryan Sean Adams
I mean I was going to ask about that. So I mean some of the, what you're saying does seem to make sense with some of the price action we've Seen over the past since the beginning of this year let's say where we see gold up which represents some hedging of, you know, maybe some currency. Right. We also see the dollar down which is somewhat interesting. And yet we do see US equities all time highs and pretty much being propelled by AI. I mean that's it. The Meg 7 is all about AI now. It's all about reinvesting all of their retained earnings in large data centers and scaling up to the next, you know, super intelligence that's going to change the world. It feels like that may have kept the energy in MEG 7. As you said, they can't live without the MEG 7 because where else do you get AI, this transformational technology? It seems at some level that the entire kind of U.S. economy at this point in time rests in the hands of AI which means there's a pretty. I'm not going to say it's an existential question but a very important question for investors is is this AI thing real or not? I mean are we going to get like a productivity S curve or is this sort of, you know, is it 1999 and we're kind of blowing up a bubble? Because if that explodes then all of the forces you've just been talking about Vincent of foreign, large institutional pension funds will start to pull money out if the mag 7 kind of disappears and if that story becomes less rosy let's say. What's your take on this? Yeah, I don't know to what extent technology and like analyzing AI is a core factor as you think about macro but I know technology's gotta be a piece of how you analyze the world.
- [37:24]
Vincent Delewarde
Well, I think there's a time to that answer, right? I mean the answer could be it's both a bubble and real. It's a short term I would guess there is certainly an aspect of short term bubble the on growth. Yeah, I think don't have the exact number but it was something insane basically that Capex from the hyperscaler accounted for about a third of GDP growth last year. I mean clearly this is not sustainable, right? You can have five companies and that built up is going to slow. So there is a one time very reminiscent of prior cycles. If you think about the, the canal boom and then the railway boom and then the TMT boom where when you lay out this infrastructure it gives a kind of a one time boost to GDP and then you know, after that big span you have an air pocket so. Very true. Over the long term impact of productivity I tend to be quite optimistic on growth, I think we are in an era of structurally higher growth. A lot of that is nominal because I believe that people kind of inflation target is drifting higher. But, but yeah, real growth has been quite good. I mean since, for the past, since COVID we've averaged about 3% real GP growth which is significantly better than the prior decade. I mean again in the 90s, we think about this long cycle where the 90s, that was kind of higher trend growth, lower trend growth in the, in the 2010s I think maybe we've reset to high trend growth and AI certainly will be part of the story. But again, typically the stock market is a discounting mechanism. Right? So I mean in 1999 people who are really smart could see that E Commerce was going to take over the world and that Amazon would be a trillion dollar company and eventually they were right. Right. Except the stock price went down by 85% along the way.
- [39:24]
Ryan Sean Adams
So. Vincent, technology is often a deflationary force, but you see more inflationary forces ahead. Called yourself an inflationista. You're self proclaimed, I believe. And I guess I take that to mean someone who believes in like persistent unrelenting inflation of the dollar, maybe some other fiats too. Talk about this. Why, why are you an inflationista?
- [39:46]
Vincent Delewarde
Because I'm, I love history and you know, show me the, the, the, the currency that has ended in a massive bout of deflation.
- [40:02]
Ryan Sean Adams
Can you talk about maybe what you mean by inflation? So there's different definitions of inflation, let's say and you know, in the crypto world we have a number of them. When you say you're an inflationista, do you mean, are you talking about cpi? Are you talking about, you know, real returns going negative, your fed funds minus cpi? Are you talking about asset price inflation? Is it all of the above? Let's get precise on what you mean by inflation.
- [40:27]
Vincent Delewarde
I'm gonna disappoint you, but I will not be. I mean we can go okay, if we want it to be precise, if we want a numerical forecast. I'm gonna go with the fact that the 2% target is dead, as evidenced by the fact that it's been what, since February of 2021, the last 2% reading. So if you kind of miss the target for five years, kind of like, oh yeah, I'm going to quit drinking tomorrow type of situation. We see the Fed cutting rates not once but twice now with core CPI at 3%. That tells you that it happened already last summer. Remember when we had a little Sam rule yen rally panic and The Fed cut by 50bps for no good reason. Core CPI is at 3% now. Core CPI is still at 3%, maybe even more. We'll see what happens next week. And the Fed, especially after today's job number is going to cut in September.
- [41:27]
Ryan Sean Adams
So you're pretty confident of this given Powell's recent speech?
- [41:30]
Vincent Delewarde
I don't necessarily think they're going to cut as much as the market thinks because I think inflation is going to surprise to the upside and I think there'll still be a tendency, a temptation for Powell to resist a bit more. What has it got to lose now? But yeah, and that tells you that 3% on core is the floor. So I don't know what the target is, but I can tell you what the floor is. It's, it's 3%. So that, that was kind of the, the nominal answer. And then in general about inflation, I, I would, I would argue that one problem with my, I mean any discipline really, but especially, I mean what I see kind of in economists is, is you know, you can always break that you can go so deep into something that you end up, you know, kind of obsessing over the tree and kind of miss the forest and on the cpi. I mean I've had this conversation for, you know, six years now and I'll meet someone and bring, and someone who's usually very, very smart because it takes a lot of intelligence to understand how that CPR report is constructed and look at the lead lag relation between owners equivalent rent and the impurity prices and what's happening to you, Scar. And I mean, yeah, you can always break down in the same way you, if you listen to a symphony, you can always say, no, that's this note and then this note and then this note. Okay, yeah, a symphony is nothing but a collection of notes. Same thing. Inflation is a symphony. It's the air we breathe, it's the water we swim in. And yes, you're absolutely right to include asset price inflation into it. Inflation is not just the month of amount change in a somewhat arbitrary defined index called cpi. It is a broad mentality, a mindset that has to do with political arrangements, that has to do with the level of trust that we have with one another, that has to do with relation between generation, that has to do with geopolitics. And because I believe inflation is all these things, that's why I don't believe it's just, it was just a one time accident, right? There's this kind of view that the Fed would love like the transitory, transitory argument. Oh, just a one time adjustment of price level because you know, we closed down the economy and then we had some supply chain issues. But we know we're going back to the old world. No, the mindset has changed. We are now in a high inflation era. And then of course it happens in waves. Everything happens in waves. I mean if you look at that just the, the past, just with the recent past in the U.S. you know, the 70s, you, you had these, these free ascending waves. 1971 as we get off the gold standard. 1973, the first old shock and then the biggest wave, 1979, the revolution. If we go before, in, in the late 40s, there is inflation spike as we demobilize and we have to kind of retool the economy for peace. Then there is another inflationary wave after the Korean War and then there's another one late, late mid-50s. So it's always a wave like pattern. Yeah. Again I'm yet to see a one time inflation wave. So that's why I think it's going to come back because at the end of the day, the causes that led. If we go with a policy explanation, right. That inflation was caused by Covid. It was not Covid that caused cause inflation. It was our reaction to Covid. Right. I mean Covid was deflationary in China.
- [45:03]
Ryan Sean Adams
Policy.
- [45:04]
Vincent Delewarde
Policy. Exactly. Like there's, there's something in the air. Right. That's why I talk about the psychology of permanent stimulus. Something in the air that led. Oh my God. Here is. I mean I don't want to minimize it but it's. It was really a bad flu. At the end of the day I need to double my monetary base. I need to keep everyone locked up. I need to Sanchez like something happened and it's the same people like you know, who was, who was the president during COVID Trump, who was the head of the, of the, of the Fed Power Lagarde in Europe. Macron friends. I mean is the same people. So the cause and again the causes is what I call this inflationary mindset. They are still here.
- [45:48]
Ryan Sean Adams
Okay. So this psychology of permanent stimulus, this idea that inflation is going to be maybe 3 to 4% like that's the new normal. Is that a contrarian take in your circles, Vincent, among investors in, in the crypto world I asked this question because in the crypto world it's not a contrarian take at all. In fact it is. We're probably even more aggressive on where we think like fiat and you know, like dollars are kind of going than many in your circles. But like I guess I'm asking because do you think the market has priced these things in or are you still a prophet in the wilderness when you say things like this in the middle?
- [46:29]
Vincent Delewarde
I was a prophet in the wilderness definitely in 2020. 2021. At the time, the consensus in 2020 was that it was deflationary. I mean remember we had negative oil prices as saying that the 10 year yield I think went below 1% and we had close to 20 trillion in debt that was trading at negative yields. I mean the only way that these people would have made money other than a pure Ponzi financing and hoping that you know, they would be selling to someone else at a higher price would be if the price level would fall. I mean we had negative yields all the way to, I think it was almost 30 years in Switzerland. So there was like 30 year price. We had these Austrian, Austria issued 100 year bond, even Peru did so and the yields were absolutely low. I mean the US should have by all means done it. But anyway so that at the time was yeah, profit in the desert. Now of course it's gaining a lot more traction. But if we, I mean we can answer this numerically, right? I mean you can see what inflation expectation from. You have two tools that people unworthy trade for inflation. One is CPA swap which you know, basically you, you enter an agreement with a bank and I'll pay you X and you'll pay me whatever the CPI does. And that's probably, you know, if we look at long term inflation it's probably pricing 2.8 and then so a little bit above 2 but still, you know, I mean I would add, you know, at least still broadly consistent with a 2% target. And then the other tool is the break even which is a difference in yield between nominal Treasuries which will just pay a fixed rate coupon and tips which will pay a fixed coupon and then on top of that are adjusted by inflation. So that gives you, if you work out the math, you see the break even inflation now because of liquidity reasons and whatever it's, it's a bit less than, than what CPI swaps. Right. But it's also broad. It's been going up and I think it's by the way for investors who want, I think kind of a boring steady way to capitalize on this kind of higher drift of inflation and don't want the volatility that we see in crypto and gold having a position in breakevens is a very good way to do that. It's returned about 6% a year since 2020. It has positive carry and it's negatively correlated with stocks. So to me that's kind of like the new bond, these two to be long breakevens. But my point is the process is not done yet. I mean you certainly see more people talk about it now. We have, you know, obviously this war on the Fed's independence. I mean everything that the crazy, you know, crypto heads have been talking about is here. You know, we have 2 trillion deficit at full employment. We have a president that bullies the central bank. We have, you know, gold rallying by, you know, what, 35% so far this year. I mean it is here. What I still find stunning is that there is this kind of institutional inertia when it comes to the inflation target that it's like a fossil almost like. Or the townsville. We still have townsville even though they don't serve a purpose in the body. The 2% targets kind of somehow survives in long term bond pricing. So no, I don't think I am. I don't think it's consensus yet.
- [50:04]
Ryan Sean Adams
Not consensus yet. One thing maybe you can help me understand Vincent, is it sounds like the way some of these large pensions and sovereign wealth funds tend to think through, you know, if they believe inflation is going to be higher, they'll buy some of these break even type products, you know, and you said that returned like 6%. Why don't they just buy gold or why don't they just buy cryptocurrency or why don't they just buy equities in dollar terms or something like that? To what extent I guess are we seeing those assets increase because of the same underlying inflationista thesis. Sorry. That you're talking about, which is just like, oh, another way to do this is you just sell bonds and you buy capital assets like equities or hard assets like gold maybe for central banks and like cryptocurrencies, things with fixed supplies, even commodities fits in there. Is that all part of the same trade? Is this the reason essentially we're seeing cryptocurrency prices at all time high and gold at all time highs at the same thesis?
- [51:11]
Vincent Delewarde
Yeah, absolutely. I'm going to use the. Yeah, the term of a good friend of mine, Warren Pies. A 314 research recently used the term the debasement mindset, which I like. Basically we moved from capital preservation mindset where after the 08 the whole idea was like how do I not lose money? What's the driving psychological principle? And now you can almost say it's formal. It's like how do I preserve my purchasing power? And yeah, there are many different answers to that. I would argue that there is a clear loser in there that that loser is long term government bonds.
- [51:55]
Ryan Sean Adams
So who's buying them? This is one thing I haven't been able to figure out which is like why is there still appetite for long duration government bonds? Who's buying this stuff? Is it still people who believe in the kind of the 60:40 type strategy?
- [52:08]
Vincent Delewarde
Yeah, there's a lot of that index fund. Go back to my green, you know, I mean Barclays AG, it's, you're just.
- [52:16]
Ryan Sean Adams
Saying it's passive investors blindly dollar cost averaging their 401ks inside.
- [52:20]
Vincent Delewarde
Yeah, but that's a lot. Like I said, we put 1% of your GDP in there and then you have a lot of regulatory demand. And again, going back to my earlier point on not getting fired and pleasing the regulator, usually buying government bonds is a good way to achieve both. Right? Few people get fired. I mean I guess the, the management of Silicon Valley bank lost their job but until then no one had lost a job for buying a U.S. treasury. And then yeah, it's the, the regulatory incentives. I mean if, if the government tells you there is no capital charge. Sure. And then they could still do that, right? I mean if that's why we talk about all these, these. I don't know, it's maybe esoteric for the, the crypto crowd, but the SLR and standing repo for srf, all these regulation on bank capital and a big debate right now is basically trick banks into providing that bid for long term treasuries. And if the regulator tells them hey, you don't have to put any capital on it, you don't have to mark them to market, as long as the yield is above zero, they'll make money, doesn't matter. So you can always engineer demand for long term treasuries. I mean that's kind of the financial repression route which is typically something that happens when you have debt crisis. It's part of the playbook and you can create that demand, even that.
- [53:41]
Ryan Sean Adams
Is that a form of soft capital control, would you say?
- [53:44]
Vincent Delewarde
Yeah, it's part of the financial repression toolbook. It's basically you direct savings ultimately that banks are playing with people's deposits and you force them into an asset that they would otherwise not buy based on its own merit by tilting the scale in its favor.
- [54:02]
Sponsor/Advertisement Voice
In the wild west of defi, stability and innovation are everything. Which is why you should Check out Frax Finance, the protocol revolutionizing stablecoins, defi and rollups. The core of FRAX finance is Frax USD, which is backed by BlackRock's Institutional Biddle Fund. Frax designed Frax USD for best in class yields across Defi t bills and carry trade returns all in one. Just head to frax.com, then stake it to earn some of the best yields in DeFi. Want even more? Bridge your Frax USD over to the fractal layer 2 for the same yield plus fractal points and explore fractals diverse layer 2 ecosystem with protocols like Curve Convex and more, all rewarding early adopters. FRAX isn't just a protocol, it's a digital nation powered by the FXS token and governed by its global community. Acquire FXS through frax.com or your Go to Dex, stake it and help shape Frax Nation's future. Ready to join the forefront of of DeFi? Visit frax.com now to start earning with Frax USD and staked Frax USD and for Bankless listeners, you can use frax.comrbankless when bridging to Fraxel for exclusive Fraxel perks and boosted rewards. Ethereum's layer 2 universe is exploding with choices. But if you're looking for the best place to park and move your tokens, make your Next stop Unichain first. Liquidity Unichain hosts the most liquid Uniswap V4 deployment on any layer 2, giving you deeper pool for flagship pairs like ETH USDC. More liquidity means better prices, less slippage and smoother swaps. Exactly what traders crave. The numbers back it up. Uni chain leads all layer twos in total value locked for Uniswap V4. And it's not just deep, it's fast and fully transparent purpose built to be the home base for Defi and cross chain liquidity. When it comes to costs, Uni Chain is a no brainer. Transaction fees come in about 95% cheaper than Ethereum Mainnet, slashing the price of creating or accessing liquidity. Want to stay in the loop on unichain? Visit unichain.org or follow unichain on X for all the updates.
- [55:49]
Ryan Sean Adams
Let's talk about this maybe new regime that we're in. I've heard you and others call it a fiscal dominance regime and a fiscal dominance era. So is fiscal dominance the root cause of this inflation? If not that, what is? And can you give us a working definition of fiscal dominance and what this era actually Means what I think is.
- [56:11]
Vincent Delewarde
The fundamental paradox of the current framework and I would say the fundamental lie of central bank independence. It's the view that started after the great inflation of the 70s, that, okay, we're going to put these completely separate central banks and there will be this kind of PhD in the ivory tower with a single or two mandates. But you really just, you know, keep in Europe when you have one price stability and it'll be completely separate from politicians because we can't trust politicians and they always do stupid things. And I, I think that was, that was never true. I mean, that was never.
- [56:54]
Ryan Sean Adams
But you're saying that, that, that independence, that was a mythology that came out of the 90s.
- [56:58]
Vincent Delewarde
Yeah, I mean, historically, historically, the role of the. It's a very new idea. Okay. Like before the gold standard used to do that, right. They achieve that, that kind of disciplining factor. But the role of the central bank in any country has always been to finance the government. I know. I mean, go back, go back to Jesus with the coin, you know, showing, you know, whose face do you see on the coin, right? It's Caesar's. Give back to Caesar's. What is Caesar's? That's the function treasury, right? It's to finance the government and it always be. And then you cannot separate. I think that's the key insight from MMT monetary theory is that you cannot separate fiscal from monetary. It's something that only works in economic textbook. And you need to invent an economic history that never happened, right, where money is somehow like exogenous and then it's not like that. It's never been like that. So that, to me, the system was always going to break because it's built, it's built on a lie. And the idea like, you know, that there can only be one king, they can only be one sovereign at the end of the day, like if you have two things that are, you know, supposedly sovereign at one point, they will clash. And the question is, someone is going to win the clash. Either the monetary dominance, the central bank is going to force the budget. So that's typically what we see in emerging markets because they can't really print currency, or the IMF is there. It's like, well, interest rates has gone up, you're paying more on servicing your debt now, so you're going to have to cut Social Security immediately spending. I don't know how you do it, but an increase in interest rate will reduce the budget. So at the end of the day, fiscal policy is subordinate to the central bank. The central bank, by its decision, defines what fiscal policy is going to be. If the central bank hydrates, it forces a tightening of fiscal policy. That would be the model around which the ECB was created. Because we had this 3% deficit target, let's assume that people actually did it and it worked as the treaty intended. So we live in the mythical EU where everybody abides by the 3% target. Oh, the ECB has raised rates. We used to pay 2% on debt, you know, now it's, it's 3%. We have about 100% debt to GDP. So 1% of GDP goes to servicing the debt. We have to cut all of the spending. So monetary dominance there now, fiscal dominance is the opposite. It's what we've seen in the US like, we've seen that the central bank has been raising rate right from 0 to 5.25. And what happened at the same time, spending has increased even faster. The rest of you know, we haven't cut Social Security, we've increased the Pentagon to trillion. Trillion dollar. Government spending has been growing by government spending. X interest has been growing by 8,9% which eventually leads to the problem of the government then calling the central banker, hey, you know that, you know, extra $500 billion a year I pay on interest. I would very much like not to pay it. Which is what Trump and Bessant are doing. And we use all sorts of tricks before we get there, like issuing at the front end like Yellen used to do it. But it's still the same idea. Like the government tries to constrain monetary policy in an age of fiscal dominance, when in monetary dominance, it's the central bank that constrains fiscal policy.
- [60:35]
Ryan Sean Adams
Is this your interpretation, Vincent, of all the kind of back and forth between, you know, Trump and, and Powell, basically it's like one, one thing that, you know, even his critics, maybe, maybe, maybe not. But some of his critics might appreciate about Trump is he just, he says what he's doing pretty explicitly. And whereas in previous eras it seems like there was kind of a, I don't know, a mask this, this idea that. No, like federal. Yeah, Fed independence is a thing. And the President, the executive branch, Congress doesn't interfere. We're a separate entity entirely. Trump just comes out with it and says like insulting things to Powell, you know, too late, Powell, you know, you should be cutting rates already. Like you're an idiot, you're incompetent. I'm about, I'm trying to hire your replacement right now. I've got job applications all of These things, that's essentially what fiscal dominance looks like. That's what he's doing. He's setting rates as a president. I mean, this is what's going on. A lot of people pretend that's not what's happening. But you're saying this is actually what's happening.
- [61:42]
Vincent Delewarde
Oh, yeah. And like you said, I mean, Trump says it. I mean, he literally says it. I pay too much on the debt and every basis point, that 25 basis point cost us x hundred billions of dollars. And I, you know, he kind of has this weird argument where he thinks that the more powerful the country, the lower the rate, or so he's like, look at the Swiss, right? They pay zero, so we should be below that, like, almost. I mean, there are some weird things on Trump's economic theories. There are parts like, you know, he same on the trade side where it's very mercantilist. I mean, there are times where his arguments even from, for pure, my country is doing so well, I should have low rates. I mean, every economist, you know, ears are bleeding when they hear that. It's like, no, but, but yeah, he, at the end of the day, it's a co. Or, yeah, it's a fiscal dominance argument. And he makes it in the open.
- [62:31]
Ryan Sean Adams
Even with his back and forth. Vincent, there's this idea that, oh, you know, Powell's resisting him. Powell is kind of bravely resisting Trump. Trump is trying to yet destroy yet another institution, and we have to keep the Fed independent. What's sort of interesting is it feels like in Powell's last speech, there was, I don't know, some capitulation, something. He is ultimately doing it.
- [62:53]
Vincent Delewarde
It's a shocking thing even, like, even for me, who kind of expected it all along, is the ease at which people cave in to brute force. And even, you know, like, the Fed was at least perceived to be this, you know, kind of bastion of independence and intellectual honesty and having, you know, academics and man, it's like people who are really arguing the exact opposite of what they said, you know, three months ago. It's really shocking. And, you know, of course, they're all jockeying before the next position. I mean, you have hawks that are now saying, we should cut, we should cut. Yeah, that's how power works. I mean, people, people respect. To respect power, they bend the knee in front of power. And that Trump, that's what Trump is really good at, in almost like a clownish, brutish way, like a, like a mafia don type of thing. But he, he, he gets it done now I mean, we can decry it. And there's, there's a part of me, though, that, that feels worried about this. And I think most people do to some extent. A lot of people do to some extent. But on that specific topic of, of monetary policy, I mean, I, I think it's going to be, I think it's short, it's probably bad short term, but over the long term, I think it's a necessary clarification. The old regime that was based on this lie, this myth, oh, the central bank does it, but we cannot do anything about it. And somehow money is this complicated thing that you should not just don't worry about it, trust me, I'm a doctor type of argument. It was wrong and it should be part of the debate. The inflation, for example, that 2% target, did you vote for the 2% target? Were you ever asked? No. Where does it come from? Some press conference in New Zealand 30 years ago where literally an economist or minister of finance was interviewed in New Zealand, had some issue, I think, with milk prices, whatever, inflation was running hot. What's the right level of inflation? The guy kind of stumbled, there's only 2% think more than that. And then they try to rationalize it with saying, well, it's because of the lower zero, lower boundary and all. I mean, first of all, what price level is optimal at all times? I mean, my answer about the inflation targets probably depends. There are times when 2% is too high, there are times when 2% is too low. And also it has distributional consequences. I mean, inflating away your debt. We may like it or not like it, but it's the way how it's always worked. It's one way we can walk around the debt crisis. And by putting that Corsair, by saying this God given number is the truth, we are restricting our degrees of freedom. It should be part of the conversation. I mean, that's, yeah, do we want more inflation? Do we want to pay less pensions? How do we deal with these debt crises that we're having? Every option should be on the table and the option that is taken should be the object of a wide debate. So that's the part to me that I find positive from this kind of trombescent takeover of the Fed is that it will make the truth emerge.
- [66:24]
Ryan Sean Adams
So this has always been kind of the argument, like you, many people, you know, crypto have been sort of early to this and they, they saw that fiscal and monetary were kind of the same thing. And the very simple story was all of this would lead to increased fiat debasement as all fiats debase throughout history and have and you know, assets that have previously held their position as reserve currency status, they're always destined to die. What's their shelf Life? You know, 60 to 70 years, something like that. And so that's all inevitable and that is what is happening and going to happen to fiats and the dollar. I mean is it, is it really that simple? Is that basically what's playing out? I mean have the, have the crypto people and maybe even the gold bugs, have they been right about this? And it's just going to play out very matter of factly. Fiat will continue to debase, inflation will continue to run hot, the debt will be delevered through this process. We'll have, I don't know, years of this, maybe a decade of this. Things will reset. But in the meantime, all of the monetary, non sovereign monetary stores of value, they will increase in relative price. Is that how this plays out?
- [67:34]
Vincent Delewarde
I mean really big picture. I would agree with that. Now there will be ebbs and flow, there will be cycles, there will be times when nothing moves in a straight line. There will be different winners and losers at different times. For example, now I would argue stocks should be part of that debasement portfolio. Like in the 70s they would have been pretty bad choice. And I think that's one of the common mistakes I think of the kind of crypto gold bug crowd has been.
- [68:05]
Ryan Sean Adams
Too kind of, it's too maximalist.
- [68:07]
Vincent Delewarde
Yeah. And for the stock market into that Ponzi fake price basket. When in reality if what we're talking about is unconstrained public spending and constantly running the economy hot, a lot of that. I mean the deficit of the public sector is the profit of the private sector. Ultimately the government just buys services from the economy. So you increase profits, you financially repress. So you keep interest rate which are costs for company lower. Yeah, stocks, stocks and also for the discount rate mechanism, asset prices are going to do well. So it's not just, you know, buy. I mean that's your thing, that's your thing. But like buy crypto and nothing else is probably not, not the right position.
- [68:55]
Ryan Sean Adams
Yeah, I think there's a fear I want to get into what you recommend is kind of a, or like your thoughts on a fiscal dominance inflationista type portfolio. But I think there's a fear among crypto people of, you know, things like recessions that could happen, job market, stock market. Maybe there's this naive view that something like gold or cryptocurrency might be immune to that, but I think you have a take that like inflation. Recessions are dead, man. Like that's not a thing that's going to happen in the era of fiscal dominance. What do you believe about that?
- [69:25]
Vincent Delewarde
Well, first of all, it's kind of an observation. I'm in my early 40s, 3 been only one recession in my lifetime in the US at least. Covid was obviously a blip, right? The only major recession we've had is 2009, right? Before that, 2000 was kind of rapid growth. You can argue maybe 2001 there was one, but you know, depends on the finish. It was very shallow 90s, it was a great moderation. The 80s, it was the Reagan boom. So when it comes to portfolio construction, right. When we look at again I go back to this long term treasuries with 6040 portfolio in the traditional 6040. Basically it works because your stocks do well when growth is good and your bonds do well when growth is a point, right? So the question is, are you going to put 40% of your portfolio to hedge against something that happens only once every 40 years that seems to be excessive? So there's that observation part. Now I think the drivers for this are many. I typically point to technology. One side I love is the, the tangible book value of the NASDAQ index is less than 3%. So you say you buy the NASDAQ index, you have a lot of money, like $30 trillion and then you buy it and okay, I'm gonna, I need some cash. I'm gonna sell the Microsoft Office, the computers, the servers, and you get less than 3 cents on the dollar. So value, my point that I'm trying to make now is value is intangible as opposed to, you know, back in the late 19th century, right? If you bought the Dow Jones in Industrial Average or the transport, it's even in the name, right? I mean you'd buy railway track, you'd buy plants. And these things behave very differently, right? When we had a physical tangible economy, well, you need capital gets used, right? You need to replace it. Tracks get broken. So there is this capex cycle over time. There is an inventory cycle because you need to move product instead of bits. There's a credit cycle because you need to finance these assets. So you have all these things that create cyclicality in the economy, which we don't have, when most of the value is intangible. Assets that don't need to be financed, that don't get used and that generate no inventory. So that, that's the technological aspect of it. Then there is the, the structure of the economy. A fascinating stat. If you add the government sector healthcare share of people about 65, you have 50% of the US population right there. So for this 50% of population, their income has nothing to do with the economy. I mean it's not because even if there is a session, people are going to fall sick and they're going to draw on their Medicare and they're going to visit a hospital. The government typically is countercyclical, even spends more in recession unless and then the retiree, you know, it's the cost of living adjustment, it's the only thing that matters to them. Conversely, the share combined share of construction and manufacturing is I think around 12, 13% in the US so and this is typically what we see even today. Like we had this, I don't know what when we published, but we had this bad job report. You know, we had finally construction employment rolled over. It took way longer than people thought. But we saw declining jobs in construction, manufacturing. We still had a positive number. Why? Because we had 50,000 jobs that were created in healthcare. And then there was this temporary drag from government because of the doorstadt. But I think that's going to flip back over again. My point is we still have a cycle. There's still a construction cycle, there's still a manufacturing cycle, but it's just not big enough to get the economy going or rolling over. So all that it does at most, which I think is where we are now, is that it kind of slows down. And because inflation remains high because of the kind of permanent stimulus story, we move from inflationary boom to stagflation. But we kind of miss the part in the economic season where we have deflationary bust, both inflation and output dropping at the same time. And that's what I mean by recessions have been canceled. Like if you think of recession as a 2009 like event where we'll see, you know, sub 1% inflation print, massive job losses, 10% employment rate. I really don't think it's going to happen. And then the finally final reason for that is the policy making. Right? We had this kind of hyperactive policy making where the Fed cuts just because inflation might slow below the 2% target in 12 months based on some number that they made up. And then we have this. Yeah, I mean the fiscal spend, I mean just one last statistical. So this year we are getting about 30 billion a month now in tariff revenue. So that annualizes to about 300 billion a year. We've had some fake cuts which on the margin should have helped with servicing. We had Doge, which according to Elon Musk saved a couple hundred billion dollars. We have extraordinarily strong tax receipts. I mean that's the part I think people don't realize is tax receipts are growing by 10% in the US. 10%.
- [74:38]
Ryan Sean Adams
Wow.
- [74:39]
Vincent Delewarde
Which again, one reason why I don't believe in recession story. But we put all that together and still the deficit today is bigger than it was last year.
- [74:47]
Ryan Sean Adams
Incredible.
- [74:48]
Vincent Delewarde
So that, that fiscal impulse is always going to be there. It's, it's just that, yeah, it's, it's the almost a perpetual motion machine. So you put all that together and I think it's, if you want to hedge against the risk, it's, it's, it's things running too hot, not too cold. And yeah, one, as you mentioned, one area I think of where I kind of disagree with the crypto maximalist gold bug is or there's going to be this sort of apocalyptic destructive moment where you know, the economy will, will blow and the Ponzi will deflate. Like it's some sort of, like there's almost like a religious view.
- [75:31]
Ryan Sean Adams
It's a, it's a doomer.
- [75:32]
Vincent Delewarde
Yes.
- [75:33]
Ryan Sean Adams
Yeah. Millionaires.
- [75:34]
Vincent Delewarde
If it does happen, I'm not so sure that MicroStrategy is going to be the best store of value for, for anything. I mean even gold for that matter. I mean gold in 08 lost, you know, lost a lot. But I don't think we need to worry about that because I don't think it's going to happen again. Going back on, on how do. If the story is as simple as what we described, which is debasement, fiscal dominance, we're gonna die. There's two ways you can die. We can die by fire or we can die by cold. And I think it will be death by fire this way. This is typically the way it goes. I mean the one reason why I'm so passionate about this spend a lot of time in emerging markets and I can see a lot of similar dynamic between the US now and Brazil 15 years ago, or Colombia and name the emerging market that died by debt driven deflation. Never happens.
- [76:28]
Ryan Sean Adams
The one thing the US does have that some of these emerging markets didn't have is the reserve currency though. And that counts for something. And you gotta wonder what's going to happen there. But as we get to the end of this conversation, Vincent, this has been very fascinating because I think a lot of our listener base probably shares Your core thesis, basically you articulated it the way many of us probably would. And that's why I'm so curious to ask you this next question which is like okay, construct a portfolio. I think a lot of bankless listeners have a portfolio that might be like what we call crypto barbell, where you have like a large portion of crypto assets, let's say and then you have on one side and then on the other side you have something ultra low risk, something like us Treasuries, like short duration treasuries. Okay, give us an alternative. So a portfolio that's like a fiscal dominance portfolio, an inflationista portfolio, something that you would advise a friend or you know, someone personally, not necessarily the pension fund portfolio because we know those guys are a bit more risk adverse and they can't get fired and they can't. Do you know that you, you couldn't, you can get too crazy with them. But if you were to construct a portfolio for yourself or someone else based on everything that you know in 2025, what would be in it?
- [77:45]
Vincent Delewarde
I mean the, the two things that you mentioned, I, I think should be, they're probably not in the same proportions as, as what you, your question implied. But in general, and again it's a bit counterintuitive given my belief in higher nominal growth and debasement over time. I like cash, I think not necessarily because I think it's going to be the best way to preserve purchasing power. But it's not the worst by the way. Really the worst is the duration. If you look at back even in the 70s, like really you got, you got ma. It's duration that massacre do, whether it was expressed in bonds or in stock. But if you, the cash rates more or less follow inflation, more often than not we're above inflation, which if you believe the CPI at this point we still have technically, I mean it's going to come down, but we have like 4% rate and inflation is, let's call it 3. So it's not the worst deal. What I like about cash is cash is the option to buy something else at a cheaper price. It has this optionality value and I do think that we are going to see there will be opportunities to buy assets and when this happen, you want to have some of that cash. I also think in general diversification is going to be a lot harder to get in large part because of what you said. You brought up this whole it's all one trade, isn't it? Now I agreed with that. You know, going back to crypto in the early age, crypto had a negative correlation to, to stocks and now it's probably around 60, 70%. And that makes sense when every time that's a normal life cycle. Right. It gets adopted and as gets adopted. Well, if I, if everybody owns it and you lose money in stocks, then you're going to sell, you know, something else. So cash, for virtue of being cash has a correlation of zero. Right. Be still the unit of account. Right. So a correlation of zero is not so attractive when you could get negative correlation which we used to get with long term treasuries or crypto. But long term treasuries are not positively correlated with stocks. Crypto is also so that, that zero is on the margin data. I think going back to the, if, if your, if your template is kind of your, your crypto maximalist, I would argue for maybe more diversification, especially abroad. I would caution against, you know, trying to, you know, short stocks or even underweight stocks. I mean I do think we're going to have a correction in September, October, like we may have started today. I think it's, but over the, over the long term I think this is still quite a good environment for stocks again. And go back to this idea that we're running the deficit at 7, 8% of GDP and we're suppressing interest rates. So yeah, it's not that hard to make money in stock market. And yes, valuations are elevated. I get all of that. Shila P. All these things, but it's not that insane to me. So what I'm hoping will happen is we are seeing this 10, 15% pullback. September, October, if that happens, I would put money back into stocks and then.
- [80:52]
Ryan Sean Adams
Wait, you think there's going to be a 10 to 15% pullback in September?
- [80:55]
Vincent Delewarde
Yeah, September, October, yeah, something like that.
- [80:59]
Ryan Sean Adams
Okay, wow, interesting. So that's what that may be, some of that cash.
- [81:02]
Vincent Delewarde
Well, I mean as a disclaimer, usually people go on these shows to show off their amazing track records and rewrite the past. I'm going to do the opposite. I've been saying that since July. Okay, so, so I had a report that July correction may happen in August. The August correction may happen in September. I mean if, if I keep pushing it out, eventually you're gonna be right.
- [81:22]
Ryan Sean Adams
One of these days. But, so, so you don't believe in recessions, but you do believe in dips.
- [81:26]
Vincent Delewarde
Yeah.
- [81:27]
Ryan Sean Adams
In particular stock market dip. But okay, the portfolio that you're, you're, you're dreaming up here is just no long duration bonds here you do like a healthy cash position, something in short.
- [81:37]
Vincent Delewarde
Duration bonds so still more market weight to overweight stocks. And then I really think people should look outside the U.S. i mean going back to the early part of the conversation I think we will see like we said that that 70% figure on the market cap is probably the peak and we will see the most interesting opportunities over the next 10 years are going to be abroad.
- [82:01]
Ryan Sean Adams
Do you, do you like the emerging countries like sort of the middling countries like you know India, Indonesia, you know Vietnam, those types of locations?
- [82:11]
Vincent Delewarde
Yeah I would, I would actually favor China specific. India has been one of the favorites and it's done very very well. It used to be that India traded a discount to broader emerging markets because, because of governance, because of productivity issues and now it's about twice as expensive as other emerging markets. I think that that story has really been told the political stability, the largest democracy and what we see I think also just peace between Russia and Ukraine is going to hurt it. One huge thing for I mean India is a billion four country that basically has no energy besides coal. So and again keep in mind for emerging markets you know the biggest problem how do I provide food and energy to my people? Because that's if you don't do that you get beheaded. Right. So that's all same concern even in China this concern food and energy. That's why they need the dollar because you need the dollar to buy food and energy and, and that's why they need to export right. For, for India it's really on the food side depend which province but they, they, they had, they're getting better on energy side there's not much you can do except that when you have something as wonderful as these silly sanctions that we put on Russia where the Europeans have a self imposed cap on what they can pay and then India can just buy it and then because Russia has no buyer they take in rupees which is great or India because they can print rupees not dollars, they buy 30% below spot, they can heat feed power their industry and then they have some leftover they can re export back to Europe at the market price.
- [83:42]
Ryan Sean Adams
I didn't really.
- [83:43]
Vincent Delewarde
Yeah, I mean this is not going to go on forever, right. I mean if we have peace between Russia and Ukraine that that anomaly is going to go away. And I think that that had quite a bit to do with the massive rally of Indian equities. So within em complex I mean I would actually favor you know China where we see the kind of that policy shift certainly the Best performing stock, major stock market this year. That's the weird thing about, you know, you always want bull markets that, that no one talks about. And, and China has been, I mean it's been volatile but pretty much since they had a big stimulus announcement about a year and a half ago, Chinese equities have outperformed. I mean look at this chart of Alibaba. I mean you see the, you certainly seen the, the technological advancement on display with their big parade. And so, and I understand that the argument, you know, the India versus China is basically a growth versus a growth argument. It's like, well you long term you want to invest in the high growth country. The high growth country is India because it's got better demographic. But China is screwed because the one child policy. I would advise against this kind of fallacy of buying the highest growth because economic growth and stock market returns are different things. What matters for international investing is not so much the growth, it's the valuation at which you buy at for any asset. The primary driver of your long term return is the price you paid. You can buy a wonderful asset at a crazy price. You know, you'll still lose money. So cheap valuation, cheap currency, hard to argue. I mean to me the biggest economic in macroeconomic imbalance, the biggest fake price in the world for since the late 90s has been the undervaluation, the suppression of Asian currencies. And we can go into the why it happened with 1998 East Asian crisis and then the reserve, but basically we had entire continent, you know, covering more than half of the world population that decided to repress the currency and then, and then that. And I think it's like a string that's you know, accumulating momentum and I think it's kind of unwinding now. So and then margins margin is really the big one. I mean one, one big reason for this when you're talking about the outperformance of the US market is the profit margin of US companies went from 7% to close to 15. That's really powerful, right. If you can double the amount of profits you squeeze out of a dollar, it doesn't even matter that you're not growing that fast. It seems to me that China is in a similar position where the profit margin has been suppressed because of this excessive competition. Right. Coming out of the real estate bubble started to deflate in 2017, 2018 and then the government directs all this money to the big four, the new industry. EVs, solar panel batteries and blanking on the forefront and basically every province Every city starts its EV company and then you have this massive attrition. But it worked, it worked. Now we have amazing electric ev. EV that are complete worldly, I mean competition work. And we kind of forgot that in the U.S. because this kind of very illegal policy tendency. But like that's it now is the, the winners have emerged and also the policy is changing. You see now the anti involution, right it's the government is saying, you know, we want companies to make profits. So I, I would see margins potential for margin expansion. So yeah, China would be one, Brazil is another one. That I think is, is, is interesting because they are the, it's not been the, the margins have been held back by interest rate. I mean the silic which is a benchmark rate in Brazil is 15%. 15% overnight the inflation rate is 5%. You have 10% real rate. I mean you can't make money in this. You can't invest in the stock market. I mean why would you. If you could make you know, 1% a month just by being in cash again, at some point this is going to normalize. When that normalizes, you'll see profit margins explode. It's also a weak dollar trade. You know, I think a lot of these kind of crypto world believes in kind of psychological on the dollar loss of reserve status which maybe I think eventually it will happen, yes, but maybe not in the time that they think, well if you believe that, buy international equities with both hands. Because for most emerging markets there is original sin where they cannot borrow at least long term in long term currency. So if you want to build a, a cement factory in Nigeria or a car, car plant in Brazil, you're going to borrow in dollars. And if you have something like what we are seeing this year where the dollar is down 15%, this is insane amount of stimulus for you. I mean suddenly the value of liability has dropped by 15%. You haven't done anything. So as the dollar falls, it stimulates growth in emerging markets. Emerging markets, as they have higher growth, the central bank has room to cut rates the currency strength and it creates these self reinforcing loop which going back to our earlier conversation explains why these Trends last for 10 years. Because it is self reinforcing. Once you make the switch to a weak dollar environment, it feeds on itself. And I still think we're in the very early innings of that.
- [89:01]
Ryan Sean Adams
That's so fascinating. You're almost causing me, Vincent, to want to do an entire episode just on emerging markets. And the story there in the context of everything we talked about. Just one last category in the portfolio we don't have to talk about crypto because bankless listeners goes without saying. How about gold? You were saying the most important thing is the price you pay. Well, gold is now all time high price you pay for this asset. Do you think gold is still in that portfolio right now?
- [89:26]
Vincent Delewarde
I've been kind of a strategic gold bull for pretty much since I started writing about this secular inflation fiscal dominance team in six years ago now. So it's kind of, I may have a little bit of an emotional attachment to it. You know, once you go back to this whole like max7 can't let go type of thing. Yeah, I mean you look at the chart, it's really going parabolic. So you, you think at some point it's, it's, it's going to break. Maybe I would still recommend again it's part of that debasement trade. One thing that does help gold is, is your, you have this kind of central bank bid right to, to your earlier point on who's buying this stuff. You know central banks are not buying crypto. Right. So we have this movement so far. I mean maybe it will change in the future. But if we are seeing a decline in dollar share of reserve, I mean so far the one that has declined is really the Euro. So what we've seen, if you look at the composition reserve is the dollar has actually been stable but the Euro has gone down and then gold and to much less extent the Chinese, Iran have gone up, it's going to go into gold and you still see like the share of, you look at people, bank of China, they probably have like 4%.
- [90:41]
Ryan Sean Adams
Is that where the net new reserve buying is going into primarily? So if, yeah, look at the report.
- [90:46]
Vincent Delewarde
The World Gold Council like tracks because they have to disclose this stuff and of course you can say they lie about the, you know, the gold bars are fake or whatever. But I don't know. Yeah, the buying, I think lately the central banks have been major, major buyers. So you use not just China, I mean Kazakhstan, Hezbollah, Russia obviously because they can't get Treasuries. So that's. But even like Poland, Turkey, it's really a broad trend which stands in contrast with the ETF market where despite going back to this idea of the, you know, the, the bull market in silence, right. You look at shares outstanding in GLD or even gdx, the gold miners. I mean it's, I mean it's insane. Again, good friend of mine Rob Mullen, I don't know, if you've heard of it, Marathon Advisor, you know, he, he goes back and you know, it's never happened to see bull market of the magnitude of what we're seeing in gold with net out, net investor outflow, at least in the U.S. so yeah, maybe, I mean one play is, you know, you may want to switch between gold and the miners, for example, because I mean gold could drop by 20%. Oh yes, for sure. But this, the gold miners will still be minting money at these levels. So maybe that's, you know, you take some profit from gold, you get back into the commodities. But I still think it should be an overweight in again, I don't think the market has fully priced this story. I think this story is going to play out on a very long timeline. And going back to your point on the US is the reserve currency. It's not like any other emerging market. I agree with that. Now, what does that mean? It means that the journey is going to be a lot longer. You know, we're not Turkey, we're not Brazil. And yes, if we had these policies in Turkey or in Brazil, maybe it'll be a couple of years, could be a decade or more. In the US we have many tools we can wield before we get to the end, so it's still early.
- [92:43]
Ryan Sean Adams
Vincent, I have thoroughly enjoyed this conversation. It's been exceptional. Thank you so much for joining us today. It's just like a wealth of knowledge.
- [92:51]
Vincent Delewarde
It was awesome. I hope to be back. Talk to you soon.
- [92:54]
Ryan Sean Adams
Bankless listener. Got to let you know none of this has been financial advice. Of course. All this stuff, financial markets, crypto, it's all risky. You could lose what you put in. But we're headed west. This is the frontier. Not for everyone, but we're glad you're with us on the bankless journey. Thanks a lot.
- [93:16]
Vincent Delewarde
Sa.