MacroVoices #324: Louis-Vincent Gave – A Major Geopolitical Transformation Is Underway

Date: May 19, 2022
Host: Erik Townsend
Guest: Louis-Vincent Gave, Co-founder of Gavekal Research

Episode Overview

In this episode, Erik Townsend is joined by Louis-Vincent Gave, a renowned macro thinker with deep international experience, to discuss the profound geopolitical and financial shifts taking place in the wake of the Russia-Ukraine conflict, Western sanctions, and evolving global order. The conversation centers on the risks to the rule of law in the West, the erosion of the US dollar’s singular reserve status, deglobalization of financial flows, and implications for markets, energy, and investors.

Key Discussion Points & Insights

1. Market Overview & Host Commentary

• US Equity Markets:

  • Erik and Patrick discuss the ongoing, orderly nature of the S&P 500 selloff, the risk of policy intervention, and the absence (so far) of panic selling.
  • Quote: "This has been a very orderly sell off so far ... all we've seen so far is a very orderly, civilized sell off. That makes perfect sense given the fundamentals." – Erik Townsend (02:11)

• US Dollar Pullback:

  • The dollar index has retreated from major resistance near 105 to around 102.80, with Erik seeing this as a healthy pullback from an important level.
  • "I do think we'll eventually break through it to the upside if the fundamentals don't change." – Erik Townsend (03:45)

• Crude Oil Analysis:

  • Inventory drawdowns continue, with restocking season seeing multiple weeks of net draws. OPEC spare capacity appears exhausted, and Strategic Petroleum Reserve (SPR) is at a 35-year low during unprecedented geopolitical risk.
  • "There can be no question that OPEC is out of spare capacity. And that is an incredibly, incredibly bullish sign for prices." – Erik Townsend (07:57)

• Gold & Bonds:

  • Gold bounced from technical support; the risk remains of forced selling if an equity crash arrives.
  • The 10-year yield touched 3%; Erik watches for signals that the Fed’s actions are stabilizing yields.

2. Feature Interview: Louis-Vincent Gave

A Shift in the Global Financial Architecture

(Start: 17:28)

• On Western Asset Seizures & Rule of Law:

  • Louis criticizes the West’s extrajudicial seizure of Russian assets, emphasizing it marks a dangerous abandonment of property rights previously considered the cornerstone of Western financial appeal.
  • Quote: "We’ve basically chosen to, in essence, change the rule of the games on people we don’t like... at a time when real returns on Western assets have never been so low." – Louis-Vincent Gave (18:51)
  • Foreign investors—e.g., Chinese, Saudi billionaires—now question the safety of their Western assets. If geopolitical winds shift, can their holdings be arbitrarily seized?
  • The rapid, unilateral Western decision-making echoes political risk previously associated only with emerging markets.

• Long-Term Implications for the US Dollar:

  • Echoing Zoltan Pozsar, Louis argues the dollar’s dominance is at risk, not from a direct challenger but from the rise of multi-currency, regional settlement systems, facilitated by technology.
  • Quote: "Perhaps we move to a world where there isn’t one massive head honcho anymore dominating everybody, but just lots and lots of different currencies." – Louis-Vincent Gave (26:11)

• Deglobalization of Financial Flows:

  • The era of emerging market (EM) savings flowing into US Treasuries and Western assets is ending.
  • EM countries are keeping savings home, leading to structural downward pressure on Western currencies.
  • Quote: "What if we move to a world where Chinese savings now stay in China, and where Indian savings stay in India ... then how do Britain, France, the US ... keep running massive twin deficits year in, year out? ... The answer is they don’t." – Louis-Vincent Gave (29:23)
  • Despite Fed tightening, EM bond markets (Brazil, India, Indonesia, China) are outperforming — the “dog that didn’t bark” in the global selloff.

Implications for Safe Haven Flows

• Flight to safety previously meant Treasuries; now marginal EM buyers are reconsidering:
  • Quote: "How is an asset that can be worth zero overnight at the decision of a politician ... considered safe again? ... These guys ... haven’t been the marginal buyer of treasuries for 25 years." – Louis-Vincent Gave (33:40)

China, Russia, and the New Global Order

• Russia increasingly an "economic colony" of China: forced to sell commodities in RMB, buy only Chinese goods.
• China can leverage its new position, press EMs to settle trade in RMB, and keep capital at home, strengthening its financial independence.
• Quote: "Russia is going to have the relationship with China that India had with Britain pre-WWII ... The big winner will be China, but yes, the massive loser will be Europe along with Russia." – Louis-Vincent Gave (43:40)

Ukraine/Taiwan – Geopolitical Risks

• Louis discounts imminent Chinese military action on Taiwan, describes Chinese philosophy of stealth, opportunistic “guerrilla warfare” rather than head-on confrontation.
• Quote: "In their whole mindset of the world, you don’t fight wars head on ... maybe if your enemy has 8.5% inflation rate, you shut down your biggest port and you make sure that that inflation rate keeps on climbing." – Louis-Vincent Gave (38:17)

3. Market & Asset Class Implications

• Direct Market Impact:

  • Louis attributes much of the market volatility and decline in Treasuries/Western risk assets since February to the shift in property rights and investor perceptions post-sanctions.
  • Rising risk premia and heightened bond/currency volatility as Western “safe” assets lose their inviolable status.

• Equity Outlook:

  • US equities are in a bear market; traditional triggers for recovering (Fed easing, falling energy prices, ultra-cheap valuations) are nowhere evident.
  • Quote: "You need either for the Fed to start adding liquidity ...or you need energy prices to collapse ... or you need asset prices to get so cheap that things bounce back. But we’re not really there." – Louis-Vincent Gave (47:31)

• Energy Crisis:

  • OPEC and most major producers are at or near capacity. Only Iran could ramp up quickly, but even that is limited.
  • Quote: "Already OPEC can’t produce at capacity. How do we get back to normal? ... wherever you look, you end up with the simple realization that anywhere you could get spare capacity is probably going to take a year or two." – Louis-Vincent Gave (59:01)
  • If/when China ends zero-COVID, demand shock could push oil up another $20-30.

4. Notable Quotes & Memorable Moments

• Abandonment of Legal Principles:
  • "Once you can just grab stuff, why stop at just the Russians? There’s plenty of other bad guys out there." – Louis-Vincent Gave (21:38)
• Shift to Multi-Currency World:
  • "Your ability to push Europe around has just also improved ... Europe can now not afford to lose the Chinese market." – Louis-Vincent Gave (44:15)
• Deglobalization Context:
  • "The much more important deglobalization ... is the deglobalization in financial flows." – Louis-Vincent Gave (27:53)
• Bear Market Dynamics:
  • "We’re in a bear market ... and the usual things you would expect to stop the bear market ... aren’t really there." – Louis-Vincent Gave (47:39)

Important Timestamps

• Market Overview and Setting (00:37 – 14:46)
• Interview Begins (17:28)
• Rule of Law, Asset Seizure, Safety of Western Assets (18:31 – 24:30)
• US Dollar Hegemony Challenged/Financial System Reset (24:31 – 33:07)
• Deglobalization and Flows (29:23 – 33:08)
• Redefining 'Safe' Assets, Cancel Culture Risk (33:08 – 36:34)
• Geopolitics: China/Taiwan, Russia/Europe/China alliances (36:34 – 45:11)
• Direct Market Impact, Bonds, Equities Outlook (45:11 – 52:29)
• Energy Market & OPEC/Spare Capacity (52:29 – 61:28)
• Closing Thoughts and Gavekal Overview (61:28 – 62:34)

Closing Analyst Commentary

After the interview, Erik and Patrick discuss:

• How the deglobalization of capital flows is shifting “safe haven” preferences.
• The significance of recent strong performance in EM bonds versus developed markets.
• Potential technical setups for market relief rallies, option strategies to repair losing positions (see Patrick’s technical chart deck and example), and how retail investors might mitigate further downside during volatility.

Quote:
"I do think a really big systemic change is underway, and we're still at the early stages of that big systemic change." – Erik Townsend (64:00)

Actionable Ideas and Conclusions

• Investors should recognize a structural shift away from Western hegemony, both in legal precedent (property rights) and in the financial flows that have underpinned asset prices for decades.
• Deglobalization is not just about supply chains, but about capital and trust. New safe havens and investment flows are moving east and south.
• Energy constraints remain severe; upside risk to commodity prices persists, especially if Chinese demand rebounds post-COVID.
• Option repair strategies (such as ratio call spreads) may offer downside management for investors stuck with underwater positions, in lieu of traditional dollar-cost averaging.

For deeper details, including Patrick's full repair options walkthrough and all referenced charts, visit Macro Voices’ Research Roundup.