MacroVoices #366: Louis-Vincent Gave – Staying Humble in Troubling Times

Date: March 9, 2023
Host: Erik Townsend
Guest: Louis-Vincent Gave, Co-Founder of Gavekal

Episode Overview

This episode features an in-depth conversation between host Erik Townsend and globally renowned macro thinker Louis-Vincent Gave. The discussion centers on navigating today's turbulent macroeconomic environment, characterized by geopolitical escalation, energy transitions, demographic shifts, and questions surrounding the global monetary system. The central theme is the importance of humility—accepting uncertainty and letting markets, rather than preconceived narratives, inform investment decisions.

Key Discussion Points & Insights

1. A World in Profound Transition

[05:22-12:55]

• Louis-Vincent Gave’s Structural Forces:
  • End of Peace Dividend:
    • "We're going through the end of the peace dividend... Every meaningful economy is increasing its defense spending." [05:47]
    • War, whether hot or cold, is fundamentally inflationary.
  • Demographic Transition:
    • “Most countries are aging and aging fast... that's a paradigm shift.” [06:44]
  • Energy Transition:
    • Modern economies are shifting to less efficient energy sources (wind, solar), raising economic costs and reducing living standards. [07:09]
    • “Economic activity is energy transformed.”
  • Monetary System Shift:
    • Cutting Russia from the US dollar system is “cutting our nose to spite our face.” [07:56]
    • Deals in commodities are increasingly being conducted in non-dollar currencies.
    • “We've started a structural shift in the global monetary system.”
• Cyclical Uncertainty:
  • Multiple cross-currents: US fiscal deficits, Fed tightening, the Chinese reopening, and market attention overly focused on the Fed.
  • The market may be less Fed-centric than the last decade suggests.

Memorable Quote:

“The first thing we have to acknowledge is to be very humble, to accept that we're going through things that probably no investor below 75 has gone through.” (Louis-Vincent Gave, 05:26)

2. Letting Markets Be the Guide

[12:55-15:32]

• Market Messaging vs. Narratives:
  • Erik expresses frustration that markets (especially gold and oil) seem unconcerned with rising geopolitical risk:
    • “Gold... is supposed to be the biggest geopolitical hedge... looks like we're going to see real interest rates starting to come off again, and that's good for gold. But we're not seeing the market say there's a big deal.” [13:36]
• Louis’s Response:
  • Gold has actually outperformed US Treasuries:
    • “Over the past couple of years, [gold] massively outperformed US Treasuries and so have many other bond markets.” [15:35]
    • People are no longer running to the "safe arms of Uncle Sam."
    • For context: Given the move in rates and the dollar, gold “should” have gone much lower.

Key Message:

• The real market signal isn’t disappointing gold, but the underperformance and loss of safe-haven status for US Treasuries.

3. Endogenous vs. Exogenous Shocks

[19:09-22:29]

• Market’s Ability to Anticipate Crisis:
  • Markets are not great at pricing exogenous shocks in advance (war, pandemics).
  • “If it happens, I’m probably dead anyway... If it doesn’t happen, then I’ve wasted capital trying to protect myself from it…it’s a little bit of a tails I lose and heads I don’t win.” (Louis-Vincent Gave, 21:07)
  • Markets typically react sharply to out-of-left-field events, not before.
• Current Positioning:
  • Investors are repositioning portfolios for structural, endogenous shifts (demographics, monetary system) but not outright “nuclear war” hedge scenarios.

4. Emerging Markets: The New Switzerland?

[24:11-28:37]

• Who Wins in Geopolitical Conflict?
  • “The only winners in a war are people who stay out of the war.” (Louis-Vincent Gave, 25:01)
  • Many emerging markets are explicitly staying neutral (India, Indonesia, some Asian economies).
• Market Evidence:
  • Outperformance of emerging market bonds and stocks, particularly in regions avoiding direct involvement.
  • “Last year, global equity is down 20%, Indonesian equities up, Indonesian bonds flat. That’s mind-boggling to me.” [26:33]
  • Opportunities are in places not involved in conflict, with reasonable valuations.

5. Energy Conundrum

[28:37-32:57]

• Why Hasn't Energy Rallied?
  • China has not fully reopened (flights and tourism still below pre-COVID levels).
    • “Maybe it’s a delayed effect… but if it doesn’t happen in the next three to four months, I think we’ll have to consider the possibility that we’re wrong.” [29:27]
  • The nature of global energy trading has changed (Russia selling cheap oil to China/India in non-USD). Could mean Asian currencies are undervalued or oil prices are due for adjustment.
• Strategy:
  • “With energy stocks... you’re paid to wait.” [31:47]
  • Prefer stock over futures for energy sector exposure in this environment.

6. The Decline of US Treasuries as Reserve Asset

[32:57-40:25]

• Loss of Safe-Haven Status:
  • US Treasuries failing at their core job—diversifying equity risk.
  • After asset seizures (Russia), trust in Western financial assets has declined, especially among surplus nations (China, oil producers).
  • “For everybody saying China’s uninvestable... the Abu Dhabi Investment Authority, the Saudis—they’re pouring money into China because, for them, China might increasingly be more safe than the U.S.” [38:52]
• Deglobalization of Financial Flows:
  • Physical trade persists, but financial deglobalization is accelerating.

Quote:

“US Treasuries have not been doing the job in portfolios that they were hired to do for two years now.” (Louis-Vincent Gave, 34:37)

7. Recession Prospects

[40:25-43:41]

• Where’s the Recession?
  • Asia, China: Growth is re-accelerating, no recession in sight.
  • Europe: Leverages EM growth and will likely fare okay.
  • US: Higher rates may dampen growth, but a severe recession is unlikely.
    • US consumers are largely insulated by low fixed mortgage rates and limited mobility.
  • “I think growth in the US isn't going to be great, but it's not going to be that bad; it's just going to be much better everywhere else.” [43:33]

8. Inflation, Interest Rates, and Fed Policy

[43:41-47:05]

• Structural Inflation
  • Demographics, energy, and geopolitics mean higher structural inflation for longer.
• Fed Constraints:
  • Central banks have three mandates: inflation, employment, and government funding—the latter is often ignored.
  • At some point, higher rates will stress government interest expenses, trigger a bond market event, and force a policy reversal (return to QE).
  • “My belief is at some point you’ll have a bond market meltdown and then the Fed will change its stripes.” [44:32]
  • Near-term: Expect more 25 bps hikes, but eventual reversal when bond markets "break."

Notable Quotes & Memorable Moments

• On Market Humility:

  • “So I think against all this uncertainty, you have to be very, very modest. You have to look at the markets and say, what are the messages am I getting from the markets today?” (Louis-Vincent Gave, 11:12)

• On Gold’s Relative Performance:

  • “If you were in gold and not in US Treasuries, you’re thanking your lucky stars.” [16:45]

• On Exogenous Shocks:

  • “If and when [events like nuclear war] do happen, as we saw with COVID, you get this brutal realignment.” [21:35]

• On Emerging Markets’ Outperformance:

  • “Let’s find the new Switzerland… the best thing you can do is say, ‘Alright, you guys want to go nuts—have at it. I’m doing something else.’” [27:52]

• On US Treasuries:

  • “What do these US Treasuries do for me? ...The first job of Treasuries is to diversify your equity risk... and they’re failing dismally at this.” [35:17]

• On US Policy Errors:

  • “It is amazing to think that US policymakers are sitting around thinking, ‘Okay... let’s take on Russia and China at the same time.’ It does boggle the mind.” (Louis-Vincent Gave, 24:21)

Key Timestamps

| Segment | Time | |-------------------------------------------|-----------| | Theme Introduction | 04:48 | | Big structural forces in play | 05:22 | | Markets vs. narratives | 12:55 | | Gold's performance vs. Treasuries | 15:32 | | Endogenous/exogenous shocks | 19:09 | | Emerging markets’ neutrality | 24:11 | | Energy market puzzle | 28:37 | | US Treasuries: fall from grace | 32:57 | | Recession prospects by region | 40:25 | | Inflation, Fed, and the ‘third’ mandate | 43:41 | | Conclusion and Gavekal plug | 47:17 |

Final Takeaways

• Humility is essential in the current macro environment due to unprecedented structural changes.
• Ignore the temptation to over-focus on the Fed; let global markets guide you.
• US Treasuries’ safe-haven status is eroding; consider alternatives in emerging markets and hard assets.
• Exogenous shocks are rare, sudden, and difficult to hedge. Endogenous trends (demographics, energy, monetary changes) are the key to anticipate.
• Energy and gold may be “paid to wait” trades; the thesis could simply be early.
• Watch for long-term de-dollarization and a shift in global reserve asset preferences.

This summary provides key insights, memorable exchanges, and a roadmap for listeners and investors navigating an era characterized by uncertainty and transformation.