Macro Voices #394: Louis-Vincent Gave – China, Energy & More

Date: September 21, 2023
Host: Erik Townsend
Guest: Louis-Vincent Gave (Co-Founder, Gavekal Research)

Episode Overview

This episode delves deeply into the shifting dynamics of global finance and geopolitics, with Louis-Vincent Gave offering unfiltered, on-the-ground insights on China’s economy, the evolving energy landscape, de-dollarization, and the broad macro implications for investors. With a focus on separating Western media bias from economic realities, the discussion explores the potential risks and opportunities in a world where old assumptions—about trade, currency reserves, and portfolio construction—are rapidly breaking down. The episode also discusses the implications of rising energy prices, the BRICS expansion, and broader shifts in global power.

Key Discussion Points & Insights

1. China’s Economic Reality vs. Western Media Narrative

• Western Biases: Erik notes a persistent Western narrative exaggerating China’s economic troubles for geopolitical reasons. Louis, as a Frenchman in Hong Kong, argues for taking a more objective, less polarized view.
• Labor Market Differences & Reopening:
  • Western economists expected a post-COVID demand surge in China, similar to the West. It didn't happen due to labor market dynamics: Chinese workers, told to "go home," actually returned to rural areas, resulting in a flood of labor back to cities and suppressed wages upon reopening.
  • Louis-Vincent Gave [06:42]:

    “I think the reason this script didn't play out in China is the very difference in the labor market.... In China, people were told, okay, go home. And going home in China meant actually going back to the countryside.”

• Real Estate and Shadow Banking Issues:
  • Real estate downturn and a crackdown have led to falling prices and developer failures, but unlike the West, it doesn't mean a "Lehman moment" due to China’s unique financial system structure.
  • Trade surplus growth is a sign of China moving up the value chain – not imminent Armageddon.
  • [09:34]

    “China’s trade surplus of almost a trillion dollars a year now is roughly the size of the GDP of Switzerland or Argentina or any G20 country.”

2. China’s Trade Surplus & Decoupling from the West

• Shifting Export Dependency:
  • China's export growth now comes mainly from emerging markets rather than the US; this is changing global trade dynamics.
  • The West’s focus is on "de-Sinification" (shifting supply chains from China to places like Vietnam, India, Mexico) rather than true deglobalization.
  • [13:37]:

    “All the growth in global trade, pretty much all of it has come from emerging market to emerging market trade... and a lot of that is really China to emerging markets.”

3. De-dollarization & the Expanding BRICS Alliance

• De-dollarization as a Process:
  • Not a single event but a gradually accelerating trend, catalyzed especially after the West excluded Russia from the dollar system post-Ukraine invasion.
  • Large emerging markets now access commodities without needing dollars, freeing them from their historical growth constraints.
  • Louis-Vincent Gave [18:55]:

    “Their biggest constraint to their growth was the fact that they needed to pay dollars for commodities. And now they don't.... This is an absolute game changer.”

• BRICS Expansion:
  • With the inclusion of Saudi Arabia, Iran, Argentina, etc., BRICS now contains both major oil producers and importers, openly stating their intent to shift energy trade away from the dollar.
  • Implications: The foundational architecture of the global financial system may be changing, with U.S. Treasuries and dollar oil pricing no longer at the center for a significant portion of the world.

4. Portfolio Construction in a New Macro Regime

• Breakdown of 60/40 Portfolio Logic:
  • Negative correlation between bonds and equities—foundation of portfolios for 30+ years—broke down in 2022 and recent months.
  • Despite this, most institutional and private client portfolios remain wedded to the old logic.
  • Louis’s advice: Investors must “put their thinking caps on” and reconsider how to build resilient portfolios for a world with shifting correlations and new macro drivers.
  • [27:20]:

    “Most people’s portfolios are still managed on the premise that bonds and equities have a negative correlation... Well, this didn’t work in 2022.”

5. Energy Markets & Geopolitics

• Oil as the Ultimate Hedge:
  • Louis warns that with the U.S. Strategic Petroleum Reserve depleted and geopolitics heating up (notably, upcoming US/UK elections), Russia is well-positioned to weaponize energy exports, targeting the West exactly when it’s most vulnerable.
  • China’s oil stockpiling could reflect a strategic shift away from holding US Treasuries, in favor of tangible assets like oil.
  • [31:25]:

    “Why would you buy U.S. Treasuries? Better buy oil. You could always use oil.”

• Energy Weaponization Scenarios:
  • Russia likely to throttle oil exports, potentially halving them, causing prices to double and hitting Western economies and politicians.
  • China’s response remains focused on stability; Russia, more willing to “tear the system down.”
  • [46:32]:

    “To just assume... they’re not going to do it—it’s like, what in Putin's track record makes you believe he’s not going to play that card?”

• Failure of the Energy Transition (So Far):
  • Massive investment in wind and solar has barely dented the reliance on carbon-based energy; nuclear’s fortunes are turning as the West wakes up to realities.
  • [39:31]:

    “We invested more than $4 trillion in wind and solar... We managed to move from 83 [percent] being carbon based to 81% being carbon based—which to me speaks to the failure of those investments.”

Notable Quotes & Memorable Moments

• On the China Narrative

  “People in the Western world always fall into one of two categories. It’s either China’s going to take over the world or China’s about to implode in a blaze of glory. And we seem to be swinging always from one extreme to the next.”
  —Louis-Vincent Gave [05:48]

• On De-dollarization

  “All of the growth impetus of Chinese trade in the past five, 10 years has been towards these emerging markets. So the dependency of China on the US is no longer what it was.”
  —Louis-Vincent Gave [12:44]

• On Portfolio Construction

  “Nobody wants to confront the reality that the 60/40 no longer works, but yet it’s a reality that’s now staring you right in the eye.”
  —Louis-Vincent Gave [27:50]

• On Weaponizing Energy

  “If you’re Putin, why would you do that? ...You throw a massive amount of pain on Europe and Joe Biden... It basically becomes impossible for you to get reelected.”
  —Louis-Vincent Gave [32:10]

Timestamps for Key Segments

• [05:34] – Louis on the labor market differences in China’s reopening
• [09:34] – Chinese trade surplus and value-chain rise
• [11:46] – China’s reduced dependency on U.S. and shifting trade flows
• [16:53] – De-dollarization and BRICS expansion
• [24:04] – Portfolio construction: Bonds/equities correlation breakdown
• [28:48] – Energy markets: Oil, Russia, and election-year risks
• [36:28] – Failure of wind/solar and new paradigm for energy investments
• [41:56] – Scenarios for Russia weaponizing energy (wheat and oil)
• [46:32] – On the willingness of Russia (vs. China) to destabilize the system

Chartbook & Market Technicals (Post-Game)

See interview transcript for minute-by-minute postgame technical chart insights from Patrick Ceresna, including crude oil, S&P 500, USD Index, gold, copper, uranium, and VIX analysis.

• Crude Oil: Shallow corrections, underlying bull trend ([55:20])
• S&P 500: Breakdown to 4300 possible, post-FOMC volatility ([58:53])
• Dollar: Testing key resistance at 105; break higher could trigger risk-off ([61:14])
• Gold: Weak trend, failed rallies, watch for support at 1927 ([62:57])
• Copper: At risk of breakdown, could head to 3.25 ([65:14])
• Uranium: Strong breakout, considered a buy on dips ([67:19])

Final Thoughts

Louis-Vincent Gave makes a compelling argument that the architecture of the global financial and trade systems is rapidly evolving. China is less vulnerable to Western pressure than supposed, BRICS and their allies are actively shifting away from dollar dependence, and the investment playbook of the last 30 years—especially regarding bonds—no longer works. For investors, the lesson is to “rethink everything,” with an emphasis on understanding geopolitical risk, energy security, and the changing underpinnings of global trade and finance.

For more from Louis-Vincent Gave:

• Book: Avoiding the Punch (available at www.gavekal.com)
• Firm: Gavekal Research (institutional research, wealth management)

[End of Summary]