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- [00:00]
Wells Fargo Representative
Wells Fargo seeks broad impact in their communities. They're focused on building a sustainable, inclusive future for all by supporting housing affordability, small business growth, financial health and other community needs. That's why They've donated nearly $2 billion to strengthen local communities over the last five years. Wells Fargo the Bank of Doing see how@wellsfargo.com Saydo Wells Fargo's philanthropic support includes contributions from Wells Fargo and Company, Wells Fargo Bankna and the Wells Fargo Foundation.
- [00:30]
Nouriel Roubini
Meta's open source A models are available.
- [00:33]
Tracy Alloway
To all, not just the few.
- [00:35]
Joe Weisenthal
Because they're open source, small businesses, students.
- [00:38]
Tracy Alloway
And more can download and build with them at no cost. Learn more about the benefits@AI.meda.com Open Bloomberg Audio Studios Podcasts Radio News hello and welcome to another episode of the Odd Thoughts podcast. I'm Tracy Alloway.
- [01:10]
Joe Weisenthal
And I'm Joe Weisenthal.
- [01:12]
Tracy Alloway
Joe, do you remember, I think it was in 2022, everyone was talking about stagflation.
- [01:19]
Joe Weisenthal
Yes, of course, because we had. Right. Because we had. Markets were low, so people were talking about recession. The Fed was hiking interest rates aggressively and inflation in 2022 was peaking. So it certainly seemed like we could have had the combo right then for essentially elevated inflation and some kind of recession.
- [01:41]
Tracy Alloway
Yes. And in fact, before we recorded this episode, I went back and I looked at a Google trends chart for the words stagflation. And like the peak in 2022 is just amazing. And then it sort of fell off because we definitely had inflation. We didn't necessarily have lower economic growth. But I think now at the tail end of 2024, some of that stagflation talk is beginning to creep back into, I guess, the economic discourse.
- [02:10]
Joe Weisenthal
Yeah, a little bit. I mean, what I would say is, I would agree with you. There seems to be a couple things going on that are very confusing to say the least. But one is the sort of, I don't know if it's acceptance or reality that like, like inflation has come down quite a bit, but maybe it's going to keep bumping up against the ceiling or maybe it's going to keep like bouncing off the floor, so to speak.
- [02:34]
Tracy Alloway
Yeah, that last mile is going to be difficult.
- [02:36]
Joe Weisenthal
There's still. And then on some measures the economy still seems good, but you look at some of the PMIs, ISMs, other industrial measures, labor market measures, some seem to be slowing down. So like, I still think this idea of like, I don't know if I would call it stagflation, but this sort of unpleasant combination of not great growth, not great Real growth and inflation that's still like, at the higher end of what people are comfortable with. Feels like something that could very plausibly be the case for a while.
- [03:08]
Tracy Alloway
It's definitely in the air. So we need to dig into this particular argument. And who better to speak to than Nouriel Roubini? He is, of course, the chief economist and portfolio manager of the Atlas America Fund, which is a new ETF that has just launched. And he is also the chairman and CEO of Rubini Macro Associates. Really the perfect guest to do this type of macro with us. So, Nouriel, welcome back to the show.
- [03:35]
Nouriel Roubini
Great being with you.
- [03:36]
Tracy Alloway
Tracy And Joe, do you get the same sense that the risk of stagflation is starting to pick up again?
- [03:43]
Nouriel Roubini
Certainly is one of the risks that we have to consider. And I think that the question on everybody's mind, of course, is what will be the economic policies of Trump and their impact on growth and inflation? Now, if I have to look ahead, I would say that some of his policies actually could increase growth and reduce inflation. Being pro business in general, making those tax cut permanent, having government efficiency, deregulating the economy, maybe even increasing the production of fossil fuels and reducing the price of energy. Those go in the direction of policies that actually increase growth and reduce inflation. But on the other side, there's a long list of other policies that could be implemented. First of them, of course, tariff protectionism and economic war with China. Secondly, draconian restriction to migration, if not mass deportation. Three, unfunded tax cuts and runaway fiscal deficits. Four, potentially an attempt to weaken the dollar in a disorderly way. Five, maybe trying to interfere with the independence of the Fed. Now, if that second set of policy were to be implemented, their impact will be higher inflation over time and lower economic growth. So those sets of policy will be definitely in the stagflationary direction.
- [05:11]
Joe Weisenthal
That was an amazing summary, by the way, of the two ways of thinking about paths. And I guess what's striking, listening to you sort of list off the two columns is within Trumpism or within the Trump administration, it feels like there are several competing camps, so to speak, and we don't really know how it's going to resolve. But there are a lot of internal contradictions, whether on personnel or ideology. And to some extent, what you just laid out are sort of, I don't know, maybe the fork in the road, so to speak, of how things could go.
- [05:41]
Nouriel Roubini
Yeah, you're absolutely right. There is a spectrum of positions on a variety of economic issues. Some are truly protectionist. Others, like Scott Besson says we want to escalate as a way of de. Escalating, and we're not going to know until after, of course, inauguration in which direction the economic policy will go. I would say, however, the following observation. I think that the potentially more stagflationary policy will be constrained by several factors. One, of course, is the choice of some of the economic advisors, like Scott Besson understand markets, and he knows that if you do things that are radically stagflationary, it'll be bad for the economy and bad for the market. So you're going to try to push down against those. Secondly, I think there'll be also significant impact of market discipline. If you have runaway budget deficits, migration restrictions and tariffs that increase inflation, then the bond market vigilante is going to wake up. Expected inflation will be higher, real rates will be higher. And then rising in bond yield could lead to a correction of the stock market. And if there's one thing that Trump cares about, is one, the stock market. He also cares about the bond market because high bond yields imply high cost of borrowing, and that's going to be hurting the economy. I think the other constraint is going to be, of course, the fact that Fed is still independent. If some of these policies were to be pursued, the Fed will likely cut next week in December, may not cut again, or may cut much less than the market are expecting next year. In an extreme scenario in which inflation goes much higher, it could even increase interest rates. And that's going to be. So there is both market discipline and there is also Fed discipline that might constrain to some extent those stagflationary policies.
- [07:38]
Tracy Alloway
Setting aside the Trump administration and what they might do. And I realize that's, that's a big thing to set aside right now, but the path of inflation, it has come down from the peaks that we saw in 2022, as Joe was talking about. Why did that happen, in your opinion? Because you were one of the, you were one of the few voices I remember in early 2020 when the pandemic was just unfolding that predicted inflation. And, you know, it happened, but since then it has petered out a little bit.
- [08:10]
Nouriel Roubini
Yes. I mean, the reason why we had this burst of inflation during and after Covid were both bad policies. The amount of monetary, fiscal and credit easing exports that turn out to be way excessive given the size of the economic shock. That was relatively temporary. But second, there was so bad luck. There were three negative aggregate supply shocks that essentially reduced growth and increase inflation. One was the impact of course of COVID on the supply of labor, on production of goods and on global supply chains. The second was the impact of the brutal Russian invasion of Ukraine on commodity prices. And three, the kind of a zero COVID policy of China that further restricted global supply chain. So why inflation fell in part was of course central bank gave up on quantitative easing, normalized policy rates. But if that was the case, we should have seen inflation falling dramatically but probably a much stronger slowdown of economic growth, maybe a recession the way most economists thought about it. Instead we got the reduction in inflation. But growth say in the US has remained robust above potential two and a half percent in the last couple of years. So I think in part we also got lucky. And luck was that these three negative aggregate supply shock got reversed. First we had the end of COVID so supply of labor increased, we started producing goods and services, supply chains got, how do I say unstuck. The impact on commodity prices of the invasion of Ukraine became reduced because there were new sources of energy coming from Middle East, US and so on that went to Europe. And finally China gave up on its zero COVID policy. So we got luck. And on top of it there was another sets of factors, at least for the US that maintained growth strong. One was that we had significant amount of migration, documented or otherwise. People estimated Maybe up to 10 million people entered in the United States in the last four years that increased the labor supply, increase growth and reduce some pressures on wage inflation. Definitely right now, politically of course migration is a hot topic, but from economic point of view it increased growth and reduced inflation. And we had also other fiscal stimulus that helped growth from the Infrastructure act, the IRA and the CHIPS Act. And then we had got also of course the AI revolution has led to significant increase in capex, at least for the United States. I think was a combination of a variety of factors that implied that inflation fell and growth remained robust. Not so in other parts of the.
- [11:08]
Wells Fargo Representative
Wells Fargo seeks broad impact in their communities. They're focused on building a sustainable inclusive future for all by supporting housing affordability, small business growth, financial health and other community needs. That's why They've donated nearly $2 billion to strengthen local communities over the last five years. Wells Fargo the Bank of doing see how@wellsfargo.com Saydo Wells Fargo's philanthropic support includes contributions from Wells Fargo & Co. Wells Fargo Bank N.A. and the Wells Fargo found Not everybody.
- [11:40]
Marin Sums
Likes talking about money. Some people find it awkward. Sometimes they even find it a little embarrassing. I do not. I like talking about money whether it's the boardroom, the newsroom, the trading floor. I've spent the last 30 years talking about money, writing about money and talking about it and writing about it a little bit more. I'm Erin Sums at Webb and every week senior reporter John Stepak and I answer your questions about personal finance and we discuss the best strategies for making the most of your money. Listen in for the kind of insights and explanations everyone can use to help them make better saving and investment choices for themselves and their families. My question is whether you think maxing out my company Pension Match is enough for when it comes to saving for.
- [12:18]
Nouriel Roubini
My pension, should I attempt to pay.
- [12:20]
Tracy Alloway
My Charles University fees and living costs? My partner and I have excess savings, so should we overpay on our mortgage or should we put the money into stocks?
- [12:30]
Marin Sums
From Bloomberg podcasts, tune into Marin Talks Money, follow Marin Talks Money on Apple Podcasts, Spotify or wherever you listen.
- [12:39]
Joe Weisenthal
I want to talk a little bit more about the dollar and there are so many different ways that you can begin a conversation or about thinking about the role of the US Dollar. You can think about the effects that tariffs will have on inflation or the strength of the US Dollar relative to other currencies. You can think about the central role that the government that the US Dollar plays in global trade and finance and whether there are possible rivals that are emerging. One of the things that we saw recently from President Trump was a threat that he put on his Truth Social account against of tariffs against any country that would attempt to form a rival currency block. And he specifically mentioned the BRICs. I don't know if the BRICS is a real thing or not. It sometimes seems like a meme to me. But there is an organization called the brics and sometimes you see headlines about dollar alternatives in the short to medium term. Is there a real prospect of some other currency, the Chinese yuan, perhaps taking sizable market share in global trade from the US Dollar?
- [13:46]
Nouriel Roubini
Well, I would say for now, not yet. But de dollarization a process that could occur over time and what could trigger it was of course that we have rightly or wrongly weaponized the dollar in the last few years for national security and foreign policy purposes, imposing a variety of sanctions against a variety of strategic rivals of the United States and the West. The issue about finding an alternative to the dollar is complicated because you cannot essentially replace something with nothing. And the question is, what's the alternative to US Dollar? Former US Secretary of the Treasury Larry Summers once joking his head people don't like the dollar, but Europe is a museum. China is a Prison, Japan is a nursing home and bitcoin, so for now is an experiment. So there is something of unhappiness with the US dollar, but for the time being I would say the US dollar is still dominant. And by the way, I would probably argue that the Trump policies regarding the dollar a little bit confused because on one side there is this concern that a strong dollar has led to deindustrialization, loss of competitiveness, large trade, current account deficits, people free riding on the US So there is a sense I would like a weaker dollar. But if you think about policy and economic fundamentals, tariffs will strengthen the dollar. And threats of tariffs have led since election the dollar becoming stronger. Trump says I don't want other countries to unquote de dollarize and I'm going to impose tariff on them if they do so he wants to maintain the role of the dollar as a major global reserve currency. If that's the case, demand for dollar has to remain high. The dollar remains strong in terms of relative growth. The US is doing stronger than Europe and other advanced economies. That should strengthen the dollar in terms of relative monetary policies. Probably given these differentials in growth and inflation, the US or the Fed is going to cut rate less than other countries while in Europe where the economy is weakened and there'll be more cuts. And overall, given the productivity growth of the US the boom of new technologies, AI, you name it, capital flows are going into the United States. So I think there is this dilemma that fundamentals and policy would suggest that the dollar is going to become stronger. But then that objective of trying to reduce the trading balance of the US through a weaker dollar, unless you have a big agreement on currency is hard to fathom how you're going to do it. There are some ideas along those lines. Is going to be to say challenging.
- [16:34]
Tracy Alloway
This is something I completely agree with and I think I've said on the podcast before that it feels like Trump doesn't know what type of dollar he wants because instinctively I think there's a sense that he wants to say the dollar is strong. It sounds good when you can say those types of things. And generally it means that the US economy is doing well relative to others. But if he's serious about boosting manufacturing and exports, then he needs the weaker dollar. There's also that tension between decoupling the US economy from the rest of the world, maybe becoming more self reliant and also wanting the dollar to be at the center of a globalized financial system. Are there ways that the Trump administration could like kind of thread the needle between those two different objectives.
- [17:24]
Nouriel Roubini
No, it's not going to be easy because either you want, you know, a weaker dollar to try to improve competitiveness, reduce the trade balances and so on, but then the dollar will have to weaken. Or instead, if you want to maintain the global reserve currency role of the dollar, then the dollar is going to remain strong. And by the way, the risk of doing an agreement to try to weaken the dollar is that that could occur in a disorderly way. Because if you do another. People talk now about a Mar A Lago agreement because in the past agreements to moved currencies were always in resorts like Bretton Woods Plaza, Louvre, Come David, you name it. So people think about maybe getting together all major economies in Mar a Lago and finding an agreement where Europe, Asian allies and others let their currency appreciate the dollar weaken. But if people expect that from happening, then capital is going to suddenly move out of the US because you're going to have a massive capital loss, 10, 15, 20% on your dollar assets and then you could have a spike in long rates or you could have a correction in US equity. So how do you engineer an orderly weakening of the dollar without causing significant tightening of financial condition? That's also problematic. It's not going to be very easy to be done. The other trade off that I think it's complicated is not just weak or strong dollar as a currency role, but also your tariff policies. Because on one side, if you impose the tariffs, the dollar is going to strengthen. And on the other side also, if you're going to raise tariffs, you need revenues. But raising tariffs, if it's very significant, is going to be highly inflationary. Now, some people within the Trump camp say, well, in 2018, 19, when we increase the tariffs on China, there was not significant increase in inflation because the RMB depreciated and therefore import prices did not increase very much. But suppose that you impose the tariffs and the currencies of all your trading partners weaken. Then you might not get the inflationary burst of the tariff. That's correct. But then you're not going to have an improvement of the competitiveness of the United States and therefore inflation is not going to rise, but your trade deficit is going to remain very large. Vice versa, if tariff are imposed and the dollar does not strengthen, other currency weaken, you might get actually some improvement of your trade balance, but then you'll have some inflationary impact of this. So in all these cases there is not really a free lunch.
- [20:07]
Joe Weisenthal
Yeah, I want to actually dive further into this because A lot of times when tariffs come up, one thing people say is that, okay, well, it's a one off. It's a one off, right? The prices may go up at some point, but that doesn't necessarily represent a new inflationary trend that say, the Fed would have to worry about. And perhaps that's true. But it also occurs to me that if part of the impulse here is to be less reliant on global trading partners for, say, various manufactured goods and to have more domestic building, et cetera, of various things, this is happening at a time of still high resource utilization already. So the unemployment rate is at 4.1%. There are already a lot. There are shortages of industrial parts. Yesterday we're recording this December 3rd, by the way. Yesterday we got the ISM manufacturing and it showed that electrical components have now been in shortage for 50 straight months. So over four years. So it seems to me that regardless of if you have this impulse to build more here, et cetera, you're coming at it at a time in which resources remain quite constrained.
- [21:14]
Nouriel Roubini
I think your point is very correct and valid in some sense. Actually, the US economy right now is not in a soft landing, maybe in a no landing zone because growth has remained above potential and inflation has fallen. But you know, core PC this year probably is going to be 2.8, even 2.9%. And next year may still remain elevated, especially next year if you impose tariff, if you do significant draconian restriction to migration, if you have runaway fiscal deficits that stimulate further demand, and if you have a policy of trying to weaken the dollar. So yeah, we live in economies already in no landing where resource constraints are significant. Labor market is significantly tight. Goods market are also tight. Imports can help you. But then if you're going to restrict the labor supply to migration restriction, if you're going to weaken the dollar, if you're going to impose tariff, you're going to make those inflationary pressure going higher and that may trigger the Fed then having to act and stop cutting rates or maybe even increase them over time.
- [22:26]
Tracy Alloway
I mean, the counterargument to the no landing idea is that we have seen some signs, as Joe mentioned in the intro, of the labor market softening. And even yesterday, you know, we already mentioned the ISM, but we had PMIs as well that also looked kind of sluggish. Is there a possibility that the economy weakens significantly into 2025?
- [22:50]
Nouriel Roubini
Well, I would say that the risk of economy weakening significant 2025 will be one in which those sets of stagflation rate policy are followed. If you really impose massive tariffs, if you deport millions of people, if you try to weaken the dollar, if you have a massive fiscal deficit, then lead to bond yields rising, crowding out economic growth. You could be in a situation in which growth significantly slows down and inflation goes higher. I think that's definitely a risk. As I pointed out at the beginning, however, there are sets of policies of Trump that are actually positive for economic growth and some of those policies will be implemented.
- [23:31]
Tracy Alloway
So wait, if you had to choose from like column A or column B, what would be like the higher probability?
- [23:38]
Nouriel Roubini
As of now, I would say that the impact on growth for next year is going to be a wash. Because on one side definitely is pro business is going to deregulate, there'll be some increase in capital spending, stock market is strong, financial condition are easy. So those are positive for increasing growth. But then some of the other policies, especially on labor market and tariff and protection, is when some increase in long rate are going to weaken economic growth. So I think that the impact for growth next year is that if this year we're growing say 2.8% next year we're going to still grow above potential, but less, maybe 2.4. But I don't think there's going to be a massive slowdown unless it goes really radical with the stagflationary policies. However, on net in an economy is already in a tight resource constraint, labor, goods, market and otherwise. That is more in a low landing zone where even before Trump was elected, the Fed was starting to say, wait a moment, should we really cut rate as much as we promised, given that growth seems to remain robust, that inflation remains more sticky that in that world, in my view, inflation is going to be on net staying high rather than going towards the 2% target. So I would say the net impact on growth for the time being is a wash. But the impact on inflation, probably the inflation is somehow higher. And that's going to impose something of a dilemma for the Fed. Of course there is a tail risk that goes fully stagflationary. But as I pointed out, there are two major constraints. One is really market discipline. The market would punish those policies and will have to reverse. I mean, take an example in the UK because there was a fiscal stimulus, was excessive, then suddenly the pound collapsed, bond yields went higher, you had a pension crisis and Lisa prime minister lost power in 44 days. Now that's not going to happen in the United States. But I think that people should not underestimate how market discipline can really punish even a country like the United States. So between the constraint of the Fed being still independent and the market discipline probably excessively stack, treasury policy will be constrained next year.
- [26:14]
Wells Fargo Representative
Wells Fargo seeks broad impact in their communities. They're focused on building a sustainable, inclusive future for all by supporting housing affordability, small business growth, financial health and other community needs. That's why They've donated nearly $2 billion to strengthen local communities over the last five years. Wells Fargo the Bank of Doing see how@wellsfargo.com Saydoo Wells Fargo's philanthropic support includes contributions from Wells Fargo and Company, Wells Fargo Bankna and the Wells Fargo Foundation.
- [26:45]
Marin Sums
Not everybody likes talking about money. Some people find it awkward. Sometimes they even find it a little embarrassing. I do not. I like talking about money, whether it's the boardroom, the newsroom, the trading floor. I've spent the last 30 years talking about money, writing about money and talking about it and writing about it. Little bit more. I'm Marin Sums at Webb and every week senior reporter John Stepek and I answer your questions about personal finance and we discuss the best strategies for making the most of your money. Listen in for the kind of insights and explanations everyone can use to help them make better saving and investment choices for themselves and their families. My question is whether you think maxing out my company Pension Match is enough for when it comes to saving for.
- [27:23]
Nouriel Roubini
My pension, should I attempt to pay.
- [27:26]
Tracy Alloway
My child's university fees and living costs? My partner and I have excess savings. So should we overpay on our mortgage or should we put the money into stocks?
- [27:36]
Marin Sums
From Bloomberg podcasts, tune into Marin Talks Money, follow Marin Talks Money on Apple Podcasts, Spotify or wherever you listen.
- [27:45]
Joe Weisenthal
So amid all of this extraordinary uncertainty, you recently at the end of November announced you have a new etf, the Atlas America Fund. And it looks very interesting. You know, I think like I want to get into what it is, but I think, you know, when people think about say like a well diversified or all weather portfolio, and it sounds like we all want an all weather portfolio because there's just so much uncertainty right now, as you've been talking about for the last several minutes, something that would thrive and be stable amid all this uncertainty. You know, for years people talked about the 6040 portfolio and it had a certain, I guess I would say intellectual elegance to it because the two legs of it generally produced positive real returns. But also they had a sort of natural hedging component against each other. And so usually if stocks were going up and bonds were doing a little worse and then when your stocks would go down and the bonds were going up, worked very beautifully for several years basically until 2021. And now I'm not sure if people feel confident at all to go back into that. And people come up with reasons why there's a lot of distrust about using bonds or a heavy allocation of bonds as a good ballast for a portfolio. What is the sort of. Before we get into the specifics per se, why don't you talk about sort of like the intellectual or conceptual framework behind your approach, which is to come up with a new sort of diversification strategy that can work across cycles?
- [29:12]
Nouriel Roubini
Yeah. The logic is as follows. I wrote a whole book titled Mega Threats where I argued that they era of the great moderation, where we had low growth and low inflation is over. Even the era of the secular stagnation that followed the post GFC period, where again growth was low and there were disinflationary forces, is over. And there are a variety of forces that are going to lead to stagflationary pressures in the global economy, both on the supply side and on demand. On the supply side, I consider 10 factors from geopolitical fragmentation to deglobalization, protectionism, French shoring reshoring to aging of population, restrictions to migration, global climate change, pandemics, cyber warfare, backlash against liberal democracy and pro labor fiscal policies, and potential gradual de dollarization. Now all these factors gradually over time reduce growth and increase inflation. And on the demand side, we live in a world of very large private and public debts are going to become larger. We're going to spend more on the fence all over the world. We're going to spend more on dealing with climate change, going to spend more to deal with pandemics. We're going to spend more because there's going to be disruption coming from AI robotic automation. We're going to spend more because there are many people left behind and we need the bigger social safety net so we spend more. We have limits how much we can raise revenues. So structural budget deficits are going to rise and therefore there'll be an incentive to wipe out the real value of nominal long duration debt through unexpected inflation. Now, I'm not talking about hyperinflation or even high inflation, not even double digits. Let's assume for a moment that this supply and these demand forces imply that over this decade inflation is not at 2, but say 5, 6%. It is very reasonable. We were at 9 just two years ago. And I think these forces over time are going to essentially materialize. And the policies of Trump Some of them exactly go along the same stagflationary direction of lower growth and higher inflation that we described. So in that world, think of it this way. Bond yields 10 years right now, Raband 4%. But if inflation was 6, bond yields have to be at least 8, 6% for expected inflation and 2 for the real. Because in the world of high debt and deficits, the equilibrium real long rate is not zero anymore, it's closer to 2. Suppose the bond yields go gradually from 4 to 8%. Then a 10 year treasury is going to lose 30, 40% of its value over time. And we saw what happened in 2022. In 2022, 60, 40 did not work. Did not work because 6040 assumes that there is a negative correlation between the price of stocks and the price of bonds. Risk on growth equity do well, bond yields are higher, the price is lower. So you make money on equities, you lose money on bonds, risk off recession, equities go down, bond yields fall, the price goes up, you make money on the bond part of your portfolio, you lose on the equity. But that negative correlation assumes that inflation is low and stable. When inflation is not low and stable is rising, then what happens? Bond yields are higher and you lose money on the bond component. And like that happened in 22 and happened again even last year when bond yields are significantly higher stock prices. Correct. And therefore you get a positive correlation between bond prices and equity prices. Paradoxically, actually in 2022 S&P 500 fell by 15%, but the price of 10 year treasury fell more, fell by 20% as 10 year treasury yield went from 1 to 3 and a half. So in a world in which bond yields gradually could go from 4 to 8, the traditional defensive asset in a 6040 portfolio, this long duration treasury doesn't work anymore. And therefore this is not an all weather portfolio etf. It's something of an alternative to the traditional defensive assets. Alternative to the 40% of the 6040 is not the 60 part.
- [33:42]
Joe Weisenthal
So we're just working the 40 here.
- [33:44]
Nouriel Roubini
We're working mostly on the 40. And the point is that if you do believe the story, or even if you assign a meaningful probability that inflation is going to be gradually higher and nominal, long bond yields are going to be higher. You have essentially $20 trillion of long duration fixed income, mostly treasury, but also high grade high yield or EM debt that is dominated $. And a significant gradual rise in those bond yields is going to imply that your defensive asset actually loses as much if not more than equities. So then you have to think in a world of gradually higher inflation, which are the other alternative assets that provide you a hedge against inflation, against debasement of fiat currency, against desolarization, against geopolitical risk, against financial crisis and against climate change. And the range of assets that we have chosen for this ETF is one that provides you a better hedge against those still risk than traditional defensive assets like 10 year Treasury. And that's the idea behind this new ETF.
- [34:52]
Tracy Alloway
Yeah, I find this ETF fascinating because it touches on so many different themes. Obviously there's the macro and the risk of inflation. There's portfolio construction in the form of 60, 40, which you just discussed. But there's also this idea of maybe creating a sort of like dollar or U.S. treasury alternative that is backed by real assets. So you mentioned, you know, the stuff that could do well in an inflationary environment and withstand some of those big risks, stuff like gold, US Property that is somewhat climate resilient. So I guess in the Northeast and short term US Treasuries where the rates will more or less follow inflation. And one of the other interesting things about this whole project is Atlas itself is based out of dub, where there are, you know, it's very close to some very large pools of capital that have been investing in Treasuries. Talk to us more about that angle, this idea that you could pitch it as a sort of treasury alternative for some big investors.
- [35:56]
Nouriel Roubini
Well, as I pointed out, any investor, starting from institutional investor, large sovereign wealth funds, private and public pension funds, endowment foundations, let alone retail investors, hold some allocation of their portfolio in long term Treasuries. And that's because it has been traditionally the safe defensive asset. Speaking about literally $20 trillion plus of debt and in the world that I describe right now, the losses that occurred in 2022 or summer of last year, when again there was a spike in bond yields to 5%, there was a correction, equity will occur. So you're going to lose money on the equity and on the bond side of portfolio. That's why, by the way, even fancy models like risk parity that are glorified versions of 60, 40, 70, 30 have not done very well. And therefore I think there is a nervousness around the world. The large pools of money that have this allocation to long duration Treasuries, they're concerned about a variety of the risk that I described and they're thinking about alternative. And as you pointed out, the combination of the assets is one. Exactly. That does reasonably well actually in normal times and is a convexity. So if some of These tail risks were to materialize, of course the return is going to be much higher. So for example, you want to stay completely away from long duration Treasuries and instead you want to be in short duration treasury, which really goes higher and don't have the same price correction. If bond yields are going to be higher, you want to be into tips that of course are going to do well if there are increases in unexpected inflation. The allocation to gold is a hedge both against inflation and the basement of fiat currency. But there's also a hedge against potential de dollarization. If you think about the only liquid foreign reserve asset that cannot be seized because the last few years in Russia, in Iran, North Korea, we've had massive sanctions financial and seized their foreign assets. The only liquid asset that cannot be seized is not euro, it's not dollar, it's not the end. All of those have been seized. But it's going to be gold bullion. If you hold gold bullion, you're going to go and be safe. And that's why, for example, significant central banks, not only of the strategic rivals of the US but even of the frenemies of the US have gone into gold this year. The surge over 40% in gold prices is significantly driven by that geopolitical risk of de dollarization and diversification. You want to be in some allocation for commodities, especially ag commodities, because in the world of climate change, the demand is going to be there, but there'll be supply disruption as we have seen spikes in commodity prices driven by climate change. And real estate traditionally is a good hedge against moderate increases in inflation because rents and other things can go higher. And in the short run, real estate is in fixed supply. But because of climate change, of course, lots of parts of North America are going to have significant problems and asset values are going to be reduced. I mean, many parts of Florida, Louisiana, California are not even any more insurable in terms of home insurance. People will have to move. And as they move, prices are going to fall in the region where you have climate change and they're going to increase where you are having better climate. And therefore some allocation is in real estate. But we have data at the zip level for every zip level county of the United States. And we look at each one of the REITs in North America, we see what's our allocation to different regions. We have a whole global climate change map based on big data that allows us to go into the REITs that are going to be benefiting from climate change as opposed to those who are going to be hurt. By climate change. So it's a combination of assets that provides solid returns with very low volatility and is an alternative to the traditional defensive asset.
- [40:16]
Joe Weisenthal
Yeah, just looking through the whole thing. So gold and short term Treasuries and tips and a short 20 year betting against the 20 year treasury and Equinix and American Tower. Interesting mix. All right, I have one last question. I'm not going to ask you the obvious question and one thing I noticed in here, there's no Bitcoin, but I don't want to relitigate a bitcoin conversation because it's the end and I don't want to have that. But I do want to ask an adjacent question to that, which is that when you talk to overseas investors and talk to people with high amounts of ultra high net worth people today in 2024, when you talk to them, how seriously do they view, setting aside your own views, how seriously do they view Bitcoin or crypto as some component of the portfolio that they want to have?
- [41:05]
Nouriel Roubini
You know, some people are opening up to the idea of holding crypto assets, but those investors that are looking, say for a safe asset that does well given this tail risk are not going to look at crypto assets. The paradox of crypto assets is that they were doing actually quite poorly when inflation was rising and the Fed was tightening. And they're doing better when inflation is falling and the Fed is easing. They're not negatively correlated with equities, actually, they are kind of like high beta equity. High beta, exactly. So if you want something that is a substitute for the 40 component, I would say the combination of assets that we have considered and look at them carefully gives you stable returns and reasonably high turns. If you add any crypto asset, you add a huge amount of volatility and there is a wide range of investors that don't want that type of volatility.
- [42:08]
Tracy Alloway
When we were first talking about the etf, there was some early discussion of maybe tokenizing it in some way. Is that still a possibility?
- [42:17]
Nouriel Roubini
Yes, it is. The idea is that I do believe that actually tokenization of real and financial asset as some validity as opposed to crypto assets are backed by nothing vaporware. And I think that the process of some degree of tokenization is going to occur. And the benefit of tokenization will be that these types of liquid asset ETF is not widely available in a variety of jurisdictions, especially in parts of the world like the Global south, where there is significant inflation, the basement of fiat currency, you could have something that would actually have a Stable store of value is still dollar ringed but gives you positive return and is going to be a good hedge against some of those terrorists that are facing. So it'll be a way of eventually making it available to many investors all over the world. So. But that'll be stage two tokenization, not for the timing is the etf. Yes.
- [43:18]
Tracy Alloway
So I have just one more question and every once in a while I get the urge to start an ETF of some sort. Maybe the odd lots ETF that is full of like thematic related assets to the stuff that we talk about on the podcast. And then I never do it for obvious reasons. But what has been the most challenging or unexpected part of launching this etf?
- [43:46]
Nouriel Roubini
Well, you know, it takes a lot of work. You know you have to build a team collaboration with Goldman Sachs.
- [43:53]
Tracy Alloway
Oh yeah. Because this one's actively managed as well.
- [43:56]
Nouriel Roubini
Yeah, yeah. So, you know, one thing is to write about money, another thing is to manage it. You have a daily P and L. But for me it's a new and interesting challenge. I've been an advisor to many financial institutions over time. There's a big picture view here is that secular stagnation is over, secular inflation is rising. So it's not just a little twist on a new idea, but says there is a big asset class, it's the defensive one. There's not going to be the safe asset anymore. In a world in which there'll be a variety of neutral risk, we have to find a hedge against it. So I think the thesis is going to take time. It's not something that's going to happen overnight as a medium long term story. But I do believe that investors are getting nervous about the whole spirit of things and have to think about an alternative to traditional. But you know, making the idea, designing it, implementing, convincing people that that's the right thing to do takes a lot of time and effort is hard work.
- [44:58]
Tracy Alloway
All right. Nouriel Roubini, truly the perfect guest to talk about stagflation and some of the other big risks out there. Thank you so much.
- [45:05]
Nouriel Roubini
Great having me. Thanks so much.
- [45:20]
Tracy Alloway
Jo. It's always fun to catch up with Nouriel and see how his thinking is kind of evolving and also how he's putting some of the big picture like theories into practice with the new etf.
- [45:32]
Joe Weisenthal
I love that chat. I thought that was a fantastic chat with Nouriel and I thought a he does a really good job of laying out what has very clearly the sort of for better or worse look all presidents come in and have different factions. Right. That's not weird. The coalitions are coalitions and what they are, and there's always tensions. But there do seem to be some very interesting sharp divides within the broader tent of Trumpism. There's the sort of traditional Wall street quote, pro business unquote view, and then there is the sort of much more nationalistic, anti immigration, anti free trade, stagflationary view. And it's very unclear who, what mix will win out.
- [46:14]
Tracy Alloway
You know, the other thing I like about Neurial is he kind of like self catalogs his thoughts.
- [46:19]
Joe Weisenthal
Yeah.
- [46:19]
Tracy Alloway
He's very clear while he speaks like number one, number two, number three, number four. The other thing I was thinking, okay, this, this has been emerging as like a big talking point in a variety of our conversations on the podcast now. And also you've written about it. I've written about it to some extent, but the idea of the market as a limiting factor on what's possible. And part of me is a little bit nervous about that one because it seems like maybe a big ask for the market to police the new administration. But the other thing I was thinking about was the importance of growth in all of this and like what becomes possible if the economy continues to grow. Maybe that enables like some of the more I don't want to say radical, but like creative ideas from the administration.
- [47:07]
Joe Weisenthal
Yeah. Adventurism and heterodox and sort of. Yeah, for sure. You know, I think also I really enjoyed hearing his theory of a new safe haven because you do see this, like a lot of people's big holdings to bonds got blown up over the last few years and you think, okay, well, now they're yielding like, I don't know, a few percent. Maybe they, it's a good time to step back in.
- [47:27]
Tracy Alloway
But the short end 40 has made like a little bit of a comeback recently.
- [47:31]
Joe Weisenthal
A little bit. But like, you know, there's a lot of people saying, why am I buying the 20 year when the short end is yielding more or is yielding about the same with much less duration? And so. And then gold has obviously done phenomenally well the last couple of years thinking about what makes real estate a safe haven in the specific properties of like, climate, et cetera. Just some very interesting ideas. There are many ETFs that get launched all the time. Most of them just sort of disappear. This will be one I at least pay attention to.
- [48:02]
Tracy Alloway
Yeah. And the ticker I just realized is usaf, which is kind of funny.
- [48:06]
Joe Weisenthal
Yeah.
- [48:07]
Tracy Alloway
Anyway, shall we leave it there?
- [48:08]
Joe Weisenthal
Let's leave it there.
- [48:09]
Tracy Alloway
This has been another episode of the All Thoughts podcast. I'm Tracy Alloway. You can follow me at Tracy Alloway, I'm Joe Wiesenthal.
- [48:16]
Joe Weisenthal
You can follow me at the Stalwart, follow Nouriel Roubini at Nouriel, follow our producers Carmen Rodriguez, CarmenArman, Dashiell Bennett at Dashbot, and Cale Brooks at Kale Brooks. Thank you to our producer Moses Andam. For more Odd Lots content go to bloomberg.com oddlots where we have transcripts, a blog and a newsletter and you can chat about all of these topics 24. 7 in our Discord with fellow listeners Discord, GG Odd Lots and if you.
- [48:43]
Tracy Alloway
Enjoy Oplots, if you like it when we catch up with Nouriel Roubini, then please leave us a positive review on your favorite podcast platform. And remember, if you are a Bloomberg subscriber, in addition to getting our new daily newsletter, you can also listen to all of our episodes absolutely ad free. All you need to do is connect your Bloomberg account with Apple Podcasts. To do that, just find the Bloomberg channel on Apple Podcasts and follow the instructions there. Thanks for listening.
- [49:32]
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Nouriel Roubini
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Tracy Alloway
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