Why the "Emerging Markets" Label Is Now Obsolete | Louis Gave
Summary
Emerging Markets: Argues EMs are structurally stronger with local pension funds as buyers of last resort and less volatility than in past cycles.
De-dollarization: Highlights growing RMB trade/financing that reduces EMs’ dependence on USD and provides a backstop in crises.
Latin America: Bullish on the region amid U.S. policy refocus, removal of dollar-crisis risk, rising FX, and falling local yields supporting assets.
Latin America Debt: Notes substantial yield compression (200–300 bps) and strong recent returns, with ongoing tailwinds for sovereign debt and equities.
China Manufacturing: Contends China has leapfrogged the West in autos, batteries, robotics, telecom, and power, creating world-class, high-margin competitors.
Autos & LiDAR: Expects rapid LiDAR adoption in vehicles (costs near $200, safety gains), citing Chinese auto ecosystem leaders like BYD and CATL.
Japan Yields: Rising JGB long yields limit prospects for global bond rallies, but a full carry-trade unwind likely requires much higher BOJ short rates.
Energy Hedge: Recommends a meaningful (20–30%) energy allocation as an anti-fragile hedge, expecting any cycle-ending shock to come via higher energy prices.
Transcript
In 2018, the US punched China on the nose and China couldn't punch back. Instead, China went to the gym and it got fit and it got strong, and we forced them to do this. It's not that China's caught up. China has now leapfrogged the west and is doing better. Hi, I am Ed D'Agostino, and today I have a great conversation for you talking about emerging markets. China's manufacturing edge, Japanese bond yields. And the broken relationship between Canada and the us. My guest is none other than Louis Gave of Gavekal Research. Welcome to Global Macro Update, Louis Gave, it's always good to see you, my friend. Thank you for taking some time. Thanks for having me, Ed. Good to be here. I think our last discussion got about a quarter million views, so, uh, really? I know what we said. Yeah. Alright. It did. It did. So. Pretty cool. Must be. Must be the new beard you're sporting. I think, yeah, this is, I call this my Louis look. Well, there you go. This is my Louis look. Yeah. That's how you done, that's how you boost the ratings. That's right, that's right. I, I highly doubt it. I think it's, I think it's more on your side of the screen. But anyway, I wanna talk to you about emerging markets, right? Us investors are discovering emerging markets all of the sudden, right? Like it is now becoming in vogue, uh, hear hearing about it in, in, in places that I'd never expected to hear about emerging markets before, but it's. You know, people are talking about it, but not really understanding what it is, right? This is just the biggest blob you can imagine, right? Everything outside of the US so, so, so can, can you help? Investors understand it and, and how to think about it and what you look for when you're investigating em. I don't really love the term em, um, yeah, it's, it's, it's terrible. Yeah. Yeah. I think it was a term invented in the seventies. I think Fidelity. Uh, and, and invented it. And essentially it was a term, it was like, yeah, whatever's left, right? You had Europe, you had Japan, you had, uh, you had the, the US and everything that was left was at that time, pretty small. Um, and, and they thought, okay, how do we like, love this together? It was really a marketing invention. Bunch, a bunch of people that are completely different, but the one thing they did have in common back then. Was they had very positive demographics. You know, it was basically young countries, countries where you had, where more than half of the population was under 30 years old, uh, you know, steep pyramid of age, et cetera. And now they don't even have that in common. You look, you look at some of the em, like some South Korea, like China, like Taiwan, that, that are all still considered emerging markets, quote unquote. Uh, these guys actually have the very worst demographics in, in the whole world. And so, uh, all this to say, I don't really love the term em, but I realize that's how we classify it and that's how money managers, you know, in, in the world in which you have to fill a box, uh, you're either a US growth guy or Europe value guy. And so you're an EM guy. And, you know, as, as a firm, we've, we've had a pretty strong EM slant, but, um, I think within em, what you find. Is, uh, so the first difference that has evolved from back in the seventies and eighties, the first difference, you know, they don't even have the common demographics, uh, uh, anymore. The other big change is that if you go back to the seventies, the eighties and nineties, even the early two thousands, most of the emerging markets were essentially dependent on foreign capital. And, and you saw this time and time again, you would have a problem in Thailand. So because Thailand got hit, all of a sudden foreign investors were like, oh, you know what? Sell Indonesia. Sell, sell Malaysia. Not because of anything linked to those countries, but simply because I'm taking losses over here and therefore I'm getting redemptions. I have to sell what I can. And before you know it, a problem that had started in Thailand, you'd get Brazil that got crushed and Argentina would get crushed. Um, now the good news is I think this, this is definitely no, no longer the case. Partly because the marginal buyer in emerging markets no longer is a foreign investor sitting in London or New York or, or Dallas or Miami. Uh, but increasingly the marginal buyer in most emerging market is now local. Um, and you see this, where you see this the most clearly is actually in Latin America. Where in Latin America, you go to countries like Chile, like Colombia, like Peru, like Mexico. And you've had the birth of a genuine domestic pension fund industry, and all this started more than 30 years ago, but when you first start a pension fund, you have peanuts in it. Yeah. But 30 years of compounding returns, plus 30 years of people putting money in and countries like Chile, I think there's about $600 billion now in Chile and pension fund money. You might say, okay, that's, uh, that's not that big relative to some of the pension funds you have in the us, but for a small market like Chile, it matters because what ends up happening is that your Chilean pension fund will always have a domestic bias towards Chilean assets and the Peruvian pension fund to the Peruvian assets, the Colombian, and, and so what happens now is that if and when, for whatever reason, there's a dip in the markets. Then the, your Chilean pension fund will say, oh, there's a dip in the Chilean peso. There's a dip in Chilean bonds. There's a dip in the Chilean equity market, and they'll buy it. And so in, in a way that before in a lot of these markets, you really didn't have a sort of buyer of last resort. And, and if once foreigners decided to leave, once foreigners decided, why am I even investing in Indonesia? It's like it's creating headaches for me. It's all over the place. Bad politics, whatever. Just get me out. Uh, and once they decided that there was essentially no market and the thing would, would absolutely collapse through the, through the floor. Um, and now you actually do have local institutions that, that step in. So the very structure of most emerging market financial markets that have changed and I think has, uh, so they're now far more stable, or at the very least, there's. Uh, the downside risk, I think is less than it, uh, it used to be in the past. Uh, so having said all this, uh, I'm still, you know, I keep saying I hate the term emerging markets. I keep using it. Um, if you, if you want to think about emerging markets in general, and historically I think you've had really two main kinds. You've had the kinds that were the commodity exporters. That made money, uh, exporting commodities. So here you can think Brazil, you can think Chile, you can think Saudi Arabia. Frankly, most of South Africa, most of Africa. Um, all the guys, uh, and these guys historically have tended to be very tied to the commodity cycles. And here I think they've become less tied to the commodity cycle. Thanks. In part to the birth of these domestic, uh, domestic pension funds, et cetera. It's reduced their volatility somewhat. So that was your, your, your first part of the, the, the, the EM base. Um, and then. You had the other guys who tended to be more the commodity importers. And so if all prices, for example, shut up, they, they would struggle countries like Korea, like Taiwan, like China, like India, uh, where big rise in commodities might actually negatively affect them. Uh, and here, within, within that group essentially had a split between the countries that were, where the cycle was essentially export led, again, Korea, Taiwan, you know, at typically export led economies. And countries that where the cycle was far more, um, domestic, domestically, domestic demand driven. Uh, and here the obvious one is India. So all this to say that the broader emerging market space is, is now extremely, extremely diverse. And I'm, I'm belaboring the point, but there's been another massive, massive shift in, in recent years is that historically. Emerging markets were always highly dependent on the US dollar, uh, highly dependent on the US dollar for a number of reasons. Uh, but one of them was if you needed to fund a new power plant, uh, a new dam, a canal, or you know, anything, a port, typically most of the infrastructure investments that you needed as an emerging market, uh, and you needed a lot, it was typically funded in US dollars. It might be funded through loans of the World Bank or the Asia Development Bank. Or through loans, uh, done by Bank of America or Citibank, if it was in Latin America, et cetera. But most of the, the big time funding occurred in, in US dollar. So when the price of the US dollar would go up, that would mean that the cost of capital for all these guys would go up a lot. And so they, they would get strangled. Uh, so, so that was the, the first thing, I think the second reason, they were all very dependent on the US dollar. Is that in most emerging markets, most people didn't really trust their policymakers, didn't really trust. Their own currency. Very often they'd had to deal with high inflation not that long ago. Whether you're Brazil or in Indonesia or Philippines, you, you'd have had high inflation. You know, you and I are in our fifties. We would've had at least two decades of, if we were Brazilian or Indonesian, we would've experienced at least two decades of uncomfortably high inflation. Which leads you to not trust your currency. And so in most emerging markets, people think in two currencies. They think in their own IE Taiba to Indonesian or P or Mexican peso. And they think in US dollars. So when the US dollar goes up, most rich people have a tendency to say, oh, US dollars going up. Get rid of my Mexican peso, put it, put it in, in US dollars. So the, the US dollar, uh, the most emerging markets have always traded as a sort of anti-US dollar as a result of this, because that knife cuts both ways. When the US dollar goes down, they repatriate capital and they buy, they buy back local assets, uh, the, at least the rich people do, but also increasingly the local pension funds. So the, the weight of the US dollar has always been super important. And that's one part that is also changing a little bit. And you know, I've talked a lot about this, uh, at the various SIC conferences over the past 10 years. How China's now going around to emerging markets and saying, Hey, you want a tractor? Uh, you can buy this tractor from me at a 3% interest rate in r and b loans. Um, you want me to build you a railroad? You want me to buy, build you a nuclear power plants? I can do all these things. Uh, and you don't even need dollars. You, you fund yourself in Remin B and now you are seeing countries, whether you're ethiopias, your Kenyas, your zombies saying, you know what? I'm transferring all my USR debt to a remin B debt because I get to do so at a, I get to fund myself at a much lower interest rate. And you have countries like Indonesia, like Thailand, that have shifted most of their trade with China, and China's now their biggest trade partner. Into reb. And so the dependency on the US dollar is also not what it used to be, uh, which is actually great news for emerging markets in general because if you're dependent on one currency, it's the old story, right? If you have one client, you don't have a client, you have a boss. Uh, and if you have, if you can fund yourself in many currencies, then if and when there's a next crisis in the us, which is what happened in 2008. 2008, US banks hit the wall. The, the US banks say to Indonesia, sorry, we can't lend you money right now. And so Indonesian trade with Korea and with China and with Taiwan, it just imploded. It just went to zero. 'cause they couldn't fund the trade because American banks wouldn't do it. Not because of anything linked to Indonesia, simply because American banks were getting lost. So to tomorrow, if that happened again, well that trade can be funded in, in Remin B, so that provides a sort of backstop to emerging markets that that didn't exist before. So on all that front, on, on on many front, the landscape for emerging markets is shifting very, very rapidly in front of our eyes. How much is coincident to the fact that the dollar is, has been getting weaker and commodities have been going up? Like what, what's the relationship today? Success has many fathers, right? And when, when you look at the fact that EM has been outperforming in 24, again, outperforming in 25, that EM equity markets are, are ripping away, uh, that em bond markets are also massively outperforming DM bond markets. Uh, you can, you can point to many things and it's, uh, you know, it's hard to isolate one. And there's also the element of, of chicken and the egg thing. Well, you know, once the momentum builds up. So again, I'm a Chilean pension fund. My currency's not going up. My equity market is outperforming the us. That's definitely because copper's going up and you know, the, the fact that copper's going up is helping fuel stronger growth in my economy. But here I am and I'm picking a number out of thin air. But let's say I am in my equity book, I'm 50% domestic equities and 50% US equities. For 15 years, the US equity thing was outperforming, and for the past two, it's now underperforming. So now I'm thinking, hmm, maybe I should be 60, 40 or 70 30. So I start to sell some of my US to repatriate money, and as I do, the dollar goes down and the cha peso comes up. Uh, and so it all feeds, uh, it all feeds into, uh, into each other. And, uh, then the next thing that happens is actually the pension fund in the us. It starts to realize, hold on, emerging markets are starting to outperform. Maybe we, you know, we don't have enough in emerging markets, or we don't have any, maybe we should have some. And, and you know, these trends, once the momentum starts, I think you need a pretty big event for, for the momentum to stop. Um, and right now all the signs are pointing to towards happening. Now the reality is we haven't really seen the flows yet. Uh, you, you pointed out in your introduction that em is now the big buzzword and everybody's talking about it, et cetera. But, you know, look at the shares outstanding of something like E Em, um, the, the big em, uh, uh, equity. Uh, ETF, uh, you know, it's picked itself up from the floor, but we're, we're definitely not at highs. And, and so wherever you care to look and you look at the investor positioning, um, the, you know, it's not, I, I, I don't, I really don't think we've seen the flows. Uh, we're we're, we're just at the beginning of a longer term trend. So do you think it's early days? I think it's very early days. Okay. Sorry about the dog barking in the background. No, no. This is the post COVID where, you know, this is the world we're in. Sorry. Uh. That dog's an idiot. Uh, he's, he doesn't like em clearly. That's bad about us referring to it there a job, actually. So, uh, on this, uh, an anecdote, I was at Tencent recently visiting the company and they have a new, uh, zoom sy zoom like system. So Tencent is one of the big, uh, Chinese tech companies, and they have. A new, a zoom, zoom, uh, like business where that essentially blocks out all the noise except your voice. Uh, they, they've got an AI that trains like, after two or three minutes, it manages to block out absolutely everything. You could be, I could be here banging a pot, but with a dog barking in the background and somebody ringing the doorbell and it doesn't pick it up. Nothing. Wow. That's why you, that's why you need to do your next zoom call on. Uh, so that, so that we, so that we don't, so that we don't get this, um, I, I will work on that. Ever since you and I last spoke. Uh, and I've been admittedly pretty, pretty hawkish on China. And you've, you, you've spent your career there, uh, or adjacent to there and, and seen firsthand just what has happened. I. And I'm reading a former, the book, I'm finally getting around to reading Break Breakneck, right. The, the book that your former colleague Dan Wang wrote fascinating. Just, just like the opening line or or page in that where he is like, America is run by lawyers and China is run by engineers like. That says so much. That's basically the book. Yeah. It could come there, but it really, it really hit me like, wow, that is so I finally get it. How much of that is spreading that, that mentality, that, that engineering, that build, that that growth mentality is spreading. Beyond China into the rest of Asia. 'cause what, you know, what I hear is that the, the middle class in a lot of Asian countries is growing. Uh, people are happy. Um, uh, quality of life has gone up and, and anyone who flies in any airport in the US and then leaves the US and goes to an an emerging market, they come back saying how. Behind We are depends on the emerging market. Uh, like if you go to China, yes, the airports are nice, but I, I just spent, uh, a week I was in, in Egypt, then I went to the Middle East, then I went to, uh, through the Middle East and I went to India. And so it depends on the airports on which you're talking about. But, uh, my go-to line for years at the SIC conferences. Was that when China enters a room, profits walk out. Uh, and uh, as a result, you know, for years and years I was an uber bull on Chinese fixed income, and I was always more skeptical on Chinese equities until essentially the COVID lockdown and when China reopened, uh, and I, I turned bullish on Chinese equities too early. Um, but, uh, the, the past couple years have been pretty good because. I think what most people miss about China, uh, and what you've just sort of scratched the surface on is the extent o uh, around which over the past really seven or eight years, China has now leapfrogged the western industry after industry. Uh, essentially what happened was that when the US decided to weaponize its, uh, the semiconductor supply chain, uh, against, uh, China in 2018. Uh, the Chinese leadership kind of freaked out and they said, you know what? If the US blocks us from semiconductors today, tomorrow, it could be chemical products, or it could be auto parts, it could be any number of things. We have no choice but to de westernize our supply chain. We can't be dependent on the west on anything. So, so we're gonna grab all of our savings, which they did, and we're gonna reallocate those away from real estate, away from consumption. And towards, um, towards industry. Um, so it's almost like in 2018 the US punched China on the nose and China couldn't pa pa punch back. Uh, instead 'cause it was too weak at the time. Instead, China went to the gym and it got fit and it got strong and we forced them to do this. We, we, maybe you said you could say they were gonna do it all along, but I think we forced 'em to do it in an accelerated timeline. And they did so at great sacrifices to themselves, you know, getting fit, getting strong meant that the real estate market went down by a third, equity markets went down by two thirds, and, and consumption absolutely cratered. Um, but it meant that when Trump came back in 25 and decided, I'm not just gonna punch China on the face, I'm also gonna punch Canada and I'm gonna punch Europe and I'm gonna punch absolutely everybody in the room. China was the one that could, could stand up and say, you know what? You want to go, let's go. Um, gloves off. Boom. Off we go. You tariff me. I tariff you. You embargo me. I embargo you. And very quickly the US was forced to back down. Uh, and we talked about this before. The US was forced to back down. Trump started talking about a G two world, and the US shifted its foreign policy to saying, you know what? Don't road doctrine. What we care about is the Western hemisphere. The Pentagon publishes a paper saying, look, we got everything we need in Latin America. We don't have to care about Europe. We don't have to care about Asia. What matters is right here, right now, we have cheap labor, cheap uh, commodities in Latin America. And by the way, this refocus of US policy towards Latin America is massively bullish Latin America. Uh, I think I mentioned it, I mentioned this at the SIC last year. It's massively bullish for Latin America because the big problem in Latin America is that every 10 or 15 years, these guys somehow run out of dollars. Uh, and when they do, everything collapses. Now, when they run out of dollars, the US steps in, as they did in Argentina, uh, this summer and say, Hey, you're out dollars. We don't want China coming in. So here's 20 billion. Here's 40 billion. And so you've removed from Latin America now the single biggest risk, which was a dollar crisis. Uh, and, and so now bond yields are gonna go down 200 basis points a year, bond yields in Brazil, in in Chile, and Colombia and Peru and Argentina. They all went down two to 300 basis points last year, and they're gonna go down another 200 basis points this year. And when interest rates go down 200 basis points a year, that's a huge tailwind for equity prices, for house prices, for, for, for consumption. So Latin America has started what I think is a triple merit scenario of rising exchange rates, falling, uh, real interest rates and rising asset prices. And. There's many ways you can play that. You know, last year Latin American debts was, you know, we run a LA debt fund. It was up 35% last year. Um, and just basically on government debt. And I'm not saying it's gonna be up another 35% this year, but it's already up, you know, up a good bit this year. Uh, it's, this is, and, but you could say, well, you've done better if you've done equities. And that's true, like equities did even better. Um, so, so many, many ways to, uh, to, to, to skin a account. But coming back to China, what you've had for seven or eight years is China take all of China's savings, which are massive. Push them down the pipe of building up industrial value added, essentially making sure we have the best car companies in the world. We have the best solar panel companies. We have the best train. We have essentially anything linked to transportation, anything linked to factory automation and robotics. Anything linked to telecom, data transmission, and anything linked to electricity generation, transportation and storage. It's not that China's caught up 'cause it was far behind seven years ago. China has now leapfrog the west and is doing better. You know, the in 2020, you know, if I had said China's gonna be the biggest car exporter in the world. People would've laughed. And in 2023, this is, this happened in 2026, people are looking at Chinese cars. There's now an article a week in the Wall Street Journal or in the New York Times saying, Hey, I test drove this latest car, and it's like the nicest car I've ever driven. The the fourth C, the fourth CEO bought to show me S seven and brought it back, and he's driving that to work. Because China now produce like BYD is producing cars where you have drones that fly ahead of you to warn you if there's deers on the road or if there's a hail of ba, a bale of hay that fell, or a tractor or BYD is also producing a car that's now, and it's, you can buy it, uh, that goes 495 kilometers an hour. Uh, the, it's the fastest car in the world and it's not even close. Amazing. So, you know, the idea that this could have happened just five years ago Yeah. Would, uh, would've seemed laughable, but here we are. And this is where I go back to my old saying that if, um, if China enter a room, profits walk out. I don't know if it's true anymore. It used to be true because China used to produce cheap goods cheaply and crush everybody's margins along the way. What you now have in China, which is new. Is you have companies that are genuinely, uh, world-class companies making products that actually nobody can compete with and making margins along the way. I'll, I'll give you an example. I'm sorry I'm being long-winded, but I'll, I'll, I'll give you an example. A company called Huai, uh, it's actually listed in nasdaq, listed in Hong Kong. Uh, they, and full disclosure, it's one of my biggest positions. Um, and Huai, uh, is a Lidar manufacturer. Uh. And so, you know, the, the whole debate around lidars is, is, is that what we need for autonomous vehicle in the futures or are we gonna go with cameras? So Elon Musk five years ago comes out and says, forget lidars. It's not, you know, it's not gonna work. Cameras are the future. When Elon Musk said this, and so he actually said, we can use 'em for our, our space rockets. We use the lidars for our space rockets, but we're not gonna use 'em for our cars. Because five years ago, the lidars would cost 50,000 US dollars. Um, uh, to, to equip today, equipping a car with lidars cost 200 US dollars cheaper than a camera, right? Yeah. They brought, they brought her side, brought the cost down 99.5% and they still make 30% profit margins. And so now actually, lidars, they used to be, oh, is that gonna be the future for autonomous driving or not? It's actually shifted now. Lidars. Are being put in every Chinese cars for safety reasons, because if you have a LIDAR in your car, the risk of a fatal accident goes down 70%. So now lidars are like airbags. It's like, yeah, right. I was just gonna say that. It's the cost of a seatbelt, right? Yeah. At 200 bucks, why wouldn't you have one? And in China it's, it's gonna move to where very soon you won't be able to insure your car if it doesn't have a lidar. And I think that's gonna move like this everywhere around the world. So a company like Huai is now signing up. BMW is now signing up, uh, Mercedes and even the military Humvees, this is hilarious. The US military Humvees use huai lidar. So, uh, all this, all this to say these types of companies like CATL, like BYD. Like, uh, Huai, uh, these types of companies did not exist in China five years ago, 10 years ago. But because you've had such a focus of policy of we gotta move up the industrial value chain very, very quickly, we're gonna throw money at it. We're also gonna throw people at it because 20 years ago, China was graduating a million university students a year. Now he graduates 12 million university students a year, and he graduates. More engineers than the rest of the world combine X India. Um, so you throw money at the problem, you throw people at the problem, and before you know it, you start to actually have companies. That are actually pretty interesting in their own right. Yeah. And the innovation, I mean, your point about the cars, Felix Soff told me that he, he was in China last year and drove around in a car that was better than his Porsche. Uh, and, and, and cost a lot less pro, probably less, less than half the price. Yeah. Yeah. Is it Shenzhen? That is the city that's sort of known as the, uh, innovation ca or manufacturing capital? So there's several actually. So if you, if you think of sort of the, the tech hubs of China, Shenzhen is definitely one of them. That's where you have BYD, that's where you have, uh, Tencent. That's where you have, uh, Huawei. Uh, so that, so that's definitely one of them. Another big city for tech and innovation is Hong Zou. So Shenzhen's a massive city. It's a first tier city. I mean, Hong Jo is a big city as well, but not as big as Shenzhen. But in Hong Zou you have the, the Jjg Institute of Technology, which is increasingly becoming a little bit like the MIT of, uh, of China in Jji. Uh, this is where you have uni tree, you know, the robotics company that you saw all the robots dance over Chinese. It's where deep seek came out from. But most importantly, it's where Alibaba, uh, is based and out of Alibaba. You've had a lot of offshoots. Um, then, uh, then frankly, you know, Shanghai is still, is still another, you know, big, big hub of a very interesting company. So in Shanghai you have. Uh, so Hosai is in Shanghai and Horizon Robotics and neo cars. And so you really have, I think if you want to think of hubs, you, you have ch you have three big hubs in China. Just like look, the US is also a massive, China's a massive economy and the US you have the Silicon Valley and, and that is essentially is shezhen. But you know, the whole, the whole area around Austin, uh, has, has a lot of things going on. Uh, the whole, uh, the broader Seattle and, you know, in Seattle you have what? You have Microsoft, you have Amazon, you have Expedia. So you, you can have several hubs and China, China does as well. The reason why I bring it up is I've, I've heard three different venture-backed engineers, uh, all, all from Silicon Valley, say separately of each other. The US desperately needs to build its own Shenzhen, which just that statement from an American entrepreneur more than one in a week is like, it's just mind blowing how fast things have changed and how far behind the US I think is the US is very far in advance in some things. And yeah, I mean, look, uh, in manufacturing the US isn't there anymore, but then you have to question, do you even want to be in manufacturing? Uh, because manufacturing is also evolving so rapidly now, you could say, well, we need to be in manufacturing because, you know, we need jobs and all that stuff. That, that would be a Donald Trump kind of worldview. The reality though. Is that the high-end manufacturing in China is also happening with no jobs. I think I've told you this joke before about how the, the factory of the future has in China has one, one German Shepherd and one security guard, and the the security guard is there to feed the German Shepherd and. The German Shepherd is there to bite the security guard if he tries to touch the machine. Uh, and, and so that's, you know, the, the, you go to these factories, you know, show me you can visit, show me has dark factories just outside. Show me is a big, uh, cell phone manufacturer and auto manufacturer. Uh, they have dark factories outside of, uh, there's a dark factory outside of Beijing that I think produces about 3 million phones a year. Uh, there's not a single worker, like literally it's just a dark factory. So, uh, you could say, oh, well the US needs some of that. Yeah. Uh, but what's the point? Well, is the point resiliency. That's right. The point is national security resiliency, who knows what the future's made of? It's better to produce it at home. Um, and, but, and, and, and I get that. Like, I, I think that's a very valid argument to be very clear. And if you want to go down this path, then you also have to be cognizant of the fact that it takes a lot of investment in, uh, in power grids, uh, a lot of investment in machinery. Um, now the reality in, in things that turn out to be pretty cyclical, raw materials, processing of raw materials, all that stuff. Absolutely. Uh, some of the stuff is polluting, et cetera. And so China's gone down this path. Uh, the US you know, could have gone down this path. You've, you've had 0% interest rates in, in essence, for 20 years, and I'm exaggerating, but interest rates have been super low for 20 years now. And over the past 20 years, you've had zero investment in the grid. You, you produce essentially as much electricity today as you did 20 years ago. Uh, China used to produce 20 years ago, half as much electricity as the US and today produces twice as much as the US. Uh, so, you know, production of electricity in China has essentially gone four x. Um, so over that same period, so the, the, you know, that was a, a cognizant investment. The US took the zero interest rate and said, this is awesome. We're gonna do share buybacks. Uh, this is this. This is awesome. We we're gonna do private equity. Uh, we're gonna gear up the balance sheet of every business out there, um, and, and we're gonna get ourselves very wealthy. Um, now what's interesting is a lot of the wealth that's been created, to your point, has been financial engineered. It's not like we've massively, uh, increased our capacity of productions, whether in the US and Europe. Um. But we did get richer, at least on paper. So let's switch gears for a second, because you spend, you spend part of your year in Canada. Yep. There's a lot of tension between our two countries, which, you know, two, two. Two years ago, um, would I even two years ago, I think would not have been, not, have not, not have been, uh, something, uh, uh, the average Canadian or an American would've would've foreseen. Right. But there's a lot of tension now. Let them win a Stanley Cup for once and uh, they'll get over it. What sport is that? Is it exactly? What's your take on that? I mean. You know, there's a lot of theories as to why it's happening. Um, a a a lot of, and it goes back to China, right? Like, like there's one theory, there's a, there's a reporter in your country, Sam Cooper, who um, does a lot of work on, on, on the CCPs infiltration of the Canadian government. And I've been dying to ask you like, what do you, what do you think about this? So I'm gonna make like a Jesuit priest and answer your question or another question. Um, I, I'm. I was actually having dinner with a friend of mine who's works for the State Department, uh, and he was saying, you know, it's really a shame that our relationship with Canada is so bad right now. And I said, you know, who's your relationship good with, uh, like beyond who's your who, honestly, who's jokes aside? Who is your relationship good with? And he said, oh, we have a great relationship with Japan. And I said, yeah, okay, fine. That's like taking your sister to the prom. Uh, like, you know, Japan, Japan is essentially a colony. Uh, you've got troops, troops all over the country, and they've always done what you've told them to do. You tell 'em to revalue the end, they revalue the end. You tell 'em to buy us treasuries, they buy us treasuries. Um, so, so today, uh, it's funny because 20 years ago. The idea that China, or even 10 years ago, the idea that China could have any friends internationally would've seemed like a joke. Uh, and, and I said, I was saying this at the time, China 10, 12 years ago, a didn't really have much of a foreign service, but China didn't have friends. It had clients. So it had a few countries like Pakistan or North Korea that depended on China, but it really didn't have friends. Uh. You know, today, who, who does the US have a good relationship with? In, in, in all honesty, jokes aside. Um, so yeah, the, the relationship isn't great with Canada, but has the US tried to have a good relationship with Canada in the past few years? Uh, I'm not sure that it has, so I don't think you can be too surprised if you, you know, if you poke people in the eye and spit in their face. After a while, they turned their back. Uh, and um, so I think that that's where, that's where Canada is today. I think it's understandable. Um, what's baffling to me, uh, as a proud Frenchman is that we Europeans, uh, continue to be absolute doormats, uh, to, to the United States. Um, and uh, and I don't really quite understand why, because we're actually far less dependent on the United States than Canada. There is. Canada is like, pretty much like massively dependent on the United States. Um, so Canada's room to maneuver is much more limited than, uh, than Europe's room to maneuver. But then I guess you could say. Canada's, uh, the threat of the US to Canada is probably more acute. You know, the whole calling Carney a governor, the whole, uh, and he continues to do it, right? Trump continues to call Governor Carney. It's, uh, you know, that's, that was maybe funny the first time, but you do it, it was kind of funny actually the first time. But, but you continue to do it, uh, and it becomes, you are like, you know, if the US did. If the US did wanna invade, if the US did wanna invade Canada, it probably could. But so now, like it's something that you would've never considered before as a Canadian, uh, and now all of a sudden it's like, it's, it's on the table. Uh, and so yeah, it's, uh, I would say that repairing the relationship, uh, really doesn't depend on, uh, the U on Canada. It depends more on the us. Uh, now having said all this. Um, to your, to your question as is the Canadian government controlled by the CPC? Uh, I, I'm doubtful that it is, uh, in, in your mind. I think if it was, they would've already built the pipelines through British Columbia to sell the order to the Chinese and Stu, and Stu being basically a hundred percent dependent on the US for all their oil and natural gas exports. If really the, the Canadian government was controlled by the CPC. You would've seen, uh, a lot more, uh, activity on, on that front. So if, if I look at, at the fact, if, if the Chinese government really does control the Canadian government, what have they done with that control that has benefited China? Uh, I, I can't name a single thing. A single policy taken by Canada in the past 10 years that has massively benefited China to the detriment of everybody else. Uh, now this doesn't mean that maybe China hasn't tried to control the Canadian government. But I, I can't really see any indication that they've been successful at it. I guess the one thing that I've learned from spending just, just a little bit of time in Washington DC is that a lot of things happen that most people have no idea. Yes. Happens of course. Um, and you hear about it, the things in the news, and, and then you learn that, you know, that was a reaction to something that was done by us. Whichever side you're on and whichever one starts it, there's, there's, there's just so much happening. Alright, let's get off of that. Well, I wanna ask you about. Um, the carry trade, um, the yen has been getting stronger. Uh, the, the, the Japanese carry trade, is it really unwinding? And what are the implications for the global market, if it is? So, let me, let me be, uh, first totally honest. If you told me if we'd done this call two years ago. And you said, Louis, you know, by when 2026 rolls around JGB, long yields will be three and a half, 4%. I would've said, oh my God, like this is gonna be a bloodbath. Uh, this is gonna be right. Uh, no, I'm, I'm being dead honest. Yeah, I know, I know. And obviously I would've been dead wrong. So you've had a massive sell off at the long end of the JGB bond market, uh, the, of the Japanese government bond market and, um. Considering the nature of that blood bath, I think markets have been remarkably well behaved. Um, now looking forward, I think Jgb can, will continue to sell off because, um, uh, you now have a, a new government in, uh, Japan that essentially can rewrite the Constitution, uh, because they have the, the necessary, uh, majority in parliament and can move to spend a lot more money on defense, which she very clearly wants to do. Uh, and run much bigger budget deficits, which she also clearly, clearly wants to do. So, you know, that's the, that's the, the, the, the path, uh, of which we're going. And by the way, yields rising in Japan means that it's gonna be very hard to get any kind of bond rally in the US or in, uh, Europe, or in any major markets because Japanese savers will continue to gradually repatriate money. Now, having said that, yields at the long end have gone up a lot. And again, sure it's gone up from one 60 to 1 54 or wherever it is today, but it, you know, the again, is, remains stupidly undervalued. And so what we haven't really seen is Japanese investors say, okay, I'm bringing back my money. And, and I think the reason for that is that there is no appetite to be in long-dated bonds. Uh, long dated bonds have been Japanese. Long day bonds have been the worst performing asset class on a one year, three year, five year, 10 year view. They've been the the worst asset class by far. And most people. And Japan have absolutely no interest in trying to catch that falling knife, uh, because they see a government that is gonna keep spending money because they see A BOJ that's still sitting on its hands. So I think we probably don't get the, the, the big unwinding of the carry trade and the Japanese really repatriating their, all their savings. We probably don't get that. Until, uh, we probably don't get that until short rates in Japan are, at least at the level of Japanese inflation, which is basically two point a half, 3% until the BOJ, you know, raises interest rates from the below 1% where they are today to two 50. So I think you need essentially, really 150 basis points of interest rates rising at the. Uh, at the short end in Japan for, for the, the carry trade to really, to really implode. And, and I'm not sure the BOG is gonna give us that, like, it's, it right now. It doesn't look like it, it's 150 basis points, but doesn't sound like a lot, but it's a massive, massive increase. I, no, it's big. It's baked. Yeah. But Japan, it's baked, so I, I, I don't think we're gonna get it. Okay. Especially in the face of a, of a government that just got a, a big popular mandate to, to keep spending a lot of money. Last question Louis. 'cause I could, I mean, I could talk to you for four hours here and I wanna be respectful. Um, years ago you said that, uh, energy had taken the place of bonds in terms of being anti, anti-fragile asset. You still believe it, so believe it. Look, I think we're in, we live in a globally inflationary environment where every government is falling very easy fiscal policy where every central bank is following too easy a monetary policy where the risk to the system isn't that growth collapses, but that inflation picks up. And that inflation pick up, typically the trigger for that, the catalyst for it is higher energy prices. Um, and so, you know, we live in a world right now where growth is fine, everything's humming along, markets are moving higher. Uh, and I think what will, what will eventually put an end to this is a spike in energy prices. I don't know when it happens, but, uh, I, so I, you're absolutely right. You know, I said, look, the 60, 40, 60 equity, 40 bonds. Of yester years is over. You now need to be 60 equity, 20, 20 gold, 20, uh, 20 bonds, uh, 20 energy and the 20 energy. You know, that portfolio did fine in 22. I mean, it survived in 22 and 22 when all prices spiked and bonds went down, and equities went down. Equities and bonds both went down 20% energy doubled. So if you had 20% in, uh, in energy. Uh, then that doubled and everything else was down 20. So you were still okay. Uh, and you fought, you fought to, to, to live another day. Uh, you lift a fight another day. And so, uh, I very much think that, uh, we're, we're having at least 20, if not 25 or 30% of your portfolio in energy in various forms, whether it's equity, uh, energy, equities, whether it's out of the money calls on, on oil, whether it's coal, uh, even if it's solar. Like, you know, some people have ESG constraints, et cetera. So go out and buy some solar. Um, but you need, you need that energy buffer because. Uh, if and when the, the thing comes to an end, it will be because of energy, probably my favorite person to, to speak with on anything related to portfolio construction or, or, or the non-US perspective. Uh, I always appreciate your time, Louis. Thank you so much. Thanks so much, ed. Great to see you.
Why the "Emerging Markets" Label Is Now Obsolete | Louis Gave
Summary
Transcript
In 2018, the US punched China on the nose and China couldn't punch back. Instead, China went to the gym and it got fit and it got strong, and we forced them to do this. It's not that China's caught up. China has now leapfrogged the west and is doing better. Hi, I am Ed D'Agostino, and today I have a great conversation for you talking about emerging markets. China's manufacturing edge, Japanese bond yields. And the broken relationship between Canada and the us. My guest is none other than Louis Gave of Gavekal Research. Welcome to Global Macro Update, Louis Gave, it's always good to see you, my friend. Thank you for taking some time. Thanks for having me, Ed. Good to be here. I think our last discussion got about a quarter million views, so, uh, really? I know what we said. Yeah. Alright. It did. It did. So. Pretty cool. Must be. Must be the new beard you're sporting. I think, yeah, this is, I call this my Louis look. Well, there you go. This is my Louis look. Yeah. That's how you done, that's how you boost the ratings. That's right, that's right. I, I highly doubt it. I think it's, I think it's more on your side of the screen. But anyway, I wanna talk to you about emerging markets, right? Us investors are discovering emerging markets all of the sudden, right? Like it is now becoming in vogue, uh, hear hearing about it in, in, in places that I'd never expected to hear about emerging markets before, but it's. You know, people are talking about it, but not really understanding what it is, right? This is just the biggest blob you can imagine, right? Everything outside of the US so, so, so can, can you help? Investors understand it and, and how to think about it and what you look for when you're investigating em. I don't really love the term em, um, yeah, it's, it's, it's terrible. Yeah. Yeah. I think it was a term invented in the seventies. I think Fidelity. Uh, and, and invented it. And essentially it was a term, it was like, yeah, whatever's left, right? You had Europe, you had Japan, you had, uh, you had the, the US and everything that was left was at that time, pretty small. Um, and, and they thought, okay, how do we like, love this together? It was really a marketing invention. Bunch, a bunch of people that are completely different, but the one thing they did have in common back then. Was they had very positive demographics. You know, it was basically young countries, countries where you had, where more than half of the population was under 30 years old, uh, you know, steep pyramid of age, et cetera. And now they don't even have that in common. You look, you look at some of the em, like some South Korea, like China, like Taiwan, that, that are all still considered emerging markets, quote unquote. Uh, these guys actually have the very worst demographics in, in the whole world. And so, uh, all this to say, I don't really love the term em, but I realize that's how we classify it and that's how money managers, you know, in, in the world in which you have to fill a box, uh, you're either a US growth guy or Europe value guy. And so you're an EM guy. And, you know, as, as a firm, we've, we've had a pretty strong EM slant, but, um, I think within em, what you find. Is, uh, so the first difference that has evolved from back in the seventies and eighties, the first difference, you know, they don't even have the common demographics, uh, uh, anymore. The other big change is that if you go back to the seventies, the eighties and nineties, even the early two thousands, most of the emerging markets were essentially dependent on foreign capital. And, and you saw this time and time again, you would have a problem in Thailand. So because Thailand got hit, all of a sudden foreign investors were like, oh, you know what? Sell Indonesia. Sell, sell Malaysia. Not because of anything linked to those countries, but simply because I'm taking losses over here and therefore I'm getting redemptions. I have to sell what I can. And before you know it, a problem that had started in Thailand, you'd get Brazil that got crushed and Argentina would get crushed. Um, now the good news is I think this, this is definitely no, no longer the case. Partly because the marginal buyer in emerging markets no longer is a foreign investor sitting in London or New York or, or Dallas or Miami. Uh, but increasingly the marginal buyer in most emerging market is now local. Um, and you see this, where you see this the most clearly is actually in Latin America. Where in Latin America, you go to countries like Chile, like Colombia, like Peru, like Mexico. And you've had the birth of a genuine domestic pension fund industry, and all this started more than 30 years ago, but when you first start a pension fund, you have peanuts in it. Yeah. But 30 years of compounding returns, plus 30 years of people putting money in and countries like Chile, I think there's about $600 billion now in Chile and pension fund money. You might say, okay, that's, uh, that's not that big relative to some of the pension funds you have in the us, but for a small market like Chile, it matters because what ends up happening is that your Chilean pension fund will always have a domestic bias towards Chilean assets and the Peruvian pension fund to the Peruvian assets, the Colombian, and, and so what happens now is that if and when, for whatever reason, there's a dip in the markets. Then the, your Chilean pension fund will say, oh, there's a dip in the Chilean peso. There's a dip in Chilean bonds. There's a dip in the Chilean equity market, and they'll buy it. And so in, in a way that before in a lot of these markets, you really didn't have a sort of buyer of last resort. And, and if once foreigners decided to leave, once foreigners decided, why am I even investing in Indonesia? It's like it's creating headaches for me. It's all over the place. Bad politics, whatever. Just get me out. Uh, and once they decided that there was essentially no market and the thing would, would absolutely collapse through the, through the floor. Um, and now you actually do have local institutions that, that step in. So the very structure of most emerging market financial markets that have changed and I think has, uh, so they're now far more stable, or at the very least, there's. Uh, the downside risk, I think is less than it, uh, it used to be in the past. Uh, so having said all this, uh, I'm still, you know, I keep saying I hate the term emerging markets. I keep using it. Um, if you, if you want to think about emerging markets in general, and historically I think you've had really two main kinds. You've had the kinds that were the commodity exporters. That made money, uh, exporting commodities. So here you can think Brazil, you can think Chile, you can think Saudi Arabia. Frankly, most of South Africa, most of Africa. Um, all the guys, uh, and these guys historically have tended to be very tied to the commodity cycles. And here I think they've become less tied to the commodity cycle. Thanks. In part to the birth of these domestic, uh, domestic pension funds, et cetera. It's reduced their volatility somewhat. So that was your, your, your first part of the, the, the, the EM base. Um, and then. You had the other guys who tended to be more the commodity importers. And so if all prices, for example, shut up, they, they would struggle countries like Korea, like Taiwan, like China, like India, uh, where big rise in commodities might actually negatively affect them. Uh, and here, within, within that group essentially had a split between the countries that were, where the cycle was essentially export led, again, Korea, Taiwan, you know, at typically export led economies. And countries that where the cycle was far more, um, domestic, domestically, domestic demand driven. Uh, and here the obvious one is India. So all this to say that the broader emerging market space is, is now extremely, extremely diverse. And I'm, I'm belaboring the point, but there's been another massive, massive shift in, in recent years is that historically. Emerging markets were always highly dependent on the US dollar, uh, highly dependent on the US dollar for a number of reasons. Uh, but one of them was if you needed to fund a new power plant, uh, a new dam, a canal, or you know, anything, a port, typically most of the infrastructure investments that you needed as an emerging market, uh, and you needed a lot, it was typically funded in US dollars. It might be funded through loans of the World Bank or the Asia Development Bank. Or through loans, uh, done by Bank of America or Citibank, if it was in Latin America, et cetera. But most of the, the big time funding occurred in, in US dollar. So when the price of the US dollar would go up, that would mean that the cost of capital for all these guys would go up a lot. And so they, they would get strangled. Uh, so, so that was the, the first thing, I think the second reason, they were all very dependent on the US dollar. Is that in most emerging markets, most people didn't really trust their policymakers, didn't really trust. Their own currency. Very often they'd had to deal with high inflation not that long ago. Whether you're Brazil or in Indonesia or Philippines, you, you'd have had high inflation. You know, you and I are in our fifties. We would've had at least two decades of, if we were Brazilian or Indonesian, we would've experienced at least two decades of uncomfortably high inflation. Which leads you to not trust your currency. And so in most emerging markets, people think in two currencies. They think in their own IE Taiba to Indonesian or P or Mexican peso. And they think in US dollars. So when the US dollar goes up, most rich people have a tendency to say, oh, US dollars going up. Get rid of my Mexican peso, put it, put it in, in US dollars. So the, the US dollar, uh, the most emerging markets have always traded as a sort of anti-US dollar as a result of this, because that knife cuts both ways. When the US dollar goes down, they repatriate capital and they buy, they buy back local assets, uh, the, at least the rich people do, but also increasingly the local pension funds. So the, the weight of the US dollar has always been super important. And that's one part that is also changing a little bit. And you know, I've talked a lot about this, uh, at the various SIC conferences over the past 10 years. How China's now going around to emerging markets and saying, Hey, you want a tractor? Uh, you can buy this tractor from me at a 3% interest rate in r and b loans. Um, you want me to build you a railroad? You want me to buy, build you a nuclear power plants? I can do all these things. Uh, and you don't even need dollars. You, you fund yourself in Remin B and now you are seeing countries, whether you're ethiopias, your Kenyas, your zombies saying, you know what? I'm transferring all my USR debt to a remin B debt because I get to do so at a, I get to fund myself at a much lower interest rate. And you have countries like Indonesia, like Thailand, that have shifted most of their trade with China, and China's now their biggest trade partner. Into reb. And so the dependency on the US dollar is also not what it used to be, uh, which is actually great news for emerging markets in general because if you're dependent on one currency, it's the old story, right? If you have one client, you don't have a client, you have a boss. Uh, and if you have, if you can fund yourself in many currencies, then if and when there's a next crisis in the us, which is what happened in 2008. 2008, US banks hit the wall. The, the US banks say to Indonesia, sorry, we can't lend you money right now. And so Indonesian trade with Korea and with China and with Taiwan, it just imploded. It just went to zero. 'cause they couldn't fund the trade because American banks wouldn't do it. Not because of anything linked to Indonesia, simply because American banks were getting lost. So to tomorrow, if that happened again, well that trade can be funded in, in Remin B, so that provides a sort of backstop to emerging markets that that didn't exist before. So on all that front, on, on on many front, the landscape for emerging markets is shifting very, very rapidly in front of our eyes. How much is coincident to the fact that the dollar is, has been getting weaker and commodities have been going up? Like what, what's the relationship today? Success has many fathers, right? And when, when you look at the fact that EM has been outperforming in 24, again, outperforming in 25, that EM equity markets are, are ripping away, uh, that em bond markets are also massively outperforming DM bond markets. Uh, you can, you can point to many things and it's, uh, you know, it's hard to isolate one. And there's also the element of, of chicken and the egg thing. Well, you know, once the momentum builds up. So again, I'm a Chilean pension fund. My currency's not going up. My equity market is outperforming the us. That's definitely because copper's going up and you know, the, the fact that copper's going up is helping fuel stronger growth in my economy. But here I am and I'm picking a number out of thin air. But let's say I am in my equity book, I'm 50% domestic equities and 50% US equities. For 15 years, the US equity thing was outperforming, and for the past two, it's now underperforming. So now I'm thinking, hmm, maybe I should be 60, 40 or 70 30. So I start to sell some of my US to repatriate money, and as I do, the dollar goes down and the cha peso comes up. Uh, and so it all feeds, uh, it all feeds into, uh, into each other. And, uh, then the next thing that happens is actually the pension fund in the us. It starts to realize, hold on, emerging markets are starting to outperform. Maybe we, you know, we don't have enough in emerging markets, or we don't have any, maybe we should have some. And, and you know, these trends, once the momentum starts, I think you need a pretty big event for, for the momentum to stop. Um, and right now all the signs are pointing to towards happening. Now the reality is we haven't really seen the flows yet. Uh, you, you pointed out in your introduction that em is now the big buzzword and everybody's talking about it, et cetera. But, you know, look at the shares outstanding of something like E Em, um, the, the big em, uh, uh, equity. Uh, ETF, uh, you know, it's picked itself up from the floor, but we're, we're definitely not at highs. And, and so wherever you care to look and you look at the investor positioning, um, the, you know, it's not, I, I, I don't, I really don't think we've seen the flows. Uh, we're we're, we're just at the beginning of a longer term trend. So do you think it's early days? I think it's very early days. Okay. Sorry about the dog barking in the background. No, no. This is the post COVID where, you know, this is the world we're in. Sorry. Uh. That dog's an idiot. Uh, he's, he doesn't like em clearly. That's bad about us referring to it there a job, actually. So, uh, on this, uh, an anecdote, I was at Tencent recently visiting the company and they have a new, uh, zoom sy zoom like system. So Tencent is one of the big, uh, Chinese tech companies, and they have. A new, a zoom, zoom, uh, like business where that essentially blocks out all the noise except your voice. Uh, they, they've got an AI that trains like, after two or three minutes, it manages to block out absolutely everything. You could be, I could be here banging a pot, but with a dog barking in the background and somebody ringing the doorbell and it doesn't pick it up. Nothing. Wow. That's why you, that's why you need to do your next zoom call on. Uh, so that, so that we, so that we don't, so that we don't get this, um, I, I will work on that. Ever since you and I last spoke. Uh, and I've been admittedly pretty, pretty hawkish on China. And you've, you, you've spent your career there, uh, or adjacent to there and, and seen firsthand just what has happened. I. And I'm reading a former, the book, I'm finally getting around to reading Break Breakneck, right. The, the book that your former colleague Dan Wang wrote fascinating. Just, just like the opening line or or page in that where he is like, America is run by lawyers and China is run by engineers like. That says so much. That's basically the book. Yeah. It could come there, but it really, it really hit me like, wow, that is so I finally get it. How much of that is spreading that, that mentality, that, that engineering, that build, that that growth mentality is spreading. Beyond China into the rest of Asia. 'cause what, you know, what I hear is that the, the middle class in a lot of Asian countries is growing. Uh, people are happy. Um, uh, quality of life has gone up and, and anyone who flies in any airport in the US and then leaves the US and goes to an an emerging market, they come back saying how. Behind We are depends on the emerging market. Uh, like if you go to China, yes, the airports are nice, but I, I just spent, uh, a week I was in, in Egypt, then I went to the Middle East, then I went to, uh, through the Middle East and I went to India. And so it depends on the airports on which you're talking about. But, uh, my go-to line for years at the SIC conferences. Was that when China enters a room, profits walk out. Uh, and uh, as a result, you know, for years and years I was an uber bull on Chinese fixed income, and I was always more skeptical on Chinese equities until essentially the COVID lockdown and when China reopened, uh, and I, I turned bullish on Chinese equities too early. Um, but, uh, the, the past couple years have been pretty good because. I think what most people miss about China, uh, and what you've just sort of scratched the surface on is the extent o uh, around which over the past really seven or eight years, China has now leapfrogged the western industry after industry. Uh, essentially what happened was that when the US decided to weaponize its, uh, the semiconductor supply chain, uh, against, uh, China in 2018. Uh, the Chinese leadership kind of freaked out and they said, you know what? If the US blocks us from semiconductors today, tomorrow, it could be chemical products, or it could be auto parts, it could be any number of things. We have no choice but to de westernize our supply chain. We can't be dependent on the west on anything. So, so we're gonna grab all of our savings, which they did, and we're gonna reallocate those away from real estate, away from consumption. And towards, um, towards industry. Um, so it's almost like in 2018 the US punched China on the nose and China couldn't pa pa punch back. Uh, instead 'cause it was too weak at the time. Instead, China went to the gym and it got fit and it got strong and we forced them to do this. We, we, maybe you said you could say they were gonna do it all along, but I think we forced 'em to do it in an accelerated timeline. And they did so at great sacrifices to themselves, you know, getting fit, getting strong meant that the real estate market went down by a third, equity markets went down by two thirds, and, and consumption absolutely cratered. Um, but it meant that when Trump came back in 25 and decided, I'm not just gonna punch China on the face, I'm also gonna punch Canada and I'm gonna punch Europe and I'm gonna punch absolutely everybody in the room. China was the one that could, could stand up and say, you know what? You want to go, let's go. Um, gloves off. Boom. Off we go. You tariff me. I tariff you. You embargo me. I embargo you. And very quickly the US was forced to back down. Uh, and we talked about this before. The US was forced to back down. Trump started talking about a G two world, and the US shifted its foreign policy to saying, you know what? Don't road doctrine. What we care about is the Western hemisphere. The Pentagon publishes a paper saying, look, we got everything we need in Latin America. We don't have to care about Europe. We don't have to care about Asia. What matters is right here, right now, we have cheap labor, cheap uh, commodities in Latin America. And by the way, this refocus of US policy towards Latin America is massively bullish Latin America. Uh, I think I mentioned it, I mentioned this at the SIC last year. It's massively bullish for Latin America because the big problem in Latin America is that every 10 or 15 years, these guys somehow run out of dollars. Uh, and when they do, everything collapses. Now, when they run out of dollars, the US steps in, as they did in Argentina, uh, this summer and say, Hey, you're out dollars. We don't want China coming in. So here's 20 billion. Here's 40 billion. And so you've removed from Latin America now the single biggest risk, which was a dollar crisis. Uh, and, and so now bond yields are gonna go down 200 basis points a year, bond yields in Brazil, in in Chile, and Colombia and Peru and Argentina. They all went down two to 300 basis points last year, and they're gonna go down another 200 basis points this year. And when interest rates go down 200 basis points a year, that's a huge tailwind for equity prices, for house prices, for, for, for consumption. So Latin America has started what I think is a triple merit scenario of rising exchange rates, falling, uh, real interest rates and rising asset prices. And. There's many ways you can play that. You know, last year Latin American debts was, you know, we run a LA debt fund. It was up 35% last year. Um, and just basically on government debt. And I'm not saying it's gonna be up another 35% this year, but it's already up, you know, up a good bit this year. Uh, it's, this is, and, but you could say, well, you've done better if you've done equities. And that's true, like equities did even better. Um, so, so many, many ways to, uh, to, to, to skin a account. But coming back to China, what you've had for seven or eight years is China take all of China's savings, which are massive. Push them down the pipe of building up industrial value added, essentially making sure we have the best car companies in the world. We have the best solar panel companies. We have the best train. We have essentially anything linked to transportation, anything linked to factory automation and robotics. Anything linked to telecom, data transmission, and anything linked to electricity generation, transportation and storage. It's not that China's caught up 'cause it was far behind seven years ago. China has now leapfrog the west and is doing better. You know, the in 2020, you know, if I had said China's gonna be the biggest car exporter in the world. People would've laughed. And in 2023, this is, this happened in 2026, people are looking at Chinese cars. There's now an article a week in the Wall Street Journal or in the New York Times saying, Hey, I test drove this latest car, and it's like the nicest car I've ever driven. The the fourth C, the fourth CEO bought to show me S seven and brought it back, and he's driving that to work. Because China now produce like BYD is producing cars where you have drones that fly ahead of you to warn you if there's deers on the road or if there's a hail of ba, a bale of hay that fell, or a tractor or BYD is also producing a car that's now, and it's, you can buy it, uh, that goes 495 kilometers an hour. Uh, the, it's the fastest car in the world and it's not even close. Amazing. So, you know, the idea that this could have happened just five years ago Yeah. Would, uh, would've seemed laughable, but here we are. And this is where I go back to my old saying that if, um, if China enter a room, profits walk out. I don't know if it's true anymore. It used to be true because China used to produce cheap goods cheaply and crush everybody's margins along the way. What you now have in China, which is new. Is you have companies that are genuinely, uh, world-class companies making products that actually nobody can compete with and making margins along the way. I'll, I'll give you an example. I'm sorry I'm being long-winded, but I'll, I'll, I'll give you an example. A company called Huai, uh, it's actually listed in nasdaq, listed in Hong Kong. Uh, they, and full disclosure, it's one of my biggest positions. Um, and Huai, uh, is a Lidar manufacturer. Uh. And so, you know, the, the whole debate around lidars is, is, is that what we need for autonomous vehicle in the futures or are we gonna go with cameras? So Elon Musk five years ago comes out and says, forget lidars. It's not, you know, it's not gonna work. Cameras are the future. When Elon Musk said this, and so he actually said, we can use 'em for our, our space rockets. We use the lidars for our space rockets, but we're not gonna use 'em for our cars. Because five years ago, the lidars would cost 50,000 US dollars. Um, uh, to, to equip today, equipping a car with lidars cost 200 US dollars cheaper than a camera, right? Yeah. They brought, they brought her side, brought the cost down 99.5% and they still make 30% profit margins. And so now actually, lidars, they used to be, oh, is that gonna be the future for autonomous driving or not? It's actually shifted now. Lidars. Are being put in every Chinese cars for safety reasons, because if you have a LIDAR in your car, the risk of a fatal accident goes down 70%. So now lidars are like airbags. It's like, yeah, right. I was just gonna say that. It's the cost of a seatbelt, right? Yeah. At 200 bucks, why wouldn't you have one? And in China it's, it's gonna move to where very soon you won't be able to insure your car if it doesn't have a lidar. And I think that's gonna move like this everywhere around the world. So a company like Huai is now signing up. BMW is now signing up, uh, Mercedes and even the military Humvees, this is hilarious. The US military Humvees use huai lidar. So, uh, all this, all this to say these types of companies like CATL, like BYD. Like, uh, Huai, uh, these types of companies did not exist in China five years ago, 10 years ago. But because you've had such a focus of policy of we gotta move up the industrial value chain very, very quickly, we're gonna throw money at it. We're also gonna throw people at it because 20 years ago, China was graduating a million university students a year. Now he graduates 12 million university students a year, and he graduates. More engineers than the rest of the world combine X India. Um, so you throw money at the problem, you throw people at the problem, and before you know it, you start to actually have companies. That are actually pretty interesting in their own right. Yeah. And the innovation, I mean, your point about the cars, Felix Soff told me that he, he was in China last year and drove around in a car that was better than his Porsche. Uh, and, and, and cost a lot less pro, probably less, less than half the price. Yeah. Yeah. Is it Shenzhen? That is the city that's sort of known as the, uh, innovation ca or manufacturing capital? So there's several actually. So if you, if you think of sort of the, the tech hubs of China, Shenzhen is definitely one of them. That's where you have BYD, that's where you have, uh, Tencent. That's where you have, uh, Huawei. Uh, so that, so that's definitely one of them. Another big city for tech and innovation is Hong Zou. So Shenzhen's a massive city. It's a first tier city. I mean, Hong Jo is a big city as well, but not as big as Shenzhen. But in Hong Zou you have the, the Jjg Institute of Technology, which is increasingly becoming a little bit like the MIT of, uh, of China in Jji. Uh, this is where you have uni tree, you know, the robotics company that you saw all the robots dance over Chinese. It's where deep seek came out from. But most importantly, it's where Alibaba, uh, is based and out of Alibaba. You've had a lot of offshoots. Um, then, uh, then frankly, you know, Shanghai is still, is still another, you know, big, big hub of a very interesting company. So in Shanghai you have. Uh, so Hosai is in Shanghai and Horizon Robotics and neo cars. And so you really have, I think if you want to think of hubs, you, you have ch you have three big hubs in China. Just like look, the US is also a massive, China's a massive economy and the US you have the Silicon Valley and, and that is essentially is shezhen. But you know, the whole, the whole area around Austin, uh, has, has a lot of things going on. Uh, the whole, uh, the broader Seattle and, you know, in Seattle you have what? You have Microsoft, you have Amazon, you have Expedia. So you, you can have several hubs and China, China does as well. The reason why I bring it up is I've, I've heard three different venture-backed engineers, uh, all, all from Silicon Valley, say separately of each other. The US desperately needs to build its own Shenzhen, which just that statement from an American entrepreneur more than one in a week is like, it's just mind blowing how fast things have changed and how far behind the US I think is the US is very far in advance in some things. And yeah, I mean, look, uh, in manufacturing the US isn't there anymore, but then you have to question, do you even want to be in manufacturing? Uh, because manufacturing is also evolving so rapidly now, you could say, well, we need to be in manufacturing because, you know, we need jobs and all that stuff. That, that would be a Donald Trump kind of worldview. The reality though. Is that the high-end manufacturing in China is also happening with no jobs. I think I've told you this joke before about how the, the factory of the future has in China has one, one German Shepherd and one security guard, and the the security guard is there to feed the German Shepherd and. The German Shepherd is there to bite the security guard if he tries to touch the machine. Uh, and, and so that's, you know, the, the, you go to these factories, you know, show me you can visit, show me has dark factories just outside. Show me is a big, uh, cell phone manufacturer and auto manufacturer. Uh, they have dark factories outside of, uh, there's a dark factory outside of Beijing that I think produces about 3 million phones a year. Uh, there's not a single worker, like literally it's just a dark factory. So, uh, you could say, oh, well the US needs some of that. Yeah. Uh, but what's the point? Well, is the point resiliency. That's right. The point is national security resiliency, who knows what the future's made of? It's better to produce it at home. Um, and, but, and, and, and I get that. Like, I, I think that's a very valid argument to be very clear. And if you want to go down this path, then you also have to be cognizant of the fact that it takes a lot of investment in, uh, in power grids, uh, a lot of investment in machinery. Um, now the reality in, in things that turn out to be pretty cyclical, raw materials, processing of raw materials, all that stuff. Absolutely. Uh, some of the stuff is polluting, et cetera. And so China's gone down this path. Uh, the US you know, could have gone down this path. You've, you've had 0% interest rates in, in essence, for 20 years, and I'm exaggerating, but interest rates have been super low for 20 years now. And over the past 20 years, you've had zero investment in the grid. You, you produce essentially as much electricity today as you did 20 years ago. Uh, China used to produce 20 years ago, half as much electricity as the US and today produces twice as much as the US. Uh, so, you know, production of electricity in China has essentially gone four x. Um, so over that same period, so the, the, you know, that was a, a cognizant investment. The US took the zero interest rate and said, this is awesome. We're gonna do share buybacks. Uh, this is this. This is awesome. We we're gonna do private equity. Uh, we're gonna gear up the balance sheet of every business out there, um, and, and we're gonna get ourselves very wealthy. Um, now what's interesting is a lot of the wealth that's been created, to your point, has been financial engineered. It's not like we've massively, uh, increased our capacity of productions, whether in the US and Europe. Um. But we did get richer, at least on paper. So let's switch gears for a second, because you spend, you spend part of your year in Canada. Yep. There's a lot of tension between our two countries, which, you know, two, two. Two years ago, um, would I even two years ago, I think would not have been, not, have not, not have been, uh, something, uh, uh, the average Canadian or an American would've would've foreseen. Right. But there's a lot of tension now. Let them win a Stanley Cup for once and uh, they'll get over it. What sport is that? Is it exactly? What's your take on that? I mean. You know, there's a lot of theories as to why it's happening. Um, a a a lot of, and it goes back to China, right? Like, like there's one theory, there's a, there's a reporter in your country, Sam Cooper, who um, does a lot of work on, on, on the CCPs infiltration of the Canadian government. And I've been dying to ask you like, what do you, what do you think about this? So I'm gonna make like a Jesuit priest and answer your question or another question. Um, I, I'm. I was actually having dinner with a friend of mine who's works for the State Department, uh, and he was saying, you know, it's really a shame that our relationship with Canada is so bad right now. And I said, you know, who's your relationship good with, uh, like beyond who's your who, honestly, who's jokes aside? Who is your relationship good with? And he said, oh, we have a great relationship with Japan. And I said, yeah, okay, fine. That's like taking your sister to the prom. Uh, like, you know, Japan, Japan is essentially a colony. Uh, you've got troops, troops all over the country, and they've always done what you've told them to do. You tell 'em to revalue the end, they revalue the end. You tell 'em to buy us treasuries, they buy us treasuries. Um, so, so today, uh, it's funny because 20 years ago. The idea that China, or even 10 years ago, the idea that China could have any friends internationally would've seemed like a joke. Uh, and, and I said, I was saying this at the time, China 10, 12 years ago, a didn't really have much of a foreign service, but China didn't have friends. It had clients. So it had a few countries like Pakistan or North Korea that depended on China, but it really didn't have friends. Uh. You know, today, who, who does the US have a good relationship with? In, in, in all honesty, jokes aside. Um, so yeah, the, the relationship isn't great with Canada, but has the US tried to have a good relationship with Canada in the past few years? Uh, I'm not sure that it has, so I don't think you can be too surprised if you, you know, if you poke people in the eye and spit in their face. After a while, they turned their back. Uh, and um, so I think that that's where, that's where Canada is today. I think it's understandable. Um, what's baffling to me, uh, as a proud Frenchman is that we Europeans, uh, continue to be absolute doormats, uh, to, to the United States. Um, and uh, and I don't really quite understand why, because we're actually far less dependent on the United States than Canada. There is. Canada is like, pretty much like massively dependent on the United States. Um, so Canada's room to maneuver is much more limited than, uh, than Europe's room to maneuver. But then I guess you could say. Canada's, uh, the threat of the US to Canada is probably more acute. You know, the whole calling Carney a governor, the whole, uh, and he continues to do it, right? Trump continues to call Governor Carney. It's, uh, you know, that's, that was maybe funny the first time, but you do it, it was kind of funny actually the first time. But, but you continue to do it, uh, and it becomes, you are like, you know, if the US did. If the US did wanna invade, if the US did wanna invade Canada, it probably could. But so now, like it's something that you would've never considered before as a Canadian, uh, and now all of a sudden it's like, it's, it's on the table. Uh, and so yeah, it's, uh, I would say that repairing the relationship, uh, really doesn't depend on, uh, the U on Canada. It depends more on the us. Uh, now having said all this. Um, to your, to your question as is the Canadian government controlled by the CPC? Uh, I, I'm doubtful that it is, uh, in, in your mind. I think if it was, they would've already built the pipelines through British Columbia to sell the order to the Chinese and Stu, and Stu being basically a hundred percent dependent on the US for all their oil and natural gas exports. If really the, the Canadian government was controlled by the CPC. You would've seen, uh, a lot more, uh, activity on, on that front. So if, if I look at, at the fact, if, if the Chinese government really does control the Canadian government, what have they done with that control that has benefited China? Uh, I, I can't name a single thing. A single policy taken by Canada in the past 10 years that has massively benefited China to the detriment of everybody else. Uh, now this doesn't mean that maybe China hasn't tried to control the Canadian government. But I, I can't really see any indication that they've been successful at it. I guess the one thing that I've learned from spending just, just a little bit of time in Washington DC is that a lot of things happen that most people have no idea. Yes. Happens of course. Um, and you hear about it, the things in the news, and, and then you learn that, you know, that was a reaction to something that was done by us. Whichever side you're on and whichever one starts it, there's, there's, there's just so much happening. Alright, let's get off of that. Well, I wanna ask you about. Um, the carry trade, um, the yen has been getting stronger. Uh, the, the, the Japanese carry trade, is it really unwinding? And what are the implications for the global market, if it is? So, let me, let me be, uh, first totally honest. If you told me if we'd done this call two years ago. And you said, Louis, you know, by when 2026 rolls around JGB, long yields will be three and a half, 4%. I would've said, oh my God, like this is gonna be a bloodbath. Uh, this is gonna be right. Uh, no, I'm, I'm being dead honest. Yeah, I know, I know. And obviously I would've been dead wrong. So you've had a massive sell off at the long end of the JGB bond market, uh, the, of the Japanese government bond market and, um. Considering the nature of that blood bath, I think markets have been remarkably well behaved. Um, now looking forward, I think Jgb can, will continue to sell off because, um, uh, you now have a, a new government in, uh, Japan that essentially can rewrite the Constitution, uh, because they have the, the necessary, uh, majority in parliament and can move to spend a lot more money on defense, which she very clearly wants to do. Uh, and run much bigger budget deficits, which she also clearly, clearly wants to do. So, you know, that's the, that's the, the, the, the path, uh, of which we're going. And by the way, yields rising in Japan means that it's gonna be very hard to get any kind of bond rally in the US or in, uh, Europe, or in any major markets because Japanese savers will continue to gradually repatriate money. Now, having said that, yields at the long end have gone up a lot. And again, sure it's gone up from one 60 to 1 54 or wherever it is today, but it, you know, the again, is, remains stupidly undervalued. And so what we haven't really seen is Japanese investors say, okay, I'm bringing back my money. And, and I think the reason for that is that there is no appetite to be in long-dated bonds. Uh, long dated bonds have been Japanese. Long day bonds have been the worst performing asset class on a one year, three year, five year, 10 year view. They've been the the worst asset class by far. And most people. And Japan have absolutely no interest in trying to catch that falling knife, uh, because they see a government that is gonna keep spending money because they see A BOJ that's still sitting on its hands. So I think we probably don't get the, the, the big unwinding of the carry trade and the Japanese really repatriating their, all their savings. We probably don't get that. Until, uh, we probably don't get that until short rates in Japan are, at least at the level of Japanese inflation, which is basically two point a half, 3% until the BOJ, you know, raises interest rates from the below 1% where they are today to two 50. So I think you need essentially, really 150 basis points of interest rates rising at the. Uh, at the short end in Japan for, for the, the carry trade to really, to really implode. And, and I'm not sure the BOG is gonna give us that, like, it's, it right now. It doesn't look like it, it's 150 basis points, but doesn't sound like a lot, but it's a massive, massive increase. I, no, it's big. It's baked. Yeah. But Japan, it's baked, so I, I, I don't think we're gonna get it. Okay. Especially in the face of a, of a government that just got a, a big popular mandate to, to keep spending a lot of money. Last question Louis. 'cause I could, I mean, I could talk to you for four hours here and I wanna be respectful. Um, years ago you said that, uh, energy had taken the place of bonds in terms of being anti, anti-fragile asset. You still believe it, so believe it. Look, I think we're in, we live in a globally inflationary environment where every government is falling very easy fiscal policy where every central bank is following too easy a monetary policy where the risk to the system isn't that growth collapses, but that inflation picks up. And that inflation pick up, typically the trigger for that, the catalyst for it is higher energy prices. Um, and so, you know, we live in a world right now where growth is fine, everything's humming along, markets are moving higher. Uh, and I think what will, what will eventually put an end to this is a spike in energy prices. I don't know when it happens, but, uh, I, so I, you're absolutely right. You know, I said, look, the 60, 40, 60 equity, 40 bonds. Of yester years is over. You now need to be 60 equity, 20, 20 gold, 20, uh, 20 bonds, uh, 20 energy and the 20 energy. You know, that portfolio did fine in 22. I mean, it survived in 22 and 22 when all prices spiked and bonds went down, and equities went down. Equities and bonds both went down 20% energy doubled. So if you had 20% in, uh, in energy. Uh, then that doubled and everything else was down 20. So you were still okay. Uh, and you fought, you fought to, to, to live another day. Uh, you lift a fight another day. And so, uh, I very much think that, uh, we're, we're having at least 20, if not 25 or 30% of your portfolio in energy in various forms, whether it's equity, uh, energy, equities, whether it's out of the money calls on, on oil, whether it's coal, uh, even if it's solar. Like, you know, some people have ESG constraints, et cetera. So go out and buy some solar. Um, but you need, you need that energy buffer because. Uh, if and when the, the thing comes to an end, it will be because of energy, probably my favorite person to, to speak with on anything related to portfolio construction or, or, or the non-US perspective. Uh, I always appreciate your time, Louis. Thank you so much. Thanks so much, ed. Great to see you.