Louis Gave: $120 Oil Breaks Everything — And Nobody Is Ready
Summary
Macro Framework: The guest focuses on three pivotal prices—US dollar, 10-year US Treasury yields, and energy—as the primary drivers of asset allocation and market outcomes.
Oil Prices: He sees significant upside risk in oil, with potential for sustained moves toward $120–$150, noting the US is relatively resilient while allies in Europe and Asia are far more exposed.
Energy Hedge: In a structurally inflationary regime, he advocates a 60/20/20 portfolio (equities/precious metals/energy), arguing energy is the best hedge for equities when inflation shocks stem from energy spikes.
Gold and Precious Metals: Bullish on gold as a hedge against poor monetary policy (not inflation per se), citing strong central bank and Asian retail buying, and under-owned Western ETFs.
Currencies: Bearish on the US dollar beyond the knee-jerk safe-haven bounce; strongly bullish on RMB appreciation due to extreme undervaluation, productivity gains, and improving momentum.
China Outlook: Sees China as uniquely deflationary with policy room, improved self-sufficiency, and an increasingly attractive currency and equity market relative to the US on valuation and positioning.
Thermal Coal Demand: Expects short-term boosts for coal producers (Indonesia, South Africa, Australia) as Europe and parts of Asia substitute coal for constrained LNG supplies.
Bonds and Policy: Warns of a bond bear market with rising yields in either war-escalation or regime-change scenarios, noting 60/40’s weaknesses amid structural inflation.
Transcript
there is room for oil prices to go up and gasoline prices to go up without absolutely crushing the the US economy. For me, the bigger question is actually not whether this crushes the US economy because again the US is uh is self-sufficient more or less in energy, but it's whether through this action the US has actually ended up crushing pretty much all of its allies. >> Louis Gav, founder and chief executive officer of Gavcow. It is so wonderful to welcome to you to the show. Great to meet you. I'm so excited to welcome you on for the very first time. >> Thanks for having me. It's a pleasure to be here. >> It is a pleasure to have you. And I have to say, our audience has been asking for you for ages. So, I was absolutely thrilled when one when one of our other guests made the introduction. So, thrilled to have you. And wow, Louie, what a time to have you, especially with everything transpiring in the world these days. So where I usually start with my guest is to get more of their macro picture, the framework in which they're looking at the world today. So we always start there big picture. What does that view look for look like for you today? What are you paying attention to? What are the themes that matter the most? The framework that you're working with. And one of the things about this show, Louie, is you can take all the time you need to set the table when it comes to that big picture macro view. Well, again, thanks uh thanks for having me. And I love I love that first question because asking what people's processes are is is a super important one. And for me personally, I start off with a very simple idea that there are three prices that matter more than any other price. Uh and those three prices are the price of the US dollar, the price of the 10-year US Treasury or the yield on the 10-year US Treasury, and the um and the price of energy. uh and that if you get the direction of these three prices right, whether they're going up or down, that that's in 80 or 90% of the work. Uh essentially, if you get the direction of these three things right, you're going to you're going to know if you want to be invested in US equities or invested in global equities. You're going to know if you're going to want to have growth or value. You're going to know if you want to be uh in emerging markets or not. If you want to invest in commodities or not. um if you want to invest in fixed income or not. Now, as you pointed out, it's uh it's been a busy week. Uh lot lots uh lots of things happening and the the main event this week is that all of a sudden the the realm of possibilities on energy has widened considerably. Um the the the the potential outcomes on energy have gone far more far more dramatic. Um, now you know we came into this crisis with energy prices at at roughly 65 bucks, 60 bucks, 65 bucks. Uh, and when I say energy, sorry, I mean oil. We came into this crisis with oil prices at 60 65 bucks. Um, as we speak, we're now at 85. So, so there's been a jump, but to me, that jump seems pretty modest given the the level of uncertainty. And if there's risk to to the old price again compared to where we were 10 days ago at 60 65 bucks, I'm much more fearful that we end up at 120 or 150 than I am that we end up at $40. I think the odds of now you could say there is a scenario where we end up at 40. A scenario where there is regime change in Iran and companies can Western companies can come in and develop Iranian oil infrastructure and all that. But but I don't think that happens overnight. Uh that that that happens down the road. Now the the interesting thing on the energy front on the energy piece of again three prices matter. The interesting thing on the energy price equation is that you've seen crazy volatility uh at the spot uh in the spot price. So yesterday you had an intraday swing of 40 bucks. Uh as an aside you have to feel sorry for the guys who work in the the hedging department of airlines or chemical product companies etc. you know how what do you do when when the oil price goes up and down 40 bucks in a day. Um but uh leaving that aside, what's fascinating to me is if you project yourself forward and you look at the 12-month contract, etc., the oil price really hasn't moved that much and the volatility way out there hasn't hasn't moved all that much. So essentially the market if you if the message from the market is yes there's big uncertainty around oil right now because the homemoo straits are closed and uh refineries are being bombed and oil installations are being bombed all across the Middle East. But in a year's time it should all be over. Uh that that that essentially is is the the market's message and and then you can decide how you how you feel about that assessment whether you want to position yourself for or against that that assessment. Again, my fear is that uh the upside on oil is is consequential and it'll last longer than uh than the next few weeks, which is again what the market is pricing in. So that's for the first the first development. The the second development I think coming into this crisis uh we were in a dollar bare market. uh the US dollar was was weakening and as very often with geopolitical events the the the sort of knee-jerk reaction of of everyone is I don't know what's going on. Sell sell stuff and put me in cash in US dollars. Um and so the dollar has rebounded against the yen. It's rebounded against um against the euro. It's rebounded against most emerging market currencies. Um and uh and again in a world in a world in which things fall apart perhaps that makes sense. Um but I'm not I'm not actually convinced that it does. Uh because if if the Iran situation goes really really bad. Um, I think that will create a political crisis in the United States because President Trump unleashed this war with very little political backing and very little um uh you know the general population in the US 70% of people didn't want this war and so if the costs start to mount uh that that will create more political uncertainty in the United States. So my I have been a US dollar bear and um I acknowledge that right now the US dollar is going up of course but I don't think this lasts. Um then I've been I've been a massive going through the three prices. I've been a a massive US treasury bear for for 5 years and my my friend Luke Groman I don't know if you've interviewed Luke. >> Oh he's been on the show. We love Luke. Yeah. >> Okay. So he loves to say that if truth is the first casualty of war, bones are usually a close second. Uh and and I think that's right. Wars are fundamentally inflationary events. Now you could say that when it comes to this Iran story, we're at a very it's it might be a very binary outcome in that you could say, "Okay, fine. If the war continues, the hormones are are shut down, that creates massive supply chain dislocations and inflationary hit for the economy and that's no good for bonds and and initially I think that's what the markets start to price in right it's even in this this phase of uncertainty and and flight to safety US treasuries have not been bid uh which I think is an important signal um but then you might tell me well look what if Trump does win his bet and you do get regime change in Iran and you do get a functioning democracy there. Uh then you have a period uh then Iran stops funding terrorist groups like Hezbollah and Hamas etc. and you have a period of dramatic uh improvements all across the Middle East and that means more oil comes out and oil prices come down and everything is great and that keeps interest rates lower. Um that sounds great on paper it sounds amazing. um it's almost be like the fall of another Berlin wall. Now, interestingly, if you go back to the late 80s, early 90s, uh when German reunification happened, the initial gut reaction of the market was this is great news. Let's buy all the German companies, the construction companies and the infrastructure companies and whatnot because they're going to have to rebuild all of Eastern Europe and these guys are going to make a ton of money. Now I think today uh there's a hope a perception that okay we get regime change in Iran that will unleash an epic boom across the Middle East. Uh we can rebuild Iraq, we can rebuild Syria, we can rebuild Iran without these these mas funding terrorism. The flip side of that coin though is if you go back to Germany in the early 90s real rates in Germany moved to 7%. People forget this, but re there was such a demand for capital to fund all of this that real interest rates went absolutely bananas and the pound broke out of the ERM, the exchange rate mechanism, the European exchange rate mechanism. The Italians also broke out. Uh France ended up having a 15% unemployment rate because they had to push up their real rates as well to to stay pegged to the to the Deutsch mark. Um, so it came at at a real cost. So if you look at today, the idea that we're going to get regime change in Iran and that's going to unleash an epic boom. The next step is that means that ADIA will no longer be buying Microsoft and US treasuries. They'll be spending their money rebuilding Iran, rebuilding ADA is the Abu Dhabi Investment Authority or the Saudi sovereign wealth fund. And all those guys that have been loading up on NASDAQ and loading up on US treasuries, all of a sudden they redirect all their money somewhere else. So the the bottom line when you I look at Iran is it's sort of tails I wins and head heads I don't lose. Heads heads tails I lose and heads I don't win. Um and that if the war continues it's a disaster for the bond market. But if you end up getting regime change in Iran then maybe you actually also get much higher real rates. So the only story that's good for the bond market is a sort of status quo such as we've had for the past 10 20 years of this regime this the current regime continues but remains boxed in by a United States and then all the Middle Eastern savings continue to go to to the United States and keeping interest rates low there. So uh bottom line for me when I look at my three prices I worry about the upside on energy. I worry about the downside on the dollar and I worry about the upside on US Treasury yields. >> Wow, what an amazing amazing like setup to the conversation to understand that framework and also just the potential scenarios and potential knock-on effects um for those various scenarios. Okay, I want to stay on oil for a bit because we did cross $100 barrel as you point out. We're where are we right now? We're about 80 bucks at the moment. Um just looking right now. Isn't it crazy? 80 bucks right now on WTI. Okay. The base case sounds like for you the base case would be higher energy that $100 barrel. So my question for you is if we get there or we stay there we stay above 100 a barrel. What does that mean? Like what for the US? What would be the options you think for the US or President Trump? because I imagine you're going to have you're going to be in quite the political predicament if we stay at $100 a barrel just because of the effects that would have. >> Yeah. So, look, economic activity is energy transformed. Uh I I say this in every interview I give. So, energy prices matter tremendously and the lower an energy price, the easier it is for entrepreneurs to transform energy into corporate profits and to economic growth. Um, so frankly, every policy maker, every elected official should be coming into office thinking, how do I keep my energy prices in check? Because incidentally, it is one of the few things that policymakers can do is have smart energy policies. Um, and credit where credit is due. I do think President Trump came in uh wanting to do that. You see this in his nuclear policy energies. You see you see um you see this in his uh wanting to deregulate coal and and push coal back. Um because by the way coal if you exclude any environmental costs coal is by far the cheapest way to produce electricity. Um the the reason China today has a cost of electricity that's half the cost of everybody else is because it burns more coal than than anybody else. So I I think Trump came into office thinking I do want to get the the I do want and keep the price of energy low. Uh and to some extent you could even say that that that partly drove the Venezuela decision. Uh the idea that there's these huge reserves there. This is being completely mismanaged. This is uh Venezuela went from exporting 2 million barrels a day to barely exporting 300,000 barrels. it's, you know, we we we need to clean this mess up essentially. Um, and and perhaps you could say that's what's motivated Iran as well. Um, in that Iran creates uncertainty in the region and as a as a result there isn't as much investment in places like Iraq, like um Kuwait, like uh the United like Iran that there could be. And if we pump more oil out of there, you'd have a lower oil price. Um but of course Iran is a much tougher nut to chew. Um and um and so the the goal I think might have been let's get lower energy prices across the board. Uh but the road to hell is paved with good intentions and all that. You we may very well end up with with higher oil prices. Now as it turns out I I don't think $100 oil uh kills the US economy. Uh it's not a great news. Don't get me wrong. It's not great news. But you we have to remember that the US is essentially energy self-sufficient. So when $100 when you get $100 oil, what does that mean? That mean money leaves from New York or Michigan to go to Oklahoma, to go to Texas, to go to North Dakota, to go to Alaska. It's sort of right pocket left pocket thing in in the United States. It does hurt uh the US consumer. No, no doubt about it. When you look at the US energy mix, uh 35% of the energy that the US uses comes from oil. And a lot of that is in transportation. Um so contrast that with say China. In China 18% of the energy that China uses comes from uh oil and not so much of that goes into transportation actually because China's done such a good job electrifying its cars but also massively upgrading its public transports, subways, high-speed trains uh and the like that actually in China's 18% it mostly goes into petrochemical products. So, I highlight this because if you think, okay, we're going to be have $100 oil. Um, I I don't it it's going to take a bite out of US consumer disposable income. No doubt people are going to pay more at the pump and that's going to be somewhat painful. Is that enough to push the US into recession? Um, when you look at the this the amount of money spent today on gasoline in the United States, we're in the bottom 10%. Well, up before this week, uh, if you looked at it a week ago, obviously now things have shot up, but if up until a week ago, you were in the bottom 10% of disposable income spent on gasoline. So, there is room for um for and you could say, "Yeah, but price have gone up, etc." But you have to remember cars are more efficient than they used to be. Some people do drive electric cars and so on and so forth. So the there is room for um for oil prices to go up and gasoline prices to go up without absolutely crushing the the US economy. For me the bigger question is actually not whether this crushes the US economy because again the US is uh is self-sufficient more or less in energy but it's whether through this action the US has actually ended up crushing pretty much all of its allies. Um >> because uh what's happened is terrible news for Europe. Um, Europe is massively dependent now that we can't import, I say we because I'm French. Now that we can no longer import Russian natural gas, we Europeans have become massively dependent on Qatari uh natural gas and and right now that's that's frozen. So that's a that's a huge question mark. Um, it's a huge problem for u Taiwan, for Korea, for for Japan. Taiwan has about 10 days left of natural gas stored and then runs out in 10 days. Now, I don't think that Taiwan's going to go without electricity. That's conceptually, if you're a politician, you you can't let that happen. So, how do you bridge the gap? You're going to burn a ton of coal. Um, and so if you're a coal producer in Indonesia, if you're a coal producer in South Africa, if you're a coal producer in Australia, all of a sudden you're getting tons of orders from Europe, from Japan, from Korea, from Taiwan. Because you project yourself at 2 weeks from now, if the straits are still closed, all these economies are in deep trouble in a way that the the US clearly is not. Uh, let's not forget that 90% of the oil that flows through the straits of Armuz heads east. uh it heads to it heads to India, it heads to China, it heads to to Japan. This is where the Middle Eastern oil goes. So, so the US and and I think this is why you've seen the equity market reaction that you've had, right? So far this month, the NASDAQ is up for the month. The S&P I think is down 50 basis points or or basically it's basically flat. Uh European markets are down 6 to 10%. Um, China's down incidentally monthto date it's down just 2%. Because China has been getting ready for this moment, but markets like Korea, markets like Japan have gone absolutely smoked. >> Hey everyone, I hope you are enjoying this interview. If you can take a quick moment and hit that subscribe button, we are on a mission to hit our next goal of 100,000 subscribers and your support could really help us get there. Thank you so much and enjoy the rest of the interview. So is there a risk then that we could be set up for like a global growth shock just because of like all of these other countries that would feel the impact of this whereas like as you point out like the US we have we're pretty much energy resilient but so many other countries depend on oil that flows through the straight of Hormuz. >> Yeah. Look again economic activities energy transformed. We've gone from a market that believed, oh, we have um we have two or three million spare barrels, so oil is cheap and we can price it at 60 bucks and and again, you were in the sort of top 10% bottom 10% of of amount being spent on oil by US consumers, etc. So everything was looking great to all of a sudden if the straits of Hormuz are blocked, you go from a market that has 2 or 3 million spare capacity to now, oh, we're missing 15 million barrels. So what what do you would do with that? Either prices have to skyrocket option one. Option two, demand has to collapse, which is your scenario, what you just highlighted. Demand collapsing means much much weaker growth. And so that means that if you're a marginal buyer, if you're Pakistan, if you're India, if you're Bangladesh, if you're Indonesia, and you can't afford a barrel, then you stop driving your car and you get demand destruction. And and you and that entails a world recession, which is that the second possible scenario. Or there's the third scenario, the one that the market again is pricing in today. It's saying, well, look, this would be really bad, so it's not going to happen. uh you know where because it's gonna it would be so bad um we're gonna find a solution or Trump won't let it happen because it'd be it'd be too disruptive and right now that is what the market is pricing in right with the oil back at for a little bit 48 hours ago when oil hit 125 it was pricing in the oh my god the straits of hormuz are closed with the oil back at 85 and again the 12-month price at 65 bucks uh which is essentially where it was when this whole thing started, the market is pricing in this won't last because if it did, it'd be such a catastrophe that it can't. I I think that's sort of the the the logic that that's unfolding. Um, and to me, that's what makes energy still a very compelling hedge for portfolios because you could say, okay, fine, there's this scenario where global growth completely implodes because energy prices are too high. Um, so how do I hedge against that? Do I buy US treasuries or do I buy energy? To me, buying energy makes more sense because the way you get there is through higher energy prices. Meanwhile, if you get a global growth implosion, it's not obvious to me that bonds will actually do that great anyway. Uh because budget deficits will will blow out uh to the upside. uh all the Middle Easterners that have been buying uh the again the Abu Dhabies and the uh the Saudi Arabs and the Kuwait have been buying US treasuries will stop buying and they'll start selling. So energy remains I've argued this I wrote a book about this back in 2021 and I've argued this time I'm blew in the face but energy remains the hedge for equity positions because the risk in an inflationary world in which we live in is not that all of a sudden growth collapses. The risk is always that energy prices spike. >> Wow. Okay. Um you've written a lot of books that I believe that was avoiding the punch investing in uncertain times. Okay. Um that's so interesting. Energy as the hedge for equities. >> Could you just elaborate a little bit more? I had not I have not heard this idea and I really am fascinated by it. Explain that and when did you kind of come to that realization that it that's the hedge >> in our process? So there's several starting points. I mentioned the three prices. The another big part of our process is acknowledging that asset prices are driven by the interaction of economic activity and inflation. So if you draw four quadrants, you you you have an up a horizontal line that is more or less inflation and a vertical line that is more or less um uh economic growth. That gives you four possible investment scenarios. Um a deflationary bust, which is essentially what Japan had through the 1990s and 2000s. uh an in a deflationary boom which is the the the default mode of capitalism. Um the deflationary boom is the default mode of capitalism because every entrepreneur, every CEO wakes up in the morning thinking how do I do more with less? How can I produce more uh uh whatever widget I I I make with or more services with fewer workers with fewer with less energy with less copper you know what whatever the inputs are always trying to produce more with less and so that's why capitalism a deflate is normally a deflationary boom at the same time I think the natural state of most democracies is the inflationary boom because most politicians if the entrepreneur says how do produce more with less? The uh the politician says, "How can I promise more to my voters without having to pay for it?" And the the answer is it by by leaning on central banks to print more money and and by running big budget deficits. So the the default mode of most democracies is the inflationary boom. And then every now and then you get an inflationary bust uh which is when growth, it's also known as stackflation. Growth goes down, inflation goes up and that almost always happens because energy prices spike. So for most of my career and I'm 52 years old for most of my career we lived in a broadly deflationary environment. Uh we lived in a broadly deflationary environment because again that's the default mode of capitalism. Uh we lived in a broadly deflationary environment because Japan had an epic bust. We lived broad lived in a broadly deflationary environment because China was a huge deflationary force in and of itself and to some extent so was technology. Now in this environment that meant that each time you got a geopolitical shock or some kind of exogenous shock because the overall backdrop was deflationary central bank and fiscal authorities could step in and push money into the system. They didn't they had very little constraint to to their to their policies and you saw this time and time again. Um you saw this up to an extreme of co COVID hit ultimate exoner shock thing comes out of nowhere it's uh nobody had this in their model um think economies go lock down economic growth collapses the response of the policy makers is to embark on a fiscal binge and a monetary policy easing bench such as the world had never seen and the end result of this we pushed so much liquidity into the system that we actually broke the structural deflationary world in which we lived in and moved into a more structurally inflationary world. Now once you're in once you've essentially moved from the bottom when you're in in the bottom of the quadrant and you're always wondering am I in the deflationary boom or deflationary bust again the hedge you buy equities and you hedge with bonds that's why through this 30 years the best possible portfolio was 60% equities 40% bonds um and whenever you move to the deflationary bust your bonds save the day we now live in a structurally inflationary world for a host of reasons that I go through in in my 2021 book. And in a structurally inflationary world, the 60/40 no longer works. What you need to do is you move to a portfolio that's still 60% equities, but you forget the 40% bonds. You buy 20% precious metals and 20% energy because the risk is always that you get an energy price spike that pushes you into the inflationary bust quadrant. Um, and so there you go. Now, people don't, your listeners don't need to buy the book. Uh, I just said uh I I just told them everything that was >> Lou will tell them to go buy the book. They'll buy the book. >> I'm kidding. I'm kidding. They actually don't even need to buy it. It's they can download it for free from the website if they uh if they have to buy if they want the hard copy. If they want the ecopy, they can get it for free. Um but uh if they want to spare themselves the um the the uh the reading um then they can um then I just summarized it. Um so today we live in a structurally inflationary environment uh in every major region except for China. Uh China is still in a structurally deflationary environment. But you look at Japan, Japan has an inflation rate over 3% which is higher than what the BOJ is comfortable with. Uh Europe has a structurally higher inflation rate than what the ECB mandate uh would uh would call for. Uh same story for the Fed. And yet, it's not like these guys are actively and proactively raising interest rates to get inflation back down to below where it should be structurally, right? The Fed isn't doing that. They're cutting rates. The ECB's cutting rates. The BOJ's is not hiking rates. So, we're in a structurally inflationary uh environment. And so, now you get an exogenous shock like this Iron War. And the question becomes, okay, what the what will the policy response be? Now you know that if this thing continues and starts to impact economic growth, you know you're going to get fiscal easing and you know you're going to get monetary policy easing and you know you're going to get more inflation. Now incidentally the one part of the world where there is no inflation and therefore there is no policy constraint and therefore they can really step on the gas and do more budget deficits and more money printing if growth really falls apart is China. China today has 0% inflation when everybody else is above two. >> Oh, that's interesting. Okay. Um before I get to China, let me just say really quickly on this new portfolio construction. 60 equities, 20 precious metals, 20 um energy. Gold's had quite the run. Um but would you say that gold's not necessarily an inflation hedge? >> Yeah, I don't think gold is an inflation hedge. I don't think it ever was. Gold is a hedge against bad monetary policy and essentially 0% interest rates. And I think you've seen this again in the past few years when gold has gone absolutely parabolic. Uh what's been fascinating as gold has gone parabolic is who the buyers of gold have been. Um now on the one hand it's been central banks and and that's a geopolitical shift. when uh when the western world sees Russia's assets uh and and told Russia, look, you get access to your US treasuries, your German boons, your your UK guilts, uh if we say you do, and if you don't act like a total jerk, it sent a very strong message to the central banks of China, of Indonesia, of Saudi Arabia, of Qatar, of everybody that uh the the US treasuries were no longer a risk-free asset. um and that in a conflict you could easily lose access to them. And so central banks that had been net sellers of gold up until that point became net buyers of gold. And if you look at the past 3 years, central banks have have bought 25% of the outstanding gold mine production every year. So so that that's been a huge shift in the gold price. But the other massive gold buyers have been the Japanese savers, the Chinese savers, the Korean savers. And why have these guys been buying gold? First, because their currencies were weakening. And second, because they had 0% interest rates at home. I think it's when you have 0% interest rates at home that a lot of savers say, you know what? Why am I keeping my money at the bank? I'm taking the risk of the bank. I'm getting not I'm not getting rewarded for it. My currency is falling. Excuse my French, but screw this. I'm going to buy um I'm going to buy gold instead. And and so it's fascinating because if you look at you've had this roaring bull market on gold. You look at shares outstanding in the GLD or shares outstanding in the SLV, which are the big gold ETFs, they're not even at they haven't even recaptured the highs that they had in 2021. The the US retail, the European retail has not participated at all in in this gold bull market. Um, and so why? Because in Europe, in the US, you were making money at the bank. You you were getting paid in interest. So the people then feel the sort of FOMO and the gun to the head. I I need to buy gold. Um so now so now what happens you know going going forward um I think the first big shift for the gold market is that if you're a central bank you bought gold because you didn't want US treasuries anymore right it was it was very much a feeling of uh I my money is no longer safe there. And I you have to remember that for 70 years we lived in a world where central banks bought gold uh sorry bought US treasuries because there was this belief that in a crisis let's say there's a tsunami or there's a war or an earthquake or whatever. Uh in a crisis I can sell my US treasuries. It's a deep liquid market and I can buy whatever I need to buy. If I need to buy weapons I can buy weapons. If I need to buy oil I can buy oil. If I need to buy food and so forth. Um now so there was this equation of US treasuries equals commodities at a moment's notice like one can be transformed into another very very quickly. The Russia thing undermined the left part of that equation. It undermined the idea that uh you could get access to your treasuries at a moment's notice. And I think Venezuela and Iran are now undermining the second thing which is I can always get access to commodities whatever I need. Um because all of a sudden that's not true. If you want fertilizer right now, you can't get it. Uh if you're Taiwan and you want natural gas, you can't get it. If you're Korea and you want oil, it's becoming much more challenging. Um if you want coal, all of a sudden you have to pay up for it. If I want Indonesian coal. So, so I think when we said, okay, US treasuries aren't safe, the default mode for a central bank was to say, you know what, I'm going to go out and buy a bunch of gold. Uh the default mode was very much I'm going to go and uh put all my money into gold because in a small room you can store a lot of gold for very little money and storing gold costs nothing. Storing oil, storing food, storing fertilizer, all that is is very very costly. Um, but now all of a sudden we are moving into a world that is more uncertain. And if you're Taiwan, you're like, great, I've got all this gold, but what I need is is natural gas. If you're India, you might say, great, I've got all this gold, but what I need is fertilizer. Uh, so we might be shifting now where people instead of storing gold, we'll start storing a a lot of the other commodities in uh essentially in the table of elements. >> So fascinating. Okay. Um, question for you. Are you would you would it be fair to say are you are you bearish on the US? >> I'm bearish on the US dollar and I'm bearish on the US Treasury market. >> That that that uh I I will definitely say that. Um I think for everything else essentially the equity market um and the overall economy we have to acknowledge that the US was born with pocket aces. um you have an economy that is self-sufficient on pretty much every commodity that matters. Now, you could say, "Oh, there's a few rare earths, etc." But on all the big commodities that matter, the US is essentially, especially if you throw Canada in there, um as as sort of one big economic block, uh the US is is economically self-sufficient, which in this day and age is, I think, an enormous comparative advantage. Uh the US obviously has the world's reserve currency. um it uh it still has the world's dominant military. It's it's got it's got all of these things. Now, having said all this, you could say, well, yeah, but the US has had this in the past and has gone through periods of underperformance and it has gone through periods of and it's gone through bare markets and and recessions. Um so, when I when I look at the US today, I think we did start a period of of underperformance in 2025. The US today accounts for roughly 70% of the world MSCI when it's roughly 22% of global GDP. So there's there's a uh there's a dislocation there that that you've seldom seen. Uh and if staying with the idea of processes when we look at when I look at any asset class any investment possibility I look at it through four prisms. Uh the first thing I I look at is fundamentals. you know, there's no point in investing in horse buggies or sewing machines. You want to own things that make sense for the long term. Now, when it comes to the US, the fundamentals are still very good. Um, and I know you can make lots of a lot of terrible stories about runaway budget deficits, etc., but by and large, the fundamentals of the US are good. The second thing I look at is momentum, both absolute and relative. Now, this is where it gets interesting is today I think there's a break between the narrative and the momentum. The narrative is the US is exceptional. It's the world's cleanest dirty shirt. It's the only place you can invest, etc. But really, for the past almost two years now, it's been underperforming. Now, it's been underperforming. It's still performed positively, but it's been underperforming. So, I think most Americans don't realize they're underperforming because the S&P is still up and that's good enough and they're happy. You look then at the third thing which is the investor positioning and investor positioning on the US is today very extreme. Um and when it comes to equities uh US domestic investors are heavily uh into equities and foreign investors are heavily into equities. So the investor positioning is definitely flashing big red light. And then the last thing you look at I look at is the valuation. So again I go through a four process thing. fundamentals are good but momentum is no good. Uh investor positioning is no good and then valuations are uh are more stretched in the US equity market than they are in any other market. So in relative terms unfortunately I don't have unlimited capital. I've got limited capital and in a limited capital world I think there's there are far more attractive opportunities today around the world than there are in the US >> such as >> well again staying with the four the four the four um process thing um I think a lot of emerging markets today whether Latin America whether China whether uh South Africa whether a lot of the Southeast Asian markets offer a much better mix of fundamentals of positive momentum of investor positioning that is nobody cares nobody's invested there and valuations that are extremely extremely attractive >> and so you know Chile comes to mind Brazil comes to mind China South Africa I think all of these markets are super exciting >> okay back to China um do you live in Hong Kong are you mostly there okay what is >> China for beginners >> okay what is the biggest misconception um around China that you hear specifically maybe looking from like I know you're you're French, you're European, but like I'm talking about like American investors like maybe most of the folks that would watch this show. What do you think is the biggest misconception on China? >> Boy, how much time do you have? >> Oh, we have we have another 20 minutes, Louie. >> I I don't know how much. Yeah, I don't know if you want to put a coin in that machine. Look, I think the the biggest misconception of all is um when you say, "Look, China's doing well and it's, you know, they're they're growing very fast and they've taken 800 million people out of poverty over the the past couple of generations, etc." Uh it makes people in America feel very uncomfortable and they and they immediately say, "Oh, so does that mean you believe in central planning? Do you believe in communism?" Um, etc. And I think that the biggest misconception when it comes to China is people uh fail to understand where the source and the genesis of of China's growth story really comes from. And the the story of China's economic growth miracle because it is a miracle. You you've never had another country grow so far, so fast, pull out 800 million people out of abject poverty. Let's not forget that when I was growing up, uh I was told finish your plate because there's little children in China that are starving. Um and it's uh and and and that was true. My parents weren't lying to me. Um I never really quite got the logic of why I needed to finish my plate and the Chinese kids starving, but to see how far it's come in in a couple generations is is really mind-blowing. So, how did it happen? It wasn't uh the wonders of central planning. Uh it it really wasn't. Um the the first thing that happened is that Mao died and Mao was to a large extent a control freak. He needed to control absolutely everything. So that went down to what people wore to work. Uh the uniforms they had to wear to work and where people ate their lunch and where people ate their dinner. So much so that when um Deng Xiaoing came to power following Mao he inherited uh total power over the country uh total control sorry shouldn't say power total control over the country but he realized that fundamentally he had no power because economically China was a and really had no no role to play in in the global economy. China was a fifth of global population and wasn't even 5% of global GDP. So he started something. He said, "Well, look, we're going to start de we're going to start liberalizing the labor markets and see where that takes us." So he gave up some control and the economy took off. And he realized that by giving up control, you could get more power. Um and and so he liberalized uh the labor markets and the first fortunes in China were made by guys who built factories there to exploit uh the local labor. And then uh in the late '9s you you you had the Asian crisis. You you hit a big economic bump and the Chinese leadership liberalized real estate. um all of a sudden you could own your your real estates and that unleashed an epic boom in China an epic real estate boom that probably went overboard but um they again gave up control i.e control over real estate for more for more growth and for more power. They liberalized also the commodity space uh all of a sudden you can be a coal mine operator copper and all these things and an oil trader and and build your own refinery. uh they so liberalized the commodity space and again that that was another boom. Um so having liberalized commodities, having liberalized land, having liberalized labor, you now are at the final frontier where you have to liberalize the world of capital. Uh and here it's um they're very the leadership is obviously very worried about it because they've seen how liberalizing capital can lead to massive accidents. They were starting the process of liberalizing the world of capital and the 2008 crisis uh showed up and and it scared the hell out of them. They said, "Okay, hold on. If we liberalize capital, does that mean that all of a sudden we we're going to blow up our banking system like the US just blew up theirs? Because if we do that, uh that that has massive massive uh negative implications for for our overall economy. So the the past 1015 years has this has been this back and forth of of uh liberalization on on the capital front. So I think that's the first big big misconceptions. Um I think the other massive misconception that that uh that westerners have about China is they believe that uh essentially you have these national champions that the government picks national champions, subsidizes them and essentially then these guys uh become global champions. It it actually doesn't work that way. Uh the way the system works in China is that CJ Ping, the guy at the very top will say you know what guys we need to produce electric cars. And he'll say that to all the mayors and the provincial governors and the party secretaries of different regions. And then all these guys go back to their district thinking, well, if I want to get the next job, I have to be the best producer of electric cars. And I can do this in different ways. So I can either a cut a deal with Tesla and get them to come and build electric cars in my district, which incidentally is what the mayor of Shanghai did. And then in time, he's now the premier. He's now the number two in the the Chinese uh government. um or I lean on my local bank to make loans to um to my local producer who will then start producing electric cars. And before you know it, you have 100 car producers in China because you have 100 different mayors who are leaning on 100 different banks to um to produce to produce local cars. And then it really becomes the hunger games of capitalism. Um out of those hundred, five will survive. And the end result is great for the consumer who gets much cheaper cars and uh and massive competitions. So it's it's actually funny because it's it's pretty much the opposite of what happens in the western world. In the western world, we say, "Okay, we want to do electric cars, so let's give a bunch of subsidies to Tesla. Let's make sure that Elon Musk becomes a trillionaire." And uh you end up with one electric car company, i.e. Tesla, that produces quite expensive cars. Um, in China you end up with a hundred producers of cars and now you can get pretty sweet uh electric cars in China for less than 10,000 bucks a car. Uh, and now they're selling them all around the world. China 5 years ago wasn't exporting any cars and now China is the biggest car exporter in the world. So the the level the level again the way you have to conceptualize Chinese capitalism is that it is the hunger games of capitalism where people surviving in that environment is extremely extremely challenging, extremely tough. >> How do you think how do you think China is looking at the war in Iran? >> I think they think of it first and foremost in economic terms. Not so much in geopolitical terms but first and foremost in economic terms. Iran was a great deal for China because they got to buy a lot of oil for very cheap. Um, they got to buy a lot of oil at big discounts and this allowed a lot of tinpot refineries up and down China's coast to keep going uh thanks to thanks to cheap Iranian crude. To the extent that right now uh this obviously is is undercut, this is not good economic news for China. It's bad news for all those tinpot refiners. Um, so I think that's how China primarily thinks about this. Um, is well, this is a shame. We used to get cheap crude. Now, now we're we're not going to get it. Um, now chi China's relationship with the broader Middle East is first and foremost one where they look at that part of the world as energy suppliers. And what what China wants out of that part of the world is stability uh for for its from its energy. Um so I think in the US, you know, you read a lot of articles in the media. Oh, how come China is not doing more to to help Iran, etc. It's China's a fair weather friend and all that. Um but I I don't think there was ever any illusion that Iran is an ally of China or anything of the sort. for for China, the the US the relationship that it has with the US both economically but also increasingly politically is far more important than any relationship it has with Iran. So, it's not going to go out of its way to help promote a war, help continue this thing. I think China just wants to get back to business, wants to get back to getting cheap oil. Um and if you get regime change in Iran and the regime continues to turn around and you know the regime will have no s no really no choice but to sell oil to China anyway. Um so I I think if you're Cining you're not so much bummed that oh my god the uh the US is bombing my friend Hamini like this is terrible as much as oh darn it like am I gonna lose my cheap oil here. >> Yeah. Okay. Um, what do you think right now is the most underappreciated macro theme? What would that be for you? >> To be honest, I going back to the idea of the three prices. Um, I think that you oil is is wrongly priced right now, especially at the long end. I think people are underestimating the upside potential on on oil and and how quickly this this might move. Now, we've seen a lot of commodity prices shoot up in the past 18 months. We've seen gold shoot up. We've seen silver shoot up. We've seen copper shoot up. None of that has a big macro impact. You and I don't need to buy gold, right? I mean, it's nice if if we get my gold. I'm sure you do. I'm sure you do. And I need to buy gold for Valentine's Day and for my wife's birthday. I get that. Um but economically, it's not devastating if that doesn't happen. um you know not in the same way that energy prices have a direct economic impact and if they start mooning like uh like all the other commodities did frankly in the past 18 months we enter into a very different world very quickly so I think that's that's one thing that's underappreciated underestimated um and then if you if I look around the world and I think okay what price out there feels completely wrong like what what price of all the things all the markets etc what is the device that is just completely stupid and really is is too far gone from reality and from from the from where it should be. For me, the obvious one is the Chinese exchange rate. The the remn is just stupidly stupidly undervalued. Um, and I I think for a number of reasons, which I'm happy to go into if you want, but we'd love to, >> but that that undervaluation is starting to to be to be taken in the BMBB's gone up seven months in a row now. uh even in this period of uncertainty over the past 10 days that we've had, the renam hasn't really been uh been smoked or anything. Um and and I tell this to everybody I meet, you you can't understand how cheap the remn is until you go visit China yourself. Um because essentially the rememb is at the same level it's been a little down but for the past 5 years but over the past 5 years the productivity gains that you've had in China and the inherent deflation you've had in China while at the same time you've had massive inflation across the western world prices in the United States are up 35% from where they were 5 years ago and that's on official data. Uh in China they're flat but I think they're actually down 10 or 20% from where they were 5 years ago. So the currency should have adjusted for this massive shift in prices and they haven't. So today you can go if if you don't believe me go to Expedia and go to book a a five-star hotel room in Shanghai or in >> I finished I've been to Shanghai. Yeah. In 2017. Yeah. >> Well, okay. So the hotel you stayed at in Shanghai >> I stayed in the Shangria. Yeah. >> Well, it's probably half the price it was back then. >> Wow. >> Uh meanwhile the same hotel in New York will have gone double. Um you can stay >> I believe that. And the rooms are tiny in New York. Oh my gosh. Yeah. So, you can stay you can stay in literally worldass hotels in Shanghai, Beijing for 100 bucks, 100 bucks a night. Um, and you can have the some of the best meals you've ever had for 20 bucks. The cap to the airport is less than 10 bucks. Uh, so on and so forth. So, the the price of the remn is now so wrong that for me, this is the obvious trade of the coming years. And so, again, you look at the fundamentals, China's got tremendous productivity gains, etc. All of which pushed towards a higher currency. You look at the momentum, it's now moving seven up months in a row. You look at the the investor positioning, absolutely nobody owns REMB. And then you look at the valuations and it's the most extreme case of undervaluation of any assets I can think of in the world. So if you think of slam dunk trades of of trades you can put on with a lot of confidence, for me that that's got to be one of them. >> Was that intentional though for them to almost keep it secret? >> Absolutely. But why? Like why? What's the benefit? >> So what happened? Okay, you know the old Steve Martin quote, right? That before you criticize anyone, you have to walk a mile in their shoes. Yeah. >> When you criticize them, you're a mile away and you have their shoes. Um so if you look at China in 2018, the US weaponized the semiconductor supply chain against China. They said nobody's allowed to sell high-end semiconductors to China anymore. The leadership, the Chinese leadership panicked at that moment. They thought, okay, if they can block us from semiconductors, they can block us from anything. They can block us from chemical products. They can block us from auto parts. Um, we need to be self-sufficient in literally everything. And so, we're going to we're going to capture all of our savings, which happen to be massive, and instead of that those savings going into equities or real estate like they used to, we're going to take all that money and we're going to push them down and essentially build up our own industry. And that's exactly what China did. That's why real estate prices went down a third. That's why equity prices went down two/3s. It was a weaponization. It was a a a weaponization of China's savings towards one very clear goal, which was dewesternizing all of its supply chains. Now, as you try to do that, as you try to ramp up your own industry, one of the simplest ways to ramp up your industry is to keep an undervalued exchange rate. is to uh make sure that the jeopard your your your local industry won't fear the competition of Japan, of Korea, of the US, of Europe, etc. And so for 8 years, the remn was kept artificially low uh as the as China felt we need to cushion ourselves against further US embargos, against further US attacks. This all ended last year when Trump comes back to power. President Trump comes back to power and decides to this time not just punch China in the face but punch absolutely everybody. He turns around and he punches Europe, he punches Canada, he punches Mexico, he punches India and alone amongst all the countries because China got punched eight years ago and eight years ago China couldn't fight back. They were too worried that the US would embargo everything. So, but they didn't sit on their hands either. They went to the gym. They got fit. They got strong. They dewesternize their supply chain so that when Trump comes back in and punches them on the nose again in 25, China stands up and says, "Okay, you want to go, let's go. You tariff me, I tariff you. You embargo me, I embargo you." And the US then has to fold. When the CEO of Rathon says, "Hey, in 3 weeks we can't produce missiles anymore." When the CEO of Fort says in two weeks we got to shut down our plants because we don't have the rare earths and we don't have the magnets. Um, China had achieved what they needed to achieve. So now they no longer have to worry about potential embargos. They no longer have to worry about um uh you know not getting supplies of something about supply chain dislocations etc. They now produce everything they need domestically. Uh I think uh Deep Seek showed that that even at the very pinnacle of technology I AI they had uh enough of chips to to go ahead and do things. uh perhaps not be quite as good as the US, but to be close enough and and to be competitive. And so uh this has been the massive shift that has gone on in the Chinese economy. And this is why now they no longer need to mobilize all their savings to push industry. Uh they can now allow the stock market to go up. They can allow the real estate market to come back up and they can also uh allow the currency to to come back up. Uh and this is what's unfolding now. >> Um who won who won the trade war? Well, who raised the white flag? >> I don't want to make a Jesuit priest and answer your question with another question. But who said, "Okay, fine. We're done." >> I would say the the China won the trade war, but it won it at tremendous cost to itself. A little bit like the Soviet Union won the Second World War, but it won it at at immense cost. the cost that most countries wouldn't even contemplate. Um the uh you know the Soviet Union took 20 million uh soldiers losses etc. It took on a huge huge uh human toll to uh to win to win this second world war. China took on huge economic toll to uh to win the trade war. Uh but now it's won it. And so now on the other side of it, you get the stronger remmbb you get the outperforming Chinese equity market. While the trade war was going on, the remn was going down and Chinese equities were underperforming. As it became obvious to anyone looking that actually China has now won the trade war. China, let me put it to you this way. When the trade war started, China was running a 20 billion a month trade surplus. Uh eight years into the trade war, China's trade surplus is now 100 billion a month. >> China's trade surplus is now bigger than Saudi Arabia's GDP. So if if you're Donald Trump and you think of trade wars in in mercantilist terms and you simply and your scoring card is the trade surplus, it's pretty clear who's won. >> Mhm. Louie, I have to say it has been so great having you on the show because we are learning so many different things and it's also just awesome having someone with a different perspective as well. Before I let you go, final question here. What is the risk that's keeping you up at night these days? And then what's the one thing that you're really optimistic or hopeful on? >> So I have four teenagers, so I I don't I don't sleep soundly at all um uh given with with my with my four teenagers. And look, uh no, the the big risk I I worry about the one thing I that has me concerned is energy prices shooting up uh and if energy prices stay low, I think the global economy stays on track. It's happy days. Everything is fine. uh most entrepreneurs, most business people can transform energy into economic growth, into profits decently. It's always when energy prices shoot up that things start derailing. Uh so, so yeah, I do worry about energy. That's why I'm loaded up with energy in my own portfolio and in the portfolios we manage because for me that's that's the big risk. And and if energy prices don't go up, um then the rest of the stuff will make money and it'll be happy days. >> Yeah. Is there a price level that it'll be like, "Oh boy, here we go." Like you'll you'll you'll know like again we're at 8420 right now in this conversation. >> I think I think up to 120 bucks you're still okay, but oil above 120 bucks breaks stuff. I I don't think it's a coincidence that the US government unleashed everything. Once oil hit 120 bucks, Trump has a press conference declaring victory. Um you start to see a lot of futures activity, etc. I think you you get to 120 bucks um it starts to to take a meaningful bite out of US consumption, out of US growth, out of global growth. >> Louis Gav, founding partner and CEO of Gavcow, it has been an absolute treat having you on the show. Thank you so much for being so generous with your time, all of your knowledge, your wisdom, helping all of us learn and get better. Really appreciate it and would love to get you back on in the future. Thanks again, Louie. Thank you all
Louis Gave: $120 Oil Breaks Everything — And Nobody Is Ready
Summary
Transcript
there is room for oil prices to go up and gasoline prices to go up without absolutely crushing the the US economy. For me, the bigger question is actually not whether this crushes the US economy because again the US is uh is self-sufficient more or less in energy, but it's whether through this action the US has actually ended up crushing pretty much all of its allies. >> Louis Gav, founder and chief executive officer of Gavcow. It is so wonderful to welcome to you to the show. Great to meet you. I'm so excited to welcome you on for the very first time. >> Thanks for having me. It's a pleasure to be here. >> It is a pleasure to have you. And I have to say, our audience has been asking for you for ages. So, I was absolutely thrilled when one when one of our other guests made the introduction. So, thrilled to have you. And wow, Louie, what a time to have you, especially with everything transpiring in the world these days. So where I usually start with my guest is to get more of their macro picture, the framework in which they're looking at the world today. So we always start there big picture. What does that view look for look like for you today? What are you paying attention to? What are the themes that matter the most? The framework that you're working with. And one of the things about this show, Louie, is you can take all the time you need to set the table when it comes to that big picture macro view. Well, again, thanks uh thanks for having me. And I love I love that first question because asking what people's processes are is is a super important one. And for me personally, I start off with a very simple idea that there are three prices that matter more than any other price. Uh and those three prices are the price of the US dollar, the price of the 10-year US Treasury or the yield on the 10-year US Treasury, and the um and the price of energy. uh and that if you get the direction of these three prices right, whether they're going up or down, that that's in 80 or 90% of the work. Uh essentially, if you get the direction of these three things right, you're going to you're going to know if you want to be invested in US equities or invested in global equities. You're going to know if you're going to want to have growth or value. You're going to know if you want to be uh in emerging markets or not. If you want to invest in commodities or not. um if you want to invest in fixed income or not. Now, as you pointed out, it's uh it's been a busy week. Uh lot lots uh lots of things happening and the the main event this week is that all of a sudden the the realm of possibilities on energy has widened considerably. Um the the the the potential outcomes on energy have gone far more far more dramatic. Um, now you know we came into this crisis with energy prices at at roughly 65 bucks, 60 bucks, 65 bucks. Uh, and when I say energy, sorry, I mean oil. We came into this crisis with oil prices at 60 65 bucks. Um, as we speak, we're now at 85. So, so there's been a jump, but to me, that jump seems pretty modest given the the level of uncertainty. And if there's risk to to the old price again compared to where we were 10 days ago at 60 65 bucks, I'm much more fearful that we end up at 120 or 150 than I am that we end up at $40. I think the odds of now you could say there is a scenario where we end up at 40. A scenario where there is regime change in Iran and companies can Western companies can come in and develop Iranian oil infrastructure and all that. But but I don't think that happens overnight. Uh that that that happens down the road. Now the the interesting thing on the energy front on the energy piece of again three prices matter. The interesting thing on the energy price equation is that you've seen crazy volatility uh at the spot uh in the spot price. So yesterday you had an intraday swing of 40 bucks. Uh as an aside you have to feel sorry for the guys who work in the the hedging department of airlines or chemical product companies etc. you know how what do you do when when the oil price goes up and down 40 bucks in a day. Um but uh leaving that aside, what's fascinating to me is if you project yourself forward and you look at the 12-month contract, etc., the oil price really hasn't moved that much and the volatility way out there hasn't hasn't moved all that much. So essentially the market if you if the message from the market is yes there's big uncertainty around oil right now because the homemoo straits are closed and uh refineries are being bombed and oil installations are being bombed all across the Middle East. But in a year's time it should all be over. Uh that that that essentially is is the the market's message and and then you can decide how you how you feel about that assessment whether you want to position yourself for or against that that assessment. Again, my fear is that uh the upside on oil is is consequential and it'll last longer than uh than the next few weeks, which is again what the market is pricing in. So that's for the first the first development. The the second development I think coming into this crisis uh we were in a dollar bare market. uh the US dollar was was weakening and as very often with geopolitical events the the the sort of knee-jerk reaction of of everyone is I don't know what's going on. Sell sell stuff and put me in cash in US dollars. Um and so the dollar has rebounded against the yen. It's rebounded against um against the euro. It's rebounded against most emerging market currencies. Um and uh and again in a world in a world in which things fall apart perhaps that makes sense. Um but I'm not I'm not actually convinced that it does. Uh because if if the Iran situation goes really really bad. Um, I think that will create a political crisis in the United States because President Trump unleashed this war with very little political backing and very little um uh you know the general population in the US 70% of people didn't want this war and so if the costs start to mount uh that that will create more political uncertainty in the United States. So my I have been a US dollar bear and um I acknowledge that right now the US dollar is going up of course but I don't think this lasts. Um then I've been I've been a massive going through the three prices. I've been a a massive US treasury bear for for 5 years and my my friend Luke Groman I don't know if you've interviewed Luke. >> Oh he's been on the show. We love Luke. Yeah. >> Okay. So he loves to say that if truth is the first casualty of war, bones are usually a close second. Uh and and I think that's right. Wars are fundamentally inflationary events. Now you could say that when it comes to this Iran story, we're at a very it's it might be a very binary outcome in that you could say, "Okay, fine. If the war continues, the hormones are are shut down, that creates massive supply chain dislocations and inflationary hit for the economy and that's no good for bonds and and initially I think that's what the markets start to price in right it's even in this this phase of uncertainty and and flight to safety US treasuries have not been bid uh which I think is an important signal um but then you might tell me well look what if Trump does win his bet and you do get regime change in Iran and you do get a functioning democracy there. Uh then you have a period uh then Iran stops funding terrorist groups like Hezbollah and Hamas etc. and you have a period of dramatic uh improvements all across the Middle East and that means more oil comes out and oil prices come down and everything is great and that keeps interest rates lower. Um that sounds great on paper it sounds amazing. um it's almost be like the fall of another Berlin wall. Now, interestingly, if you go back to the late 80s, early 90s, uh when German reunification happened, the initial gut reaction of the market was this is great news. Let's buy all the German companies, the construction companies and the infrastructure companies and whatnot because they're going to have to rebuild all of Eastern Europe and these guys are going to make a ton of money. Now I think today uh there's a hope a perception that okay we get regime change in Iran that will unleash an epic boom across the Middle East. Uh we can rebuild Iraq, we can rebuild Syria, we can rebuild Iran without these these mas funding terrorism. The flip side of that coin though is if you go back to Germany in the early 90s real rates in Germany moved to 7%. People forget this, but re there was such a demand for capital to fund all of this that real interest rates went absolutely bananas and the pound broke out of the ERM, the exchange rate mechanism, the European exchange rate mechanism. The Italians also broke out. Uh France ended up having a 15% unemployment rate because they had to push up their real rates as well to to stay pegged to the to the Deutsch mark. Um, so it came at at a real cost. So if you look at today, the idea that we're going to get regime change in Iran and that's going to unleash an epic boom. The next step is that means that ADIA will no longer be buying Microsoft and US treasuries. They'll be spending their money rebuilding Iran, rebuilding ADA is the Abu Dhabi Investment Authority or the Saudi sovereign wealth fund. And all those guys that have been loading up on NASDAQ and loading up on US treasuries, all of a sudden they redirect all their money somewhere else. So the the bottom line when you I look at Iran is it's sort of tails I wins and head heads I don't lose. Heads heads tails I lose and heads I don't win. Um and that if the war continues it's a disaster for the bond market. But if you end up getting regime change in Iran then maybe you actually also get much higher real rates. So the only story that's good for the bond market is a sort of status quo such as we've had for the past 10 20 years of this regime this the current regime continues but remains boxed in by a United States and then all the Middle Eastern savings continue to go to to the United States and keeping interest rates low there. So uh bottom line for me when I look at my three prices I worry about the upside on energy. I worry about the downside on the dollar and I worry about the upside on US Treasury yields. >> Wow, what an amazing amazing like setup to the conversation to understand that framework and also just the potential scenarios and potential knock-on effects um for those various scenarios. Okay, I want to stay on oil for a bit because we did cross $100 barrel as you point out. We're where are we right now? We're about 80 bucks at the moment. Um just looking right now. Isn't it crazy? 80 bucks right now on WTI. Okay. The base case sounds like for you the base case would be higher energy that $100 barrel. So my question for you is if we get there or we stay there we stay above 100 a barrel. What does that mean? Like what for the US? What would be the options you think for the US or President Trump? because I imagine you're going to have you're going to be in quite the political predicament if we stay at $100 a barrel just because of the effects that would have. >> Yeah. So, look, economic activity is energy transformed. Uh I I say this in every interview I give. So, energy prices matter tremendously and the lower an energy price, the easier it is for entrepreneurs to transform energy into corporate profits and to economic growth. Um, so frankly, every policy maker, every elected official should be coming into office thinking, how do I keep my energy prices in check? Because incidentally, it is one of the few things that policymakers can do is have smart energy policies. Um, and credit where credit is due. I do think President Trump came in uh wanting to do that. You see this in his nuclear policy energies. You see you see um you see this in his uh wanting to deregulate coal and and push coal back. Um because by the way coal if you exclude any environmental costs coal is by far the cheapest way to produce electricity. Um the the reason China today has a cost of electricity that's half the cost of everybody else is because it burns more coal than than anybody else. So I I think Trump came into office thinking I do want to get the the I do want and keep the price of energy low. Uh and to some extent you could even say that that that partly drove the Venezuela decision. Uh the idea that there's these huge reserves there. This is being completely mismanaged. This is uh Venezuela went from exporting 2 million barrels a day to barely exporting 300,000 barrels. it's, you know, we we we need to clean this mess up essentially. Um, and and perhaps you could say that's what's motivated Iran as well. Um, in that Iran creates uncertainty in the region and as a as a result there isn't as much investment in places like Iraq, like um Kuwait, like uh the United like Iran that there could be. And if we pump more oil out of there, you'd have a lower oil price. Um but of course Iran is a much tougher nut to chew. Um and um and so the the goal I think might have been let's get lower energy prices across the board. Uh but the road to hell is paved with good intentions and all that. You we may very well end up with with higher oil prices. Now as it turns out I I don't think $100 oil uh kills the US economy. Uh it's not a great news. Don't get me wrong. It's not great news. But you we have to remember that the US is essentially energy self-sufficient. So when $100 when you get $100 oil, what does that mean? That mean money leaves from New York or Michigan to go to Oklahoma, to go to Texas, to go to North Dakota, to go to Alaska. It's sort of right pocket left pocket thing in in the United States. It does hurt uh the US consumer. No, no doubt about it. When you look at the US energy mix, uh 35% of the energy that the US uses comes from oil. And a lot of that is in transportation. Um so contrast that with say China. In China 18% of the energy that China uses comes from uh oil and not so much of that goes into transportation actually because China's done such a good job electrifying its cars but also massively upgrading its public transports, subways, high-speed trains uh and the like that actually in China's 18% it mostly goes into petrochemical products. So, I highlight this because if you think, okay, we're going to be have $100 oil. Um, I I don't it it's going to take a bite out of US consumer disposable income. No doubt people are going to pay more at the pump and that's going to be somewhat painful. Is that enough to push the US into recession? Um, when you look at the this the amount of money spent today on gasoline in the United States, we're in the bottom 10%. Well, up before this week, uh, if you looked at it a week ago, obviously now things have shot up, but if up until a week ago, you were in the bottom 10% of disposable income spent on gasoline. So, there is room for um for and you could say, "Yeah, but price have gone up, etc." But you have to remember cars are more efficient than they used to be. Some people do drive electric cars and so on and so forth. So the there is room for um for oil prices to go up and gasoline prices to go up without absolutely crushing the the US economy. For me the bigger question is actually not whether this crushes the US economy because again the US is uh is self-sufficient more or less in energy but it's whether through this action the US has actually ended up crushing pretty much all of its allies. Um >> because uh what's happened is terrible news for Europe. Um, Europe is massively dependent now that we can't import, I say we because I'm French. Now that we can no longer import Russian natural gas, we Europeans have become massively dependent on Qatari uh natural gas and and right now that's that's frozen. So that's a that's a huge question mark. Um, it's a huge problem for u Taiwan, for Korea, for for Japan. Taiwan has about 10 days left of natural gas stored and then runs out in 10 days. Now, I don't think that Taiwan's going to go without electricity. That's conceptually, if you're a politician, you you can't let that happen. So, how do you bridge the gap? You're going to burn a ton of coal. Um, and so if you're a coal producer in Indonesia, if you're a coal producer in South Africa, if you're a coal producer in Australia, all of a sudden you're getting tons of orders from Europe, from Japan, from Korea, from Taiwan. Because you project yourself at 2 weeks from now, if the straits are still closed, all these economies are in deep trouble in a way that the the US clearly is not. Uh, let's not forget that 90% of the oil that flows through the straits of Armuz heads east. uh it heads to it heads to India, it heads to China, it heads to to Japan. This is where the Middle Eastern oil goes. So, so the US and and I think this is why you've seen the equity market reaction that you've had, right? So far this month, the NASDAQ is up for the month. The S&P I think is down 50 basis points or or basically it's basically flat. Uh European markets are down 6 to 10%. Um, China's down incidentally monthto date it's down just 2%. Because China has been getting ready for this moment, but markets like Korea, markets like Japan have gone absolutely smoked. >> Hey everyone, I hope you are enjoying this interview. If you can take a quick moment and hit that subscribe button, we are on a mission to hit our next goal of 100,000 subscribers and your support could really help us get there. Thank you so much and enjoy the rest of the interview. So is there a risk then that we could be set up for like a global growth shock just because of like all of these other countries that would feel the impact of this whereas like as you point out like the US we have we're pretty much energy resilient but so many other countries depend on oil that flows through the straight of Hormuz. >> Yeah. Look again economic activities energy transformed. We've gone from a market that believed, oh, we have um we have two or three million spare barrels, so oil is cheap and we can price it at 60 bucks and and again, you were in the sort of top 10% bottom 10% of of amount being spent on oil by US consumers, etc. So everything was looking great to all of a sudden if the straits of Hormuz are blocked, you go from a market that has 2 or 3 million spare capacity to now, oh, we're missing 15 million barrels. So what what do you would do with that? Either prices have to skyrocket option one. Option two, demand has to collapse, which is your scenario, what you just highlighted. Demand collapsing means much much weaker growth. And so that means that if you're a marginal buyer, if you're Pakistan, if you're India, if you're Bangladesh, if you're Indonesia, and you can't afford a barrel, then you stop driving your car and you get demand destruction. And and you and that entails a world recession, which is that the second possible scenario. Or there's the third scenario, the one that the market again is pricing in today. It's saying, well, look, this would be really bad, so it's not going to happen. uh you know where because it's gonna it would be so bad um we're gonna find a solution or Trump won't let it happen because it'd be it'd be too disruptive and right now that is what the market is pricing in right with the oil back at for a little bit 48 hours ago when oil hit 125 it was pricing in the oh my god the straits of hormuz are closed with the oil back at 85 and again the 12-month price at 65 bucks uh which is essentially where it was when this whole thing started, the market is pricing in this won't last because if it did, it'd be such a catastrophe that it can't. I I think that's sort of the the the logic that that's unfolding. Um, and to me, that's what makes energy still a very compelling hedge for portfolios because you could say, okay, fine, there's this scenario where global growth completely implodes because energy prices are too high. Um, so how do I hedge against that? Do I buy US treasuries or do I buy energy? To me, buying energy makes more sense because the way you get there is through higher energy prices. Meanwhile, if you get a global growth implosion, it's not obvious to me that bonds will actually do that great anyway. Uh because budget deficits will will blow out uh to the upside. uh all the Middle Easterners that have been buying uh the again the Abu Dhabies and the uh the Saudi Arabs and the Kuwait have been buying US treasuries will stop buying and they'll start selling. So energy remains I've argued this I wrote a book about this back in 2021 and I've argued this time I'm blew in the face but energy remains the hedge for equity positions because the risk in an inflationary world in which we live in is not that all of a sudden growth collapses. The risk is always that energy prices spike. >> Wow. Okay. Um you've written a lot of books that I believe that was avoiding the punch investing in uncertain times. Okay. Um that's so interesting. Energy as the hedge for equities. >> Could you just elaborate a little bit more? I had not I have not heard this idea and I really am fascinated by it. Explain that and when did you kind of come to that realization that it that's the hedge >> in our process? So there's several starting points. I mentioned the three prices. The another big part of our process is acknowledging that asset prices are driven by the interaction of economic activity and inflation. So if you draw four quadrants, you you you have an up a horizontal line that is more or less inflation and a vertical line that is more or less um uh economic growth. That gives you four possible investment scenarios. Um a deflationary bust, which is essentially what Japan had through the 1990s and 2000s. uh an in a deflationary boom which is the the the default mode of capitalism. Um the deflationary boom is the default mode of capitalism because every entrepreneur, every CEO wakes up in the morning thinking how do I do more with less? How can I produce more uh uh whatever widget I I I make with or more services with fewer workers with fewer with less energy with less copper you know what whatever the inputs are always trying to produce more with less and so that's why capitalism a deflate is normally a deflationary boom at the same time I think the natural state of most democracies is the inflationary boom because most politicians if the entrepreneur says how do produce more with less? The uh the politician says, "How can I promise more to my voters without having to pay for it?" And the the answer is it by by leaning on central banks to print more money and and by running big budget deficits. So the the default mode of most democracies is the inflationary boom. And then every now and then you get an inflationary bust uh which is when growth, it's also known as stackflation. Growth goes down, inflation goes up and that almost always happens because energy prices spike. So for most of my career and I'm 52 years old for most of my career we lived in a broadly deflationary environment. Uh we lived in a broadly deflationary environment because again that's the default mode of capitalism. Uh we lived in a broadly deflationary environment because Japan had an epic bust. We lived broad lived in a broadly deflationary environment because China was a huge deflationary force in and of itself and to some extent so was technology. Now in this environment that meant that each time you got a geopolitical shock or some kind of exogenous shock because the overall backdrop was deflationary central bank and fiscal authorities could step in and push money into the system. They didn't they had very little constraint to to their to their policies and you saw this time and time again. Um you saw this up to an extreme of co COVID hit ultimate exoner shock thing comes out of nowhere it's uh nobody had this in their model um think economies go lock down economic growth collapses the response of the policy makers is to embark on a fiscal binge and a monetary policy easing bench such as the world had never seen and the end result of this we pushed so much liquidity into the system that we actually broke the structural deflationary world in which we lived in and moved into a more structurally inflationary world. Now once you're in once you've essentially moved from the bottom when you're in in the bottom of the quadrant and you're always wondering am I in the deflationary boom or deflationary bust again the hedge you buy equities and you hedge with bonds that's why through this 30 years the best possible portfolio was 60% equities 40% bonds um and whenever you move to the deflationary bust your bonds save the day we now live in a structurally inflationary world for a host of reasons that I go through in in my 2021 book. And in a structurally inflationary world, the 60/40 no longer works. What you need to do is you move to a portfolio that's still 60% equities, but you forget the 40% bonds. You buy 20% precious metals and 20% energy because the risk is always that you get an energy price spike that pushes you into the inflationary bust quadrant. Um, and so there you go. Now, people don't, your listeners don't need to buy the book. Uh, I just said uh I I just told them everything that was >> Lou will tell them to go buy the book. They'll buy the book. >> I'm kidding. I'm kidding. They actually don't even need to buy it. It's they can download it for free from the website if they uh if they have to buy if they want the hard copy. If they want the ecopy, they can get it for free. Um but uh if they want to spare themselves the um the the uh the reading um then they can um then I just summarized it. Um so today we live in a structurally inflationary environment uh in every major region except for China. Uh China is still in a structurally deflationary environment. But you look at Japan, Japan has an inflation rate over 3% which is higher than what the BOJ is comfortable with. Uh Europe has a structurally higher inflation rate than what the ECB mandate uh would uh would call for. Uh same story for the Fed. And yet, it's not like these guys are actively and proactively raising interest rates to get inflation back down to below where it should be structurally, right? The Fed isn't doing that. They're cutting rates. The ECB's cutting rates. The BOJ's is not hiking rates. So, we're in a structurally inflationary uh environment. And so, now you get an exogenous shock like this Iron War. And the question becomes, okay, what the what will the policy response be? Now you know that if this thing continues and starts to impact economic growth, you know you're going to get fiscal easing and you know you're going to get monetary policy easing and you know you're going to get more inflation. Now incidentally the one part of the world where there is no inflation and therefore there is no policy constraint and therefore they can really step on the gas and do more budget deficits and more money printing if growth really falls apart is China. China today has 0% inflation when everybody else is above two. >> Oh, that's interesting. Okay. Um before I get to China, let me just say really quickly on this new portfolio construction. 60 equities, 20 precious metals, 20 um energy. Gold's had quite the run. Um but would you say that gold's not necessarily an inflation hedge? >> Yeah, I don't think gold is an inflation hedge. I don't think it ever was. Gold is a hedge against bad monetary policy and essentially 0% interest rates. And I think you've seen this again in the past few years when gold has gone absolutely parabolic. Uh what's been fascinating as gold has gone parabolic is who the buyers of gold have been. Um now on the one hand it's been central banks and and that's a geopolitical shift. when uh when the western world sees Russia's assets uh and and told Russia, look, you get access to your US treasuries, your German boons, your your UK guilts, uh if we say you do, and if you don't act like a total jerk, it sent a very strong message to the central banks of China, of Indonesia, of Saudi Arabia, of Qatar, of everybody that uh the the US treasuries were no longer a risk-free asset. um and that in a conflict you could easily lose access to them. And so central banks that had been net sellers of gold up until that point became net buyers of gold. And if you look at the past 3 years, central banks have have bought 25% of the outstanding gold mine production every year. So so that that's been a huge shift in the gold price. But the other massive gold buyers have been the Japanese savers, the Chinese savers, the Korean savers. And why have these guys been buying gold? First, because their currencies were weakening. And second, because they had 0% interest rates at home. I think it's when you have 0% interest rates at home that a lot of savers say, you know what? Why am I keeping my money at the bank? I'm taking the risk of the bank. I'm getting not I'm not getting rewarded for it. My currency is falling. Excuse my French, but screw this. I'm going to buy um I'm going to buy gold instead. And and so it's fascinating because if you look at you've had this roaring bull market on gold. You look at shares outstanding in the GLD or shares outstanding in the SLV, which are the big gold ETFs, they're not even at they haven't even recaptured the highs that they had in 2021. The the US retail, the European retail has not participated at all in in this gold bull market. Um, and so why? Because in Europe, in the US, you were making money at the bank. You you were getting paid in interest. So the people then feel the sort of FOMO and the gun to the head. I I need to buy gold. Um so now so now what happens you know going going forward um I think the first big shift for the gold market is that if you're a central bank you bought gold because you didn't want US treasuries anymore right it was it was very much a feeling of uh I my money is no longer safe there. And I you have to remember that for 70 years we lived in a world where central banks bought gold uh sorry bought US treasuries because there was this belief that in a crisis let's say there's a tsunami or there's a war or an earthquake or whatever. Uh in a crisis I can sell my US treasuries. It's a deep liquid market and I can buy whatever I need to buy. If I need to buy weapons I can buy weapons. If I need to buy oil I can buy oil. If I need to buy food and so forth. Um now so there was this equation of US treasuries equals commodities at a moment's notice like one can be transformed into another very very quickly. The Russia thing undermined the left part of that equation. It undermined the idea that uh you could get access to your treasuries at a moment's notice. And I think Venezuela and Iran are now undermining the second thing which is I can always get access to commodities whatever I need. Um because all of a sudden that's not true. If you want fertilizer right now, you can't get it. Uh if you're Taiwan and you want natural gas, you can't get it. If you're Korea and you want oil, it's becoming much more challenging. Um if you want coal, all of a sudden you have to pay up for it. If I want Indonesian coal. So, so I think when we said, okay, US treasuries aren't safe, the default mode for a central bank was to say, you know what, I'm going to go out and buy a bunch of gold. Uh the default mode was very much I'm going to go and uh put all my money into gold because in a small room you can store a lot of gold for very little money and storing gold costs nothing. Storing oil, storing food, storing fertilizer, all that is is very very costly. Um, but now all of a sudden we are moving into a world that is more uncertain. And if you're Taiwan, you're like, great, I've got all this gold, but what I need is is natural gas. If you're India, you might say, great, I've got all this gold, but what I need is fertilizer. Uh, so we might be shifting now where people instead of storing gold, we'll start storing a a lot of the other commodities in uh essentially in the table of elements. >> So fascinating. Okay. Um, question for you. Are you would you would it be fair to say are you are you bearish on the US? >> I'm bearish on the US dollar and I'm bearish on the US Treasury market. >> That that that uh I I will definitely say that. Um I think for everything else essentially the equity market um and the overall economy we have to acknowledge that the US was born with pocket aces. um you have an economy that is self-sufficient on pretty much every commodity that matters. Now, you could say, "Oh, there's a few rare earths, etc." But on all the big commodities that matter, the US is essentially, especially if you throw Canada in there, um as as sort of one big economic block, uh the US is is economically self-sufficient, which in this day and age is, I think, an enormous comparative advantage. Uh the US obviously has the world's reserve currency. um it uh it still has the world's dominant military. It's it's got it's got all of these things. Now, having said all this, you could say, well, yeah, but the US has had this in the past and has gone through periods of underperformance and it has gone through periods of and it's gone through bare markets and and recessions. Um so, when I when I look at the US today, I think we did start a period of of underperformance in 2025. The US today accounts for roughly 70% of the world MSCI when it's roughly 22% of global GDP. So there's there's a uh there's a dislocation there that that you've seldom seen. Uh and if staying with the idea of processes when we look at when I look at any asset class any investment possibility I look at it through four prisms. Uh the first thing I I look at is fundamentals. you know, there's no point in investing in horse buggies or sewing machines. You want to own things that make sense for the long term. Now, when it comes to the US, the fundamentals are still very good. Um, and I know you can make lots of a lot of terrible stories about runaway budget deficits, etc., but by and large, the fundamentals of the US are good. The second thing I look at is momentum, both absolute and relative. Now, this is where it gets interesting is today I think there's a break between the narrative and the momentum. The narrative is the US is exceptional. It's the world's cleanest dirty shirt. It's the only place you can invest, etc. But really, for the past almost two years now, it's been underperforming. Now, it's been underperforming. It's still performed positively, but it's been underperforming. So, I think most Americans don't realize they're underperforming because the S&P is still up and that's good enough and they're happy. You look then at the third thing which is the investor positioning and investor positioning on the US is today very extreme. Um and when it comes to equities uh US domestic investors are heavily uh into equities and foreign investors are heavily into equities. So the investor positioning is definitely flashing big red light. And then the last thing you look at I look at is the valuation. So again I go through a four process thing. fundamentals are good but momentum is no good. Uh investor positioning is no good and then valuations are uh are more stretched in the US equity market than they are in any other market. So in relative terms unfortunately I don't have unlimited capital. I've got limited capital and in a limited capital world I think there's there are far more attractive opportunities today around the world than there are in the US >> such as >> well again staying with the four the four the four um process thing um I think a lot of emerging markets today whether Latin America whether China whether uh South Africa whether a lot of the Southeast Asian markets offer a much better mix of fundamentals of positive momentum of investor positioning that is nobody cares nobody's invested there and valuations that are extremely extremely attractive >> and so you know Chile comes to mind Brazil comes to mind China South Africa I think all of these markets are super exciting >> okay back to China um do you live in Hong Kong are you mostly there okay what is >> China for beginners >> okay what is the biggest misconception um around China that you hear specifically maybe looking from like I know you're you're French, you're European, but like I'm talking about like American investors like maybe most of the folks that would watch this show. What do you think is the biggest misconception on China? >> Boy, how much time do you have? >> Oh, we have we have another 20 minutes, Louie. >> I I don't know how much. Yeah, I don't know if you want to put a coin in that machine. Look, I think the the biggest misconception of all is um when you say, "Look, China's doing well and it's, you know, they're they're growing very fast and they've taken 800 million people out of poverty over the the past couple of generations, etc." Uh it makes people in America feel very uncomfortable and they and they immediately say, "Oh, so does that mean you believe in central planning? Do you believe in communism?" Um, etc. And I think that the biggest misconception when it comes to China is people uh fail to understand where the source and the genesis of of China's growth story really comes from. And the the story of China's economic growth miracle because it is a miracle. You you've never had another country grow so far, so fast, pull out 800 million people out of abject poverty. Let's not forget that when I was growing up, uh I was told finish your plate because there's little children in China that are starving. Um and it's uh and and and that was true. My parents weren't lying to me. Um I never really quite got the logic of why I needed to finish my plate and the Chinese kids starving, but to see how far it's come in in a couple generations is is really mind-blowing. So, how did it happen? It wasn't uh the wonders of central planning. Uh it it really wasn't. Um the the first thing that happened is that Mao died and Mao was to a large extent a control freak. He needed to control absolutely everything. So that went down to what people wore to work. Uh the uniforms they had to wear to work and where people ate their lunch and where people ate their dinner. So much so that when um Deng Xiaoing came to power following Mao he inherited uh total power over the country uh total control sorry shouldn't say power total control over the country but he realized that fundamentally he had no power because economically China was a and really had no no role to play in in the global economy. China was a fifth of global population and wasn't even 5% of global GDP. So he started something. He said, "Well, look, we're going to start de we're going to start liberalizing the labor markets and see where that takes us." So he gave up some control and the economy took off. And he realized that by giving up control, you could get more power. Um and and so he liberalized uh the labor markets and the first fortunes in China were made by guys who built factories there to exploit uh the local labor. And then uh in the late '9s you you you had the Asian crisis. You you hit a big economic bump and the Chinese leadership liberalized real estate. um all of a sudden you could own your your real estates and that unleashed an epic boom in China an epic real estate boom that probably went overboard but um they again gave up control i.e control over real estate for more for more growth and for more power. They liberalized also the commodity space uh all of a sudden you can be a coal mine operator copper and all these things and an oil trader and and build your own refinery. uh they so liberalized the commodity space and again that that was another boom. Um so having liberalized commodities, having liberalized land, having liberalized labor, you now are at the final frontier where you have to liberalize the world of capital. Uh and here it's um they're very the leadership is obviously very worried about it because they've seen how liberalizing capital can lead to massive accidents. They were starting the process of liberalizing the world of capital and the 2008 crisis uh showed up and and it scared the hell out of them. They said, "Okay, hold on. If we liberalize capital, does that mean that all of a sudden we we're going to blow up our banking system like the US just blew up theirs? Because if we do that, uh that that has massive massive uh negative implications for for our overall economy. So the the past 1015 years has this has been this back and forth of of uh liberalization on on the capital front. So I think that's the first big big misconceptions. Um I think the other massive misconception that that uh that westerners have about China is they believe that uh essentially you have these national champions that the government picks national champions, subsidizes them and essentially then these guys uh become global champions. It it actually doesn't work that way. Uh the way the system works in China is that CJ Ping, the guy at the very top will say you know what guys we need to produce electric cars. And he'll say that to all the mayors and the provincial governors and the party secretaries of different regions. And then all these guys go back to their district thinking, well, if I want to get the next job, I have to be the best producer of electric cars. And I can do this in different ways. So I can either a cut a deal with Tesla and get them to come and build electric cars in my district, which incidentally is what the mayor of Shanghai did. And then in time, he's now the premier. He's now the number two in the the Chinese uh government. um or I lean on my local bank to make loans to um to my local producer who will then start producing electric cars. And before you know it, you have 100 car producers in China because you have 100 different mayors who are leaning on 100 different banks to um to produce to produce local cars. And then it really becomes the hunger games of capitalism. Um out of those hundred, five will survive. And the end result is great for the consumer who gets much cheaper cars and uh and massive competitions. So it's it's actually funny because it's it's pretty much the opposite of what happens in the western world. In the western world, we say, "Okay, we want to do electric cars, so let's give a bunch of subsidies to Tesla. Let's make sure that Elon Musk becomes a trillionaire." And uh you end up with one electric car company, i.e. Tesla, that produces quite expensive cars. Um, in China you end up with a hundred producers of cars and now you can get pretty sweet uh electric cars in China for less than 10,000 bucks a car. Uh, and now they're selling them all around the world. China 5 years ago wasn't exporting any cars and now China is the biggest car exporter in the world. So the the level the level again the way you have to conceptualize Chinese capitalism is that it is the hunger games of capitalism where people surviving in that environment is extremely extremely challenging, extremely tough. >> How do you think how do you think China is looking at the war in Iran? >> I think they think of it first and foremost in economic terms. Not so much in geopolitical terms but first and foremost in economic terms. Iran was a great deal for China because they got to buy a lot of oil for very cheap. Um, they got to buy a lot of oil at big discounts and this allowed a lot of tinpot refineries up and down China's coast to keep going uh thanks to thanks to cheap Iranian crude. To the extent that right now uh this obviously is is undercut, this is not good economic news for China. It's bad news for all those tinpot refiners. Um, so I think that's how China primarily thinks about this. Um, is well, this is a shame. We used to get cheap crude. Now, now we're we're not going to get it. Um, now chi China's relationship with the broader Middle East is first and foremost one where they look at that part of the world as energy suppliers. And what what China wants out of that part of the world is stability uh for for its from its energy. Um so I think in the US, you know, you read a lot of articles in the media. Oh, how come China is not doing more to to help Iran, etc. It's China's a fair weather friend and all that. Um but I I don't think there was ever any illusion that Iran is an ally of China or anything of the sort. for for China, the the US the relationship that it has with the US both economically but also increasingly politically is far more important than any relationship it has with Iran. So, it's not going to go out of its way to help promote a war, help continue this thing. I think China just wants to get back to business, wants to get back to getting cheap oil. Um and if you get regime change in Iran and the regime continues to turn around and you know the regime will have no s no really no choice but to sell oil to China anyway. Um so I I think if you're Cining you're not so much bummed that oh my god the uh the US is bombing my friend Hamini like this is terrible as much as oh darn it like am I gonna lose my cheap oil here. >> Yeah. Okay. Um, what do you think right now is the most underappreciated macro theme? What would that be for you? >> To be honest, I going back to the idea of the three prices. Um, I think that you oil is is wrongly priced right now, especially at the long end. I think people are underestimating the upside potential on on oil and and how quickly this this might move. Now, we've seen a lot of commodity prices shoot up in the past 18 months. We've seen gold shoot up. We've seen silver shoot up. We've seen copper shoot up. None of that has a big macro impact. You and I don't need to buy gold, right? I mean, it's nice if if we get my gold. I'm sure you do. I'm sure you do. And I need to buy gold for Valentine's Day and for my wife's birthday. I get that. Um but economically, it's not devastating if that doesn't happen. um you know not in the same way that energy prices have a direct economic impact and if they start mooning like uh like all the other commodities did frankly in the past 18 months we enter into a very different world very quickly so I think that's that's one thing that's underappreciated underestimated um and then if you if I look around the world and I think okay what price out there feels completely wrong like what what price of all the things all the markets etc what is the device that is just completely stupid and really is is too far gone from reality and from from the from where it should be. For me, the obvious one is the Chinese exchange rate. The the remn is just stupidly stupidly undervalued. Um, and I I think for a number of reasons, which I'm happy to go into if you want, but we'd love to, >> but that that undervaluation is starting to to be to be taken in the BMBB's gone up seven months in a row now. uh even in this period of uncertainty over the past 10 days that we've had, the renam hasn't really been uh been smoked or anything. Um and and I tell this to everybody I meet, you you can't understand how cheap the remn is until you go visit China yourself. Um because essentially the rememb is at the same level it's been a little down but for the past 5 years but over the past 5 years the productivity gains that you've had in China and the inherent deflation you've had in China while at the same time you've had massive inflation across the western world prices in the United States are up 35% from where they were 5 years ago and that's on official data. Uh in China they're flat but I think they're actually down 10 or 20% from where they were 5 years ago. So the currency should have adjusted for this massive shift in prices and they haven't. So today you can go if if you don't believe me go to Expedia and go to book a a five-star hotel room in Shanghai or in >> I finished I've been to Shanghai. Yeah. In 2017. Yeah. >> Well, okay. So the hotel you stayed at in Shanghai >> I stayed in the Shangria. Yeah. >> Well, it's probably half the price it was back then. >> Wow. >> Uh meanwhile the same hotel in New York will have gone double. Um you can stay >> I believe that. And the rooms are tiny in New York. Oh my gosh. Yeah. So, you can stay you can stay in literally worldass hotels in Shanghai, Beijing for 100 bucks, 100 bucks a night. Um, and you can have the some of the best meals you've ever had for 20 bucks. The cap to the airport is less than 10 bucks. Uh, so on and so forth. So, the the price of the remn is now so wrong that for me, this is the obvious trade of the coming years. And so, again, you look at the fundamentals, China's got tremendous productivity gains, etc. All of which pushed towards a higher currency. You look at the momentum, it's now moving seven up months in a row. You look at the the investor positioning, absolutely nobody owns REMB. And then you look at the valuations and it's the most extreme case of undervaluation of any assets I can think of in the world. So if you think of slam dunk trades of of trades you can put on with a lot of confidence, for me that that's got to be one of them. >> Was that intentional though for them to almost keep it secret? >> Absolutely. But why? Like why? What's the benefit? >> So what happened? Okay, you know the old Steve Martin quote, right? That before you criticize anyone, you have to walk a mile in their shoes. Yeah. >> When you criticize them, you're a mile away and you have their shoes. Um so if you look at China in 2018, the US weaponized the semiconductor supply chain against China. They said nobody's allowed to sell high-end semiconductors to China anymore. The leadership, the Chinese leadership panicked at that moment. They thought, okay, if they can block us from semiconductors, they can block us from anything. They can block us from chemical products. They can block us from auto parts. Um, we need to be self-sufficient in literally everything. And so, we're going to we're going to capture all of our savings, which happen to be massive, and instead of that those savings going into equities or real estate like they used to, we're going to take all that money and we're going to push them down and essentially build up our own industry. And that's exactly what China did. That's why real estate prices went down a third. That's why equity prices went down two/3s. It was a weaponization. It was a a a weaponization of China's savings towards one very clear goal, which was dewesternizing all of its supply chains. Now, as you try to do that, as you try to ramp up your own industry, one of the simplest ways to ramp up your industry is to keep an undervalued exchange rate. is to uh make sure that the jeopard your your your local industry won't fear the competition of Japan, of Korea, of the US, of Europe, etc. And so for 8 years, the remn was kept artificially low uh as the as China felt we need to cushion ourselves against further US embargos, against further US attacks. This all ended last year when Trump comes back to power. President Trump comes back to power and decides to this time not just punch China in the face but punch absolutely everybody. He turns around and he punches Europe, he punches Canada, he punches Mexico, he punches India and alone amongst all the countries because China got punched eight years ago and eight years ago China couldn't fight back. They were too worried that the US would embargo everything. So, but they didn't sit on their hands either. They went to the gym. They got fit. They got strong. They dewesternize their supply chain so that when Trump comes back in and punches them on the nose again in 25, China stands up and says, "Okay, you want to go, let's go. You tariff me, I tariff you. You embargo me, I embargo you." And the US then has to fold. When the CEO of Rathon says, "Hey, in 3 weeks we can't produce missiles anymore." When the CEO of Fort says in two weeks we got to shut down our plants because we don't have the rare earths and we don't have the magnets. Um, China had achieved what they needed to achieve. So now they no longer have to worry about potential embargos. They no longer have to worry about um uh you know not getting supplies of something about supply chain dislocations etc. They now produce everything they need domestically. Uh I think uh Deep Seek showed that that even at the very pinnacle of technology I AI they had uh enough of chips to to go ahead and do things. uh perhaps not be quite as good as the US, but to be close enough and and to be competitive. And so uh this has been the massive shift that has gone on in the Chinese economy. And this is why now they no longer need to mobilize all their savings to push industry. Uh they can now allow the stock market to go up. They can allow the real estate market to come back up and they can also uh allow the currency to to come back up. Uh and this is what's unfolding now. >> Um who won who won the trade war? Well, who raised the white flag? >> I don't want to make a Jesuit priest and answer your question with another question. But who said, "Okay, fine. We're done." >> I would say the the China won the trade war, but it won it at tremendous cost to itself. A little bit like the Soviet Union won the Second World War, but it won it at at immense cost. the cost that most countries wouldn't even contemplate. Um the uh you know the Soviet Union took 20 million uh soldiers losses etc. It took on a huge huge uh human toll to uh to win to win this second world war. China took on huge economic toll to uh to win the trade war. Uh but now it's won it. And so now on the other side of it, you get the stronger remmbb you get the outperforming Chinese equity market. While the trade war was going on, the remn was going down and Chinese equities were underperforming. As it became obvious to anyone looking that actually China has now won the trade war. China, let me put it to you this way. When the trade war started, China was running a 20 billion a month trade surplus. Uh eight years into the trade war, China's trade surplus is now 100 billion a month. >> China's trade surplus is now bigger than Saudi Arabia's GDP. So if if you're Donald Trump and you think of trade wars in in mercantilist terms and you simply and your scoring card is the trade surplus, it's pretty clear who's won. >> Mhm. Louie, I have to say it has been so great having you on the show because we are learning so many different things and it's also just awesome having someone with a different perspective as well. Before I let you go, final question here. What is the risk that's keeping you up at night these days? And then what's the one thing that you're really optimistic or hopeful on? >> So I have four teenagers, so I I don't I don't sleep soundly at all um uh given with with my with my four teenagers. And look, uh no, the the big risk I I worry about the one thing I that has me concerned is energy prices shooting up uh and if energy prices stay low, I think the global economy stays on track. It's happy days. Everything is fine. uh most entrepreneurs, most business people can transform energy into economic growth, into profits decently. It's always when energy prices shoot up that things start derailing. Uh so, so yeah, I do worry about energy. That's why I'm loaded up with energy in my own portfolio and in the portfolios we manage because for me that's that's the big risk. And and if energy prices don't go up, um then the rest of the stuff will make money and it'll be happy days. >> Yeah. Is there a price level that it'll be like, "Oh boy, here we go." Like you'll you'll you'll know like again we're at 8420 right now in this conversation. >> I think I think up to 120 bucks you're still okay, but oil above 120 bucks breaks stuff. I I don't think it's a coincidence that the US government unleashed everything. Once oil hit 120 bucks, Trump has a press conference declaring victory. Um you start to see a lot of futures activity, etc. I think you you get to 120 bucks um it starts to to take a meaningful bite out of US consumption, out of US growth, out of global growth. >> Louis Gav, founding partner and CEO of Gavcow, it has been an absolute treat having you on the show. Thank you so much for being so generous with your time, all of your knowledge, your wisdom, helping all of us learn and get better. Really appreciate it and would love to get you back on in the future. Thanks again, Louie. Thank you all