Lead-Lag Live

Global Markets Beyond America

• Michael A. Gayed, CFA

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The global investment landscape is shifting beneath our feet, yet most investors remain fixated on US markets. Rohit Goel, Partner and Head of Global Macro at Breakout Capital, reveals why this myopia could prove costly in the years ahead.

Rohit drives home an alarming point: US fiscal deficits running at 6.5-7% of GDP during economic expansion represent an understated risk that markets have largely ignored. "If it is any other country on this planet, you would see a reaction, whether in bond yields or currency," he explains. This fiscal vulnerability could eventually force global investors to demand higher risk premiums on US assets, catalyzing capital flows toward international alternatives.

Where might this capital flow? Rohit points to markets starved of investment for fifteen years – Europe, Japan, and particularly emerging markets. Latin America stands at an inflection point with elections potentially delivering reform-minded leadership across major economies. Poland's investment-focused policies create another bright spot, while frontier markets from Nigeria to Sri Lanka implement meaningful reforms after pandemic-era financing constraints forced hard choices.

Perhaps most valuable is Rohit's framework for emerging market investing: "In emerging markets, 65% of returns are attributable to country selection." Unlike developed markets where sector selection drives performance, getting the country right is paramount in emerging spaces. And while liquidity remains challenging, patient investors with two-to-five-year horizons stand to benefit as capital eventually follows performance.

Rohit also dispels a common misconception about dollar cycles. The currency's likely depreciation over the next several years represents a normal economic cycle unrelated to reserve currency status. Since 1975, the dollar has experienced multiple significant bear markets without losing its position in the global financial architecture.

For investors willing to look beyond US borders, the coming years may offer extraordinary opportunities in markets long overlooked by global capital. The question is whether you'll position yourself ahead of this potential sea change or chase it after it's already underway.

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Speaker 1:

The way we look at portfolio construction is get the countries right at all of these levels. The second part is look once you get the country right. Question is how much you can. A how much you should allocate and B how much you can realistically allocate. The truth of the matter is that, given the last 15 years, many of these markets did underperform and foreign capital did go out right. So, given this kind of a scenario, the actual liquidity on ground is quite weak, right? So even if you want to deploy a lot of capital, it's realistically not that feasible. But the way around is twofold, right? One, you look at these markets from a long-term perspective. In any case, it's very difficult to trade in and out of emerging markets. So the view is, if you want to invest in these markets, you should have a two to five year view. And that's how you play it, because it's very difficult to figure out the exact time when the themes will turn. But the trend is in the right direction.

Speaker 2:

My name is Michael Guy, a publisher of the Lead Lag Report. This is Lead Lag Live. Joining me here is Rohit Gohale. Rohit, the first time you're in our chatting. I know we rescheduled this a few times, but introduce yourself to the audience to me more formally. Who are you, what's your background, what have you done throughout your career and what are you doing currently? Sure.

Speaker 1:

Thank you so much for having me, michael. It's been a long time coming. I work with Breakout Capital. I'm a partner here and head of Global Macro. My job is all things global macro and work on global thematics as well as country selection, so I'm quite deeply involved. We do invest in emerging markets, but my sort of analysis spans beyond that. Prior to this, I used to work with the IMF and we used to publish the global financial stability report and I used to collate some of the sections there. So that was the job where I had to look at the glass half empty, and now I also have to look at the glass half full. So this is quite exciting. Lastly, beyond the day job, I am quite involved with CFA. I'm a vice chair of the international investing group as well as Bretton Woods committee. I'm a big fan of Michael. I'm quite excited to see where the conversation goes.

Speaker 2:

All right. So you mentioned global macro. That's a term that's thrown out a lot. I think we should go basic and define what exactly global macro means.

Speaker 1:

Sure? No, basically look, ultimately we invest in emerging markets, and for investing in emerging markets, you do need to have a view on global fixed income, which includes US fixed income, which includes the view on dollar, which includes the view on individual countries more broadly as well. So that's what I mean by global macro. The work span basically includes more 30,000 feet research, a la what we used to do at IMF, which pertains more at the intersection of macro as well as policy, and then, ultimately, we do manage a portfolio right. So it's an intersection of, I would say, macro and markets. So that's what I meant by global macro, looking at US in particular, but also all developed and emerging markets.

Speaker 2:

And obviously it's being aware of different asset classes and sort of interactions of different parts of the marketplace. And there are times when the market is very much in sync in terms of macro, sort of giving you the same message across multiple asset classes and there are times, like now, when there's a lot of conflicting signals and typically when there are conflicting signals, you can argue that risk is perhaps more elevated because there's confusion in the marketplace as to what comes next. Let's talk about risk. Let's talk about what you think the marketplace has right about risk and what the marketplace is missing about current risks.

Speaker 1:

I mean, I think one of the I would say it's almost like a common answer, like one topic which keeps coming back for all our conversations whether you're having that with policymakers or the sell side or the buy side forums is that ultimately, look, we are investing in global markets. Us fixed income markets and US treasury yields ultimately form the bare bone of how we price in these assets, right? So these conversations where US fiscal deficits will go, how important US yields are, where that trend will go it occupies a ton of mind space. But when we look at the market, I think that's the most understated risk out there. A lot of the conversation still revolves around tweets, what happens in the last, uh, couple of weeks, so on and so forth. But more structurally speaking and that's what we sort of do take a back seat and look at the big picture, structural trends, rather than forecasting monthly or quarterly trends.

Speaker 1:

You do see that ultimately the black swan event could be the US yields. We have seen bond vigilantes. Obviously, emerging markets have always been in the forefront of that. It did come to Europe as well. Then we had the incident with UK. Us obviously continues to sort of elude those issues, partly because we have the exorbitant privilege of dollar being dollar. But ultimately, if you look at the trends, irrespective of how effective Doge has been or not has been, the reality is that the fiscal deficits are through the roof and this is in a pro-cyclical manner where it's like 6.5-7% of GDP. Imagine if we enter a recessionary time. Then we can very easily imagine these expanding to 8.5-9% of GDP. And if it is any other country on this planet, you would see a reaction, whether it is in bond yields or it is in the currency. Us, for now, has been sort of eluding that 10-year yields continues to bob around. But if you look underneath, we do see that there are signs building up that can actually surprise quite negatively.

Speaker 2:

There used to be this I forget who said it, I think it was Roosevelt or somebody. He said something along the lines of you can always count on America to do the right thing when all other options are exhausted, or something along those lines.

Speaker 1:

I think that's true. I would say look, I mean, I've been doing it for 15 years now and that's the ultimate answer, and not just for US, I would say for all countries in particular, the time when they actually do the thing, the right thing, is when the back is against the wall. And this was exactly the job back at the IMF, which is the international monetary fund, to work with countries, especially emerging markets, and figure out what went wrong and then try to prevent the crisis right. And when we look at all the imf programs, which are countries which actually do the right thing, when they are out of options and the free lunch is over, right, so ultimately and that's what it has been happening in the us as well uh, it, the back has not been against the wall, partly because of some of the factors which I just mentioned, and the right thing will happen, has to happen, when the back will be against the wall. So that is still awaited.

Speaker 2:

Okay, so let's go with that sort of the moment that forces the change. It seems to me it's hard to envision that unless the Fed lets the US bond market go and you have like a Liz Truss moment right where just yields have. It's the whole failed auction idea right, correct? The thing is the Fed will step in because that's their mandate right to provide stability. So how can you have the back against the wall when the Fed is going to keep on trying to break the wall?

Speaker 1:

No, but honestly, that channel is true across all cases. Right, most of the central banks do have financial stability as one of their mandates, right, and they do try to salvage the markets or prevent any kind of a crisis. But the truth of the matter is, at some point of time, they do need the markets to function properly, right, and that's where Fed's hands will be tied. So in previous crises it was a difficult situation. If you look at the last 15-20 years, inflation was quite low, so Fed had the bandwidth to ignore its other mandates and say, okay, look, financial stability takes precedence over almost anything else. Now, if you imagine the next few years, we are in a very difficult regime. Inflation is not necessarily low, it is anchored to some extent, but clearly the risks are two-sided versus the last 15 years when the risks were one-sided, right, so that is a bit of a problem for Fed.

Speaker 1:

I would say in general that how much effective it would be. Again, the question is not that, look, next month, suddenly there'll be a shock and they'll be out of ammo. The leaking channel would be that when we have such kind of an event and Fed comes and salvages the market, eventually global investors will realize that there does need to be some sort of a risk premia on US assets, on US assets, and that's what we have started to see in US assets this year. There's still a long way to go, given the valuation gap and given the positioning gap in general, but my view is that ultimately, it won't be a case where just US goes into a massive crisis, but it will be a case where there is a global recognition that, look, things have become too overextended in favor of US outside of other assets, and then we will start to see the flows moving quite aggressively in the other direction, so that, I think, is the channel through which the rebalancing would happen, rather than a pure play crisis.

Speaker 2:

So play that out for me. Where does that money then flow to? Some people will argue that it goes to gold, it goes to Bitcoin. I mean, under a scenario like that, what happens?

Speaker 1:

Look some of that is already happening, right? So I mean, under a scenario like that, what happens? Look, some of that is already happening, right? So I mean, gold has been there and it's obviously the last 12 to 15 months it has become quite center of the normal attention span. But I mean, we have seen this trend playing out. But if you look more broadly, there are enough and more markets globally, enough and more asset classes globally which have been starved off of, I would say, capital in the last 15 years. And if you look at it, last 15 years, the only asset class which work quite decisively were us big tech in a way. Right. So all international markets, whether it is europe or japan or emerging markets, they sort of underperformed, um, in the last 15 years and we could see that the flows were also aggressively directed towards us perspective, right? So if you look at decade till date trends, 80% of the flows actually went to the US and not really other markets globally, right? So that's sort of my point that if you want to create a steady state scenario or if you want to create a situation where things get normalized, there are plenty of more regions and asset classes where flows can go.

Speaker 1:

Now take it to the second step. The first step is okay. The US market is overextended when it comes to valuation or sentiment or general risk premium involved. So we need to diversify outside of the US. Where can we do that? And I would argue that Europe, japan and even emerging markets. They have enough and more capacity to absorb these flows. And, given the starting point where the valuations are quite low, the positioning is quite weak. And many of those markets, especially in emerging markets, are doing the right thing when it comes to the policy mix, when it comes to the economic growth model. So that can actually benefit quite a lot.

Speaker 2:

From an asset class perspective, if we're talking about considering other parts of the marketplace, do we want to think in terms of equities? Do we want to think in terms of commodities as an asset class play? Do we want to think more in terms of those countries' bond markets? I mean, how should we go about the asset class decision?

Speaker 1:

Sure. So I think the big picture, I would say one is the private and the public debate. I think on that angle, what we saw in the last 10 to 15 years, private asset class in general has exploded quite aggressively globally. Right, and we can debate about the volatility laundering and all those pieces. That's one part of the argument. But my belief is, at some point of time normalization has to happen, right so, and we have started to see some of that playing out in the private markets. Right, many of the global endowments have started to come under pressure and they have to do secondary market sales. But even otherwise, when you look at the stock price of private players and so on, so forth, you do see pressure building up in the private class and this is somehow also related with us. Ultimately, a ton of the private flows do flow to north america and us in particular. So they are sort of related. But I would say, in terms of the broad big picture asset classes, the tide had shifted quite aggressively towards private markets in the last 15 years, and I'm not saying it's the end of private asset class, I'm just saying this is how cycles behave, right, so you have a boom in a particular asset class for 10, 15 years and then the cycles turn and then you would see things normalizing. So I would argue that the next five to 10 years we would see some sort of a normalization again for the same reasons that. Look, valuations and positioning are quite overextended in the favor of privates. So this is one.

Speaker 1:

The second, very correctly, rightly mentioned, is commodities. Obviously gold sort of comes to the limelight for it, but I would argue it's much more broader and it's not just because of the cycle and they have sort of underperformed. But we do see that the big picture playing out globally is, uh, the industrial ring fencing and the fortification which many countries are doing right. So commodities not all of them, many of them very much come into the limelight because of the strategic importance. You can argue whether it is agriculture or whether it is commodities like copper, aluminum and so on, so forth, but they are in the limelight not just because of the usual economic supply and demand situations but because many countries do want to stockpile. So I would argue commodities in general are a good asset class to also look at for the next uh, three to five years. And the last is the bond markets. But here I have a slightly different view, I would argue bond markets. It sort of depends where you are looking at. In the, the US, as I rightly mentioned, this remains one of those asset classes where the risks are relatively underpriced.

Speaker 1:

But one segment where I would want to highlight is emerging markets. Again, it's the cycle. These are the countries which are doing many of them are doing the right economic policy mix. They have enough buffers in terms of cheap currencies. They have enough buffers in terms of cheap currencies. They have enough buffers in terms of relatively high real rates, and inflation has been well getting controlled, quite aggressively, right. So when you look at that kind of a policy mix, you do expect that. Look, emerging market assets on the fixed income side can be quite attractive and honestly, it's not a new thing. In the last one, one and a half years, the local currency asset class has done quite well. But my argument is that now, since the dollar has turned and I am quite aggressively in that direction that this is not a short-term blip but it's a trend we can expect for the next five to seven years. In that kind of a regime, emerging market asset classes, be it equities or fixed income, can be quite, quite lucrative.

Speaker 2:

How do you go about identifying the right emerging markets? I say that very purposely because I think it's debatable to argue China is an emerging market. I think we have to kind of define what an emerging market is.

Speaker 1:

And that's a $2 trillion question, right. It's always a challenge where you draw the line when it comes to emerging markets, right. But to simplify, I would argue that, rather than just saying emerging markets, the big picture view is that this is about international markets and not just emerging. So this is number one, that, look, I believe in the next five years we are in an environment where dollar will depreciate, and I mean it could be a volatile right, but the structural direction will be low. In that kind of environment, you do see international markets, uh, outperforming. So this is step one.

Speaker 1:

Now, which kind of markets to look at within that segment? Then you look at two types of markets. So one where the domestic market is large enough to provide some sort of an insulation against tariff issues and if globalization sort of rolls back to an extent. That is one. And the second is you would want to look at the markets where they are reformist leaders and trying to do the right thing, even if it comes at a cost.

Speaker 1:

And one such example and again it's too small, uh, in the big picture of things, but it does highlight that change is underfoot is argentina, and what melee has been doing there. Argentina has been a country and I used to work at the imf right, so it's been a country which has been under severe crisis for the last 125 years, but now it has become the poster child of neoliberalism and setting what should be done when it comes to the policy mix. So the argument is that look beyond US. There are a lot of markets which are cheap, which are doing the right thing, and then pick the ones where you think the leader is supportive of growth and less state control.

Speaker 2:

So China obviously would not factor into that. So let's talk about some of the best countries there. Right that you think look the most attractive, the cheapest, that have the right mix.

Speaker 1:

Sure, I mean, look, I mean one region which I would want to highlight is LATAM in general. I mean, if you look at the last uh many decades, latam always, almost always, has been a country which is almost exclusively about commodities, right. That commodity cycle happens and latam in general outperforms aggressively and then the cycle turns and most of the latam markets remain quite weak and we can sort of see that kind of an issue in their productivity growth as well, that it has been quite reliant on this commodity cycle and hasn't really seen a very meaningful increase in investment or manufacturing or productivity growth, right. So that's why the region has remained very cyclical, uh, but uh, cheap right now. If we look at the next three to five years, uh, one change which is happening in LATAM is obviously, the starting point is different Very cheap assets, underpositioned and so on and so forth, and cheap across all categories, whether it is equities or FX and also many bonds. The one thing which is playing out quite well for LATAM in the next one and a half years we'll see elections coming up for all major economies. For LATAM in the next one and a half years we'll see elections coming up for all major economies. We start with Chile in November this year and then obviously the big election is Brazil in 26 next year, but in October next year.

Speaker 1:

But if you look at the underlying pools and if you look at the direction of the travel there, you see that the tide is turning quite aggressively towards orthodox leaders. Obviously, mille in argentina set the trend in 23, um, but even beyond that, that's the region where we think things can perform quite positively uh, especially if the political trends uh are quite supportive. So I would say argue that that can be one of the regions which is and quietly, I would say, and silently outperforming and becoming of interest. If you look at year to date trends, that has been the region which has outperformed across the world and if trends continue this way, this is just the beginning, this is one, this is one. And then on the other side we also have countries like Poland, which is obviously got impacted quite aggressively due to the Russia-Ukraine war. It still sort of is at the forefront of it. But when you look at the policy mix, when you look at the direction of the travel, things are pretty supportive.

Speaker 1:

Government is investing in the right things. There's a lot of focus on investment and not just the Ukraine reconstruction efforts, but much beyond that. So when you look at some of those markets, you do see that the policy is relatively orthodox, the policy is reformist, the assets are relatively cheap and the companies are quite high quality. So that is again one of the markets which can continue to outperform. And one bucket which I would also want to put in is the frontier markets in general, without naming individual country names. This is the exact same example which you gave in the beginning that, look, the only real change uh can happen when you run out of options, and I would say, during the pandemic and financing crisis. After that, most of the frontiers did run into that kind of a situation where they were out of free money and they had to do the right steps. So we see a ton of reforms, ranging from Nigeria to Sri Lanka to Zambia and many other countries where the leaders are reformist and they're going down the right path.

Speaker 2:

Okay so and I think Ola makes sense when you mention frontier markets. I don't hear anybody talking about frontier markets and that was such a very hot term for a while, kind of the emerging of the emerging, so to speak. But how should we think about risk management if we're going to go with that way of allocating right? I mean, it's hard to get proper data on individual companies. Yes, you can do broad-based ETFs. Data on individual companies, yes, you can do broad-based ETFs, but even that doesn't necessarily tell you much about weightings. And a lot of the broad-based ETFs are primarily going to be focused on certain sectors, like financials, which may not be ideal for real country exposure. So talk through portfolio construction, sure.

Speaker 1:

No, I think one big picture view which, if you look at emerging markets or frontiers in particular and this is where they differ from developed markets if you do the decomposition, where do actual returns and alpha sort of comes from?

Speaker 1:

In emerging markets, the most important variable is country selection. As long as you can get the country selection right, the stock selection will sort of follow suit. So if you do the actual decomposition, 65% of returns in emerging markets are attributable to country selection. Now, this is very different from what we see in US and Europe in direct markets in particular, because there the sector selection and the industry and the thematic makes a much more important difference right. So when you go down the curve and start investing in emerging and frontier markets, the first focus is let's get the country right. After that comes to the second step okay, what kind of companies we should invest in which is where you're absolutely right. The data sometimes can be a bit tricky and there are obviously corporate governance issues there as well, but you would see that the correlation between uh the overall market and actual uh the quality of the country remains very high. So you get the country right. Very difficult to find ets which are completely represented, which is true, but to a great extent, you will be on the right path, like the one thing which we always see is that as long as you get the country right, even if you pick the second best stock or the third best stock, you will be fine. But if you get the country right, even if you pick the second best stock or the third best stock, you'll be fine. But if you get the country wrong, even if you pick the best performing stock in that market, it won't really make a difference. So for emerging markets in general and frontiers which are emerging, of emerging in particular, this becomes the most important thing, and which is what we have. Also, sort of the way we look at portfolio construction is get the countries right at all of these levels.

Speaker 1:

The second part is look once you get the country right. Question is how much you can A, how much you should allocate, and B how much you can realistically allocate. The truth of the matter is that, given the last 15 years, many of these markets did underperform and foreign capital did go out. So, given this kind of a scenario, the actual liquidity on ground is quite weak. So even if you want to deploy a lot of capital. It's realistically not that feasible.

Speaker 1:

But the way around is twofold right. One you look at these markets from a long-term perspective. In any case, it's very difficult to trade in and out of emerging markets. So the view is, if you want to invest in these markets, you should have a two to five year view. And that's how you play it, because it's very difficult to figure out the exact time when the themes will turn. But the trend is in the right direction and I would argue that's sort of the big picture. I think the second argument which we have seen if you're long-term investors, especially in these markets, the liquidity is pro-cyclical. Markets turn, foreign capital comes in, domestic investors also become more exuberant and then you see that liquidity comes in and that sort of makes it much easier to invest in these markets. So question is you wait for the tide to turn or you position yourself beforehand and then when the tide turns you're already there in the market. So that's some of the challenges and in fact also the opportunity when it comes to investing in emerging as well as frontier markets.

Speaker 2:

Any concerns around how tariffs deglobalization anything policy-wise could impact the thesis?

Speaker 1:

Right? No, I mean, look, I think one big, I won't call a myth. The debate is obviously around globalization, right, and the big picture is that, look, us is sort of pulling back and that means almost like an end of globalization and that will impact emerging markets quite aggressively. I have a slightly different view here. I do think we have been in this new regime for quite some time, but if you look at the underlying data, us is the only country globally and I mean there is New Zealand and a couple of other smaller ones where trade to GDP has actually declined since 2016 end. So, since Trump came In all of the markets almost 90% of emerging and developed markets trade to GDP has actually increased in the last eight years. So the question is that it's not as if trade is weak in the world outside of the US. It's just that the trade architecture is sort of getting realigned, it's moving away from US and more and more countries are trying to trade within each other.

Speaker 1:

Now, look, the reality is US is still very important. It is very difficult to imagine a world where all the countries can very easily bypass us and just trade within themselves. Uh, but the reality also is that if you want to imagine a steady state world that, okay, all this tariff chaos settles in. Three years down the line, four years on the land, what's the steady state new normal? It's very difficult to imagine a world where most of the factories are in the us unit. Economics will just not justify that. So either the MNCs will just eat up the tariffs and the margins will come down, or there'll be some supply chain realignment and factories will move from Vietnam to Bangladesh and so on and so forth, but the factories will still remain outside of the US and the trade will still sort of continue. Fact is, we'll still remain outside of the US and the trade will still sort of continue. So that's my view on tariffs in general that there will be idiosyncratic issues depending upon how US wants to sort of play these games and a lot of it is obviously unmodellable, depends on the day and the hour of the tweet.

Speaker 1:

But more generally I would argue that this is a big change which we have seen in the global markets and policy space in the last, not just one year it has become quite aggressive in the last six months but in the last few years that they know that they need to de-risk their economic supply chains and they have been trying to do that.

Speaker 1:

In fact, if you look at and if you talk to policymakers in ASEAN specifically because that's one of the regions which has been in the eye of the storm, they're very clear that, look, we are not in a position to negotiate aggressively versus US, so we'll have to deal with whatever cards we are given with. But what we know is that we need to increase the intra-ASEAN trade, intra-asean payments and intra-ASEAN linkages. So I think more important than just creating a single derivative view that globalization is under stress and tariffs will actually have a negative impact on trade, I think it just opens up a lot more opportunities for investors to pick up the countries which can actually benefit from this kind of a trade fragmentation and attract the supply chains.

Speaker 2:

I want to go back to commodities for a bit. I happen to be of the same mindset, but maybe for different reasons. I mean, it seems to me that everything going on with China as far as Trump and tariffs and deals and all that stuff, probably benefits China more than the US, because in my mind it means it's a reinforcement to the policymakers there that they have to focus more on domestic consumption and rely less on the US. If Trump becomes a catalyst for that, whether they can succeed or not, it's enough to get some, you know, some annals. First, right in the commodity space, how much of a commodity cycle is dependent purely on just China as opposed to, you know, broader underinvestment and somehow it starts to work.

Speaker 1:

I mean, I think to a great extent it still will. China still consumes a lot more and has been a growth survivor for a while. So it's quite difficult to just completely discount China's view, even though the focus has been shifting, and you can sort of see that in the prices as well. If you look at the last one and a half two years of trend, obviously China's growth has been relatively weak and people have been arguing for different reasons behind that. But despite that the commodity import demand from China has remained quite robust and obviously they have been stockpiling and they have been sort of fortifying their own economy. But the truth of the matter is that the correlation between pure play China's usage of these commodities versus the global demand for these commodities has sort of broken in the last couple of years and I would argue this is a trend which is here to stay, as more and more countries sort of realize that, look, we have entered into a world where it is increasingly transactional and we can't just rely on old existing supply chain partners, right? So in that kind of environment you would expect more and more people to fortify, more and more people to stockpile these commodities. So I think that's a much more broader trend.

Speaker 1:

The second part also is true that, purely because of base and how the global economies move, china will continue to play a relatively uh important role. The question is, uh the mix can change. Whether it is agriculture or whether it is copper, it depends upon how they sort of view their strategic industry uh focus. But china is quite critical. Uh, to look at the commodity cycles, I mean, if you want to create a more sustainable view, right, I mean the argument about underinvestment and all those things are absolutely true. I very much believe in those parts as well, but some of that can prove to be more tactical. But if you want to create a more durable three to five year super cycle view, I think China's role has to be price placed here.

Speaker 2:

You had sent me a note saying dollar depreciation in the next few years does not mean the dollar is the one we're going to be the reserve currency. I think we need to really kind of unpack that, because I think a lot of people keep using that term the demise of the dollar and use that as an excuse for the new system which is coming in most people's minds around, you know, using gold or Bitcoin or combination of the two and hard money and all that stuff. Let's maybe counter some of that.

Speaker 1:

Sure no, I think. Thank you. I think this is a topic which I'm very passionate about in the sense that, especially this year, right, obviously, dollar has depreciated quite aggressively. And a big comment not just from you know, simple analysts, from very, very senior, seasoned people we keep hearing is the dollar has depreciated because, as you rightly said, it's a demise of the dollar and there'll be other contenders for reserve currency. And da, da, da, da da.

Speaker 1:

The argument which many people take is that that's not possible. It's very difficult to dethrone dollar. It's very difficult to find reasonable dollar alternatives, which means that dollar will not depreciate. Now, my problem with this argument is that these two things are sort of uncorrelated. If you take the next three to five years time frame, which is what is we generally look at, since 1975, when dollar started to trade more freely, right, uh, dollar has depreciated. There have been multiple bear markets in dollars, there have been multiple bull markets in dollar, and this is exactly how the cycles behave. If you see, in fact, in 75 there have been two pretty massive bear markets in dollar. Dollar depreciated for almost seven years on an average in each and was down 45 percent over a seven-year time period. It had nothing to do with dollar getting replaced as the reserve currency. That can continue, but then the economic cycles also need to be taken into account. So that's my quite strong conviction that, look, we should take the entire view about what Trump is doing where US role is in the global architecture. Entire view about what Trump is doing where US role is in the global architecture. That is out of the window for the next three to four years. When you want to talk about where dollar should be and where its fair value should In a proper cycle.

Speaker 1:

Dollar was overextended. You look at BIS, google, any of those estimates. It was the most expensive since 1960 and predicated on the fact that 80% of global portfolio flows were flowing into the US, which obviously supports dollar, and predicated on the fact that US economy was exceptional. And we can argue that it was exceptional for the wrong reasons fiscal deficits and so on and so forth but dollar was being supported in a large part by those factors. Now you want to create the next three to five year view, you would see much of it getting diluted away. We very strongly believe portfolio flows will get reallocated to other markets. It doesn't mean that nothing will flow into us, it just means that, look, 80 percent of flows don't need to flow into the us. It could be 50, which is where its global share of earnings are right. So when that kind of a thing happens, when we finally realize that, look, the growth premium that dollar had, that us had built, versus international markets is finally getting normalized, which is where it should be given the cycle, then again dollar will see some kind of a pressure. So that's sort of my view that, look, there is a cyclical uh view on dollar where it should depreciate for the next three to five years, and so far it definitely seems to be playing out that way. That has nothing to do with dollar will not be the reserve currency.

Speaker 1:

Now, if you want to talk about dollars role in the global architecture, that's a separate argument and we have seen some chipping at the margin. Right, dollar used to be 70 percent of global reserves in 2000s. Right now it's 57 percent, continues to tickle down slowly and steadily. We do see more and more number of countries trying to diversify away from dollar as best as they can. There is a fantastic paper by imf, sarkhan and barry I can read in 22.

Speaker 1:

It shows that there are a ton of countries which are trying to diversify away from US dollars. Now, in the big picture scheme of things, in aggregate many of these countries don't matter. They're quite small. But if you look at that research and if you look at the data, you do see that the trend is definitely there that they want to diversify out of dollar in a slow, manageable fashion. So that's my view that, look, dollar is the reserve currency will be in the foreseeable future. We can be in a multipolar world, but it is getting chipped away at the margin. But the dollar weakness that we will likely see over the next two to five years, it has nothing to do with that. That is pure economic cycle in progress.

Speaker 2:

Rohit. Talk about the company, what you do, what you can provide to those who might be interested in your services.

Speaker 1:

Look, ultimately we are institutional investors, we manage money and we invest in emerging market assets globally. But the main discussion point and view for me is to just engage in some of these global macro themes and try, and I would say, bust some of the myths which we keep seeing in many of these global discussion forums, whether it comes to US dollar or the underappreciated role of international markets. I'm on LinkedIn. Rohit Goel Goelrohit is my public username. I'm also on Twitter, not very active there, but, yeah, I'm very much available on LinkedIn.

Speaker 2:

Appreciate those that watch this live. I enjoyed the conversation. I think the emerging market frontier market point is important, as well as the dollar demise one. This again will be podcast under LeadLag Live and hopefully I'll see you all on the next episode. Thank you, rohit, appreciate it. Thank you, roy.

Speaker 1:

Appreciate it. Thank you so much for having me, Michael, and the usual disclaimer the views are my own, not Breakout Capital or Rockefeller. Thank you so much for having me.

Speaker 2:

Cheers buddy.

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Michael A. Gayed, CFA

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