The NEW Geopolitical Reality - No longer in Kansas Folks!!!

Global Market Shifts and Geopolitics: Insights from Louis Vincent Gave

In this episode, Alan O'Sullivan interviews Louis Vincent Gave, a seasoned market analyst based in Hong Kong, to explore the evolving landscape of global markets, geopolitics, and economic policies. They discuss China's demographic challenges, US exceptionalism, deglobalization trends, and their long-term implications for investors worldwide.

Key topics: 

• Louis Vincent Gave’s background and expertise in emerging markets and geopolitics
• The impact of China's demographic decline and urbanization on future growth
• How global geopolitical relationships are shifting, with a focus on US-China dynamics
• The transition from globalization to deglobalization and reshoring trends
• The changing nature of US exceptionalism and its influence on investment strategies
• The implications of rising debt levels, inflation, and the decline of traditional safe assets
• Strategic portfolio construction in an inflationary world, including gold and energy assets
• The long-term effects of trade wars, regional conflicts, and multipolar power balances

Resources & Links

• Out of the Gobi: My Wild Ride from Mao's Village to the Boardroom (by We John Sean)
• Louis Vincent Gave’s official website

 - [LinkedIn](https://linkedin.com/in/louis-vincent-gave) - [Twitter](https://twitter.com/LouisGave)

Note: For deeper market insights, check out the "Truth Series" mentioned by Ivan Yates, which complements these discussions.

Transcript

SPEAKER_00 0:07

Welcome to the Most Important Insights, the short form series from the Most Important Things podcast. Each episode is built an hour-long conversation with some of the world's leading investors, economists, and thinkers is the essential ideas you need to know in just 10-15 minutes. Our aim is simple: separate the signal from the noise, identify what matters most, and leave you with insights that can improve the way you think about markets, investing, business, and the world around you. I'm Alan Sullivan. Thank you for joining me. So this week on The Most Important Insight, we revisit a summary of the interview with Louis Vincent Gav of GavCal Research. Louis is one of the most respected geopolitical experts in the world, and we had a fascinating conversation about a whole range of topics. In this episode, we start by introducing Louis and why his global market perspective matters. We then dig into the shift in US power and why the old assumptions around American exceptionalism, the dollar, and global safety are being challenged. From there we turn to Europe, its energy mistakes, structural weaknesses, and why some of those problems may now be turning into opportunity. We also explore China's demographics, urbanization, and the limit of government policy when it comes to reversing deep social trends. Finally, we look at debt, inflation, and portfolio construction in an inflationary world, including why bonds may no longer play the role investors once expected. It's a wide-ranging conversation about geopolitics, markets, and the changing rules of investing. Welcome to the Most Important Insight, the short form series and the Most Important Thing podcast.

SPEAKER_01 1:46

The relationship, the single most important event was J.D. Vance showing up in Munich and essentially breaking up with the Europeans. Because that speech he gave back at the NATO conference in Munich, it was a breakup speech, right? Um, and you know, usually when you break up with someone, you say, look, it's not you, it's me, I'm sorry. J.D. Vance did none of that. He comes in and he says, it's you. You know, you're you're fat, you're lazy, you're stupid, uh, you're not carrying your weight in this relationship, and and we're out. Um and, you know, this has forced, you know, perhaps this was a message Europe needed to hear. It's forced a little a big shift in Europe, but it's forced a big shift everywhere around the world. Because when you see how the US has frankly bullied Canada so far this year, you know, if you're in Indonesia, if you're a Thailand, and you think, you know what, if the US can bully Canada this way, Canada who's been a historical ally, who's been a historical friend, et cetera, like where does that put me in the pegging order? If the US can treat Canada this way, what's going to happen to me kind of thing? So everybody, you know, we've lived in a world for 70 or 80 years where the where the assumption was that the U.S. was this benign hegemon. It was it was a hegemon and it did control an empire, but it was, you know, they were mostly good guys, etc. And now the relationship is changing. They're saying, look, we don't want to do this. Number one, we don't want to do this anymore. And if we're going to do it, we're definitely taking a pound of flesh. Um, you saw this very clearly when Zelensky shows up in Washington, D.C., and he says, look, my back is to the wall, I need help. And essentially the US's response was, what'd you got for us? Like, maybe we'll help you, but you know, what can you give us? You got mineral rights? Okay, fine. All right, great, we'll take your mineral rights. So the message from the US is if you need our help, it's going to be costly. And so this means now that I think every country has to look at their own ecosystem, essentially, but also every company has to do that and build a lot more resiliency. I'm sorry to interrupt you, but what you just said is super important because if you were European, if you were Japanese, if you were British, whatever, you invested in the US. And to your point, US equities went down 10, US dollar went up five. So you're like, yeah, I'm down five. Like, you know, if you're a European guy, you're like, yeah, I'm down five, it's you know, whatever. It's not, it's it's not the end of the world. Now, what's happening is US equities, as we saw in early April, down 10, US dollar down five. So now what used to be a down five, like on a bad, bad week, is now down 15, which is which is not the same feeling, not the same sentiments at all. So this the fact that the US dollar, which for years was indeed a shelter in the storm, a sort of say pavement asset, etc., the fact that it no longer is, the fact that it's now an at-risk asset, inherently makes other US assets less attractive for foreigners, because it adds risk. Before it reduced the risk, now US exposures are actually at more risk. You know, you can say, oh, well, you know, the SP, it's not having the best of years relative to other countries, it's up seven or eight percent for the year. Um that's true if you're a US dollar investor. If you're a Korean one investor, you're down five. If you're a euro investor, you're down three. So it's you know, the fact that a the US dollar is no longer a risk-on-risk-off currency. Uh, the fact that the US dollar is now structurally weak means that all of a sudden allocations into the US uh for foreign investors are riskier than they used to be. So to answer your question, how'd you get out of it? Look, you you you look through history, you know, how do you get out of debt situations? Option one, you you default, you restructure the debt. You you you tell everyone you're not gonna you're getting paid 50 cents on the dollar, etc., and you take a hit. Now that's that's massively disruptive. You know, it's it's one thing to do it on on Greek government debt. Well, that was disruptive enough, but to do it on the US Treasury markets, which is sort of the anchor of the overall system, would the that would be a catastrophe. So that seems like a highly, highly unlikely path to take. So if you're not going to go down this path, you know, the the the other way historically that you deal with this is you inflate your way out, and you just, you know, you tell people, yeah, the inflation rate, it's just three percent. We'll pay you, you know, three and a half percent on the debt, but really the inflation is five. Uh your tax receipts grow by five or six, and and you you just you know reduce your debt like this slowly over time. And you know, I I think it's pretty clear that's what that's where we're heading. That's where that's why you've had you know four consecutive down years on U.S. treasuries, which has never happened uh before. You know, this is why government bonds all across the OECD, frankly, are a mugs game. We grew up in a world that was, you know, more or less fundamentally deflationary. And in a deflationary world, people, you know, we were told volatility equals risk and risk equals volatility, and that you know, risk and volatility were the same thing. In an inflationary world, they're not the same thing at all. In an inflationary world, risk and volatility are completely separate. So, you know, in an inflationary world, the risk is because of the debasement of your currency, you're gonna lose your money. So if you're trying to run a low volatility portfolio, chances are you're gonna get debased. And you're gonna achieve your low volatility and you're gonna achieve massive capital destruction at the same time. So risk and volatility in an inflationary world are not the same thing. So in an inflationary world, really what you need is you need gold and you need equities. Um and when you have that, you have a volatile portfolio. But inherently you have a less risky portfolio. So I think we have to break, as investors, you know, to your listeners, to your friends, etc. And I tell this to anybody I meet is we have to break this mindset that volatility equals risk. Because in an inflationary world, it's not true.

SPEAKER_00 8:19

It's really interesting what you're talking about. I I actually interviewed Diego Perea as well, of Corriga. You're probably Yeah yeah. Yeah, like fixed income is is dead really as a portfolio diversifier in an inflationary environment. Because it works, it works in this disinflationary environment, yields down, prices up. But where is the diversifier in in this inflationary environment? And then we get into portfolio construction, adding gold to reduce your risk in a portfolio. They're both similar, similar volatility profile, but they are good. Gold is a good hedge against equity market risk during stressed environments. So but it's it's really interesting because you try and have a conversation with a client. I mean, we're having a fairly sophisticated conversation now, but you're trying to have a conversation with a client and trying to explain that we actually need to increase your volatility to reduce your portfolio risk. I know.

SPEAKER_01 9:20

That's that's that's it's it that it's a very tough one. It's a very tough one, but nonetheless, it's the conversation you need to have. It's it it just it just is, and you know, I'm trying to do this all the time. I you know, you mentioned the book I I wrote called Avoiding the Punch. That was essentially the theme of the book, saying, look, um I and you know, the analogy I use in the book is to say, uh, and this might, you know, your Irish listeners could probably relate to this, is to say, building a portfolio is like building a rugby team. You build a rugby team, you you need people of different shapes and sizes. You need your props that are gonna be six foot one and and weigh 130 kilos. You need your second rows that are gonna be six foot six, uh, you know, your flankers who can run all day, you need your wings who are small guys who can run really fast. So different guys who do different jobs. Now, everybody's gonna do the bare minimum. Everybody's gonna tackle, everybody's gotta pass, but everybody's gonna do the bare minimum, but yeah, you get different body shapes. Now, the bonds for for decades were essentially the best props in the world. They were there, solid, couldn't move them. If there was a crisis, if there was a fight, they'd be the first ones to show up. Dependable, you know, they were the props, and they held the scrum together and they were amazing. They were the best props in the world. Um and now it's like they've gone on summer holiday and they come back and they weigh 80 kilos. And you know, who who needs an 80 kilo prop? And and it's and the answer is is nobody. So now you're left, imagine you're the coach, i.e., the portfolio constru construct the portfolio manager having to build it, and you're like, I need props, but I don't have them. Um and you know, no scrum, no win, right? Um, so I need props, I don't have them. Where where am I gonna find the replacement for the bonds? And and the reality is, you know, bonds were so great for so long, you're never gonna find it's like you have the best props in the world and now they're gone. So you now you're gonna find that you're gonna have to make do with something a little bit different. And so what you're gonna do, you know, I think you're gonna you have to build sort of a sort of hybrid mini mini portfolio that replaces what the bonds used to do. And for that, for me, that hybrid mini portfolio has some precious metals, it has some energy, because the big risk in an inflationary world is if energy prices spike, everything collapses. So, so it has some energy. Um, it has some you know high-yielding assets like high dividend yielding assets, um you know, MLPs if you're an American client, that kind of thing. But so you create a little hodgepodge to try to replicate what bonds used to be, but the reality is you've lost your props, and that's you know, you just have to move on and live without them. So the demographics, as you point out, are really bad. I would say that's uh that's a a Pan East Asian problem. It's a problem in China, it's a worse problem in South Korea, it's a worst problem in Taiwan, it's about as bad a problem in Japan, it's a worst problem in Hong Kong. Actually, Hong Kong's amount of the worst, um uh in Singapore. So it's uh it's a real issue, which is frankly, there's there's a lot of factors. You mentioned there's the cyclical economic factors that that's part of it, but I think a lot of it is is you know, people live in really small areas here. You know, it used to be if you go back 20 years ago, 60% of the Chinese population was still rural, you know, living, living in the the farms, etc. And now that it's like two-thirds of the people live in cities, so people have moved into cities and they live in 80 s 80 square meter apartments. You know, you're not gonna have five kids, right? Um it's and by the way, it was you know, it was the same in Ireland, it was the same in France when when we were like when people lived on the farm, they had 10 kids because you'd have kids that first they'd help on the farm, second, you know, I'd just let them run around outside, and and there was nothing else to do, anyways. It's like just what people did. Um and people move to cities and you just have fewer kids. Um like uh even very Catholic countries like Ireland no longer have like five kids. Uh it's so as people urbanize, people get married later, which is another factor. You know, um a lot of women, you know, over the same period. If you go back 20 years ago, China was graduating a million university students a year, and now they're graduating 13 million university students a year. Um, so uh, you know, 13 million, and like a lot of countries, they now have more women going to universities than men. It's now skewing, it's like 52% women, 48% men. You know, before women would get married young, start having kids. Again, now, you know, they go to universities, and then they're like, Well, I went to university, I want to have a career. So they have a career, and you know, and before you know it, you're 30, and you're like, okay, now I want to have a kid, but yeah, if you start at 30, you're also not gonna have five kids. So, you know, all these factors, it's the same all over East Asia. It's not like specific to China, but it is it is a real issue. Now, you know, against this, you do wonder, you know, what can the government really do? Um you know, it can't tell girls you're not going to university, you're getting married at 18. It can't do that. Can't tell people no, you're moving back to the countryside. It's like I'm not sure there's an obvious answer. Now, part of it is cyclical, and you could say, okay, government should do more. But you know, this year, so China now has, you know, it's been very easy monetary policy. It's got the lowest cost of capital in the world today. Uh, you know, you can borrow money for essentially free. And at the same time, you know, this year the budget deficit's gonna be 10% of GDP. Like they are really sending now. As a result, we are having a bull market. You know, you we've got the easiest monetary policy in the world and the easiest fiscal policy in the world. Guess what? You know, stocks are going up, they're liking it. Is that gonna make people have kids? Uh like honestly, like I'm I'm I'm not like joking around. Like if I was tomorrow president of China and you know, it's and this is a real crisis. There's a demographic crisis coming. So you could say, okay, let's build more child care, let's build more, you know, there they're like some provinces, like in Mongolia, are now giving 100,000 M and B, which is about 10,000 euros or so, like 11,000 euros. If you have a third child and every child that they're after. So, you know, they're giving subsidies, etc. But like nobody has a kid for 10,000 euros, right? Nobody does that. So it's not obvious what you can do for the to solve the demographic crisis.

SPEAKER_00 16:04

So that wraps up the most important insight from Louis Vincent Gab. Hope you found that useful. As I said, Louis is one of the best geopolitical experts in the world. And if you want to go back, I strongly suggest watching Louis's full interview on the most important thing podcast. I think it's episode two or three, but one of the early ones, and well worth going back and looking at that full episode. Okay, till next time, thanks for tuning in.