Podcast Summary
Macro investing strategies: Avoid bond market, duration, and 60-40 portfolio. Invest in US equities despite high valuations, non-US equities for value, and crypto. Predict devaluation of dollar, invest in Asia. Kraken for crypto buying, Uniswap extension for trading, Obol Collective for Ethereum staking.
Key takeaway from this episode of Bankless is that macro analyst Louis Vincent Gabb shares seven ideas for investing in uncertain times. He believes that avoiding the bond market, avoiding duration, and the death of the 60-40 portfolio are important strategies. Additionally, he suggests investing in US equities despite their high valuations and non-US equities for value. He also predicts a devaluation of the dollar and advocates for investing in Asia. Lastly, they discussed the importance of crypto, with Louis sharing his spicy takes on the subject. Overall, Louis's insights provide valuable perspectives for investors navigating these uncertain times. Additionally, the episode highlighted the importance of Kraken as a secure and accessible platform for buying crypto. The Uniswap extension and the Obol Collective were also introduced as valuable resources for crypto trading and Ethereum staking, respectively.
Western welfare states financial crisis: The Western welfare states are facing a financial crisis due to a decrease in new workers and an increase in aging populations, compounded by global anomalies such as the undervalued Japanese yen, overvalued tech and AI industries, and China's trade surplus despite an undervalued currency, leading to market instability and a bear market, but gold is making new all-time highs during this time.
The Western welfare states, built on a Ponzi scheme model, are now financially breaking down due to a decrease in new workers and an increase in aging populations. This issue is compounded by three significant global anomalies: the undervalued Japanese yen, the overvalued tech and AI industries, and China's trade surplus despite an undervalued currency. These anomalies have led to market instability, with the summer of 2022 seeing a shift in markets as the yen and tech bubbles began to deflate. The current bear market, which started with a 20% drop, is not the end of the world and is allowing capital to shift to new themes. Interestingly, gold is the only asset class making new all-time highs during this time. A garden variety bear market, which can last for months and may lead to a recession, is characterized by a 20-50% drop in asset prices. However, it's important to note that the demographics and asset classes involved can significantly impact the perceived severity of a bear market.
Investor demographics and market reactions: Older investors, heavily invested in equities, may be devastated by market corrections while younger investors see opportunities. Policymakers' sensitivity to asset values could limit future corrections, but bond investors have already lost money in real terms and emerging market bonds have delivered positive real returns.
The demographics of investors in traditional assets like US equities versus newer assets like Bitcoin play a significant role in how markets react to downturns. For older investors, who are more likely to be retired or close to retirement and heavily invested in equities, a major market correction can be devastating. In contrast, younger investors may view a bear market as an opportunity to buy more. Furthermore, policymakers are increasingly sensitive to changes in asset values due to the large percentage of the population that owns equities and votes. This sensitivity could limit the severity of future market corrections, keeping them from reaching the "Armageddon" levels discussed. Additionally, bond investors have already lost money in real terms this decade due to inflation, and policymakers are more likely to debase currencies than allow economies to deflate. However, emerging market bonds have actually delivered positive real returns for investors this decade. The question remains, who is holding the riskier assets like Bitcoin and emerging market bonds?
Regulatory bias towards illiquid assets: Institutional investors are heavily invested in illiquid assets due to regulatory obligations and historical low-interest rates, but the maths don't add up as these assets represent more than half of US GDP and may not deliver the required returns, potentially leading to a shift of the burden to governments and massive money printing
Many institutional investors, such as pension funds and insurance companies, are holding long-duration bonds despite the current unfavorable environment due to regulatory obligations and historical low-interest rates that left them in a difficult financial position. This regulatory bias, coupled with the need to match future liabilities with current assets, has led to a significant increase in the amount of capital allocated to private credit, infrastructure funds, real estate, and private equity, among other illiquid assets. However, the maths don't add up, as these assets represent more than half of US GDP, and it's unlikely they can deliver the required returns given the current economic growth rate and cost of debt. Eventually, the burden of these unfunded liabilities is expected to shift to governments, potentially leading to massive money printing and a repricing of currencies. For individual investors, the lesson is to avoid duration and favor credit and inflation protection to safeguard their wealth.
Asset Allocation Shift: The traditional 60-40 portfolio may no longer be effective due to the end of the 'free lunch' from bonds. Gold and long-term bonds from countries with surpluses are now considered safer bets for inflation protection.
The traditional 60-40 portfolio of equities and bonds may no longer be effective in today's economic climate. With the end of the "free lunch" of low volatility and consistent returns from bonds, investors are looking for alternative ways to protect their portfolios against inflation. Gold has emerged as a safe haven during recent market volatility, and long-term bonds from countries like Brazil and China, with their record surpluses, are now considered safer bets than U.S. Treasuries. Diversification remains crucial, but investors need to reconsider their asset allocation to adapt to the changing economic landscape.
Demographic shifts and economic realities: Investors must adapt to a changing economic landscape by diversifying beyond traditional bonds and considering assets like gold, energy, Bitcoin, and emerging market debt due to demographic shifts and retirement of baby boomers, decreased number of children, and challenges for welfare states leading to increased inflation.
The demographic shifts and economic realities of today have significantly impacted traditional investment strategies, particularly in the areas of bonds and equities. With the retirement of the baby boomer generation and a decrease in the number of children, the economic landscape has changed, leading to challenges for welfare states and increased inflation. As a result, investors must adapt by diversifying their portfolios beyond traditional bonds and considering assets such as gold, energy, Bitcoin, and emerging market debt. US equities, while historically strong, are currently considered expensive relative to their earning power and global market cap representation. Non-US equities, on the other hand, offer more value and are more cyclical. It's essential for investors to accept a higher level of portfolio volatility in this new economic climate and consider a balanced approach to investing.
US economy overvaluation: Despite US tech leadership, its overvaluation and potential risks to property rights make non-US equities, like Chinese tech companies, more attractive investments
While the US economy has a strong history and dynamic technology sector, its overvaluation relative to other markets, particularly in terms of property rights and attractive non-US equities, presents an investment opportunity. The speaker emphasizes the importance of property rights and the potential risks for foreign investors in the US. They also highlight the underperformance of US productivity growth in recent years, despite its tech leadership. As a result, they suggest considering investing in undervalued non-US equities, such as Chinese tech companies like Tencent, which offer better growth prospects at more reasonable valuations.
Chinese asset seizure vs Western experiences: Despite concerns, there's no evidence of Chinese govt seizing assets of Western citizens. Instead, consider ETFs for Chinese tech or Brazil, and watch for equities value rotation from growth to value.
While the Chinese government's seizure of Western assets is a valid concern, it's essential not to project our own experiences onto China. There have been no instances of the Chinese government seizing assets of Western citizens, unlike what we've seen with Russians, Iranians, and Venezuelans. Moreover, if such a scenario were to unfold, it could lead to a global economic freeze, making it a moot point. Instead, investors seeking exposure to non-US equities can consider ETFs like KWEB for Chinese tech or EWZ for Brazil. Additionally, equities leadership is expected to rotate from growth to value as global recession fears subside. Value indices, comprising financials, materials, and energy, are trading at low valuations due to recession concerns. However, if the recession doesn't materialize, these stocks could offer better value. Warren Buffett, with his vast cash reserves, might be waiting for such a value rotation.
Buffett's investment strategy: Warren Buffett is currently holding back on significant investments due to high prices and uncertainty, especially abroad, but anticipates global trade expansion and potential appreciation of the Renminbi, yen bond and equity markets.
Warren Buffett, known for his value investing and growth approach, is currently waiting for more affordable prices and predictable businesses before making significant investments, especially abroad due to his brand and comfort level. The world economy may continue to bifurcate between China-aligned blocks and the US, but global trade expansion is still happening rapidly, with the fastest growth occurring between emerging markets. The Renminbi's rise during a recent risk-off event is an indication of increasing domestic savings staying at home in China, which could lead to currency, bond, and equity appreciation. The dollar's devaluation against the yen and Renminbi is expected, but it doesn't necessarily mean the end of the dollar's reserve currency status in the short term.
Dollar bear market and crypto: The speaker believes a dollar bear market is underway, leading to increased use of other currencies and potential for crypto, particularly Bitcoin, as a neutral financial system and parallel store of value.
The speaker believes we are experiencing a dollar bear market, leading to increased use of other currencies like the yen, renminbi, and euro. The speaker also expresses concerns about the erosion of the rule of law and property rights in the US, which could negatively impact its status as the world's reserve currency. The speaker is open to the potential of crypto, particularly Bitcoin, as a neutral financial system and a parallel store of value. The speaker sees gold as primarily a play on emerging markets and cultural demand, rather than a direct competitor to crypto. The speaker's father, who is older and enjoys new technologies, holds a different view on crypto and prefers to invest in various coins. The speaker sees the ecosystem's success as crucial for crypto to flourish as a parallel financial system, and currently, Bitcoin appears to be the leading contender. The speaker acknowledges the challenges in the crypto space, including the presence of "shitcoins," but remains bullish on Bitcoin's potential.
Crypto market evolution: The crypto market is an ongoing debate with potential rewards for those willing to take the risk, but it's important to stay informed and remember investing carries risk.
The crypto world, like the world of gadgets, can be filled with exciting innovations that may not always be used or have lasting impact. However, for those willing to take the risk, the potential rewards can be significant. The crypto market is an ongoing debate and continues to evolve. To stay informed, listeners can follow Louis on Eggs or sign up for the free newsletter Evergreen Gaff Gal. As a reminder, none of this conversation should be considered financial advice, and investing in crypto carries risk. But for those brave enough to join the bankless journey, the potential rewards are worth the adventure. Louis' insights and perspectives on the crypto market can be found on his various platforms, and more information on how to access his content will be provided in the show notes.