The Global Economic Shift and Its Impact on Markets and Investments
Louis-Vincent Gave's Recent Views on How Emerging Markets, Energy, and Geopolitics are Reshaping Traditional Financial Models and Strategies - Article #83
In this 14-minute article, The X Project will answer these questions:
I. Who is Louis-Vincent Gave, and Why this article now?
II. What are the structural challenges in Western economies?
III. What does this mean for bond markets?
IV. What are alternatives for bonds?
V. What is the new investment frontier?
VI. What does this mean for global energy markets?
VII. How is China’s continuing evolution impacting all of this?
VIII. What about the broader geopolitical landscape?
IX. What does The X Project Guy have to say?
X. Why should you care?
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I. Who is Louis-Vincent Gave, and Why this article now?
Originally, I was going to write an article about crude oil because its price has recently fallen below $70 per barrel. And then I came across this video by Louis-Vincent Gave (LVG), who has been a long-standing structural energy and crude oil bull, where he explains why he is still bullish despite crude oil’s lowest prices in 2024, and very near the lowest prices of 2023 and 2022.
https://research.gavekal.com/content/video-beyond-the-slide-in-energy-prices/
I first introduced LVG in April in my article “Is Inflation About to Make a Comeback?” which is worth re-reading as it is still very relevant today despite the latest benign inflation report leading to widespread expectations of a Fed rate cut next week. LVG has an interesting perspective given that he is not an American and does not live in the U.S. According to his bio,
“After receiving his bachelor's degree from Duke University and studying Mandarin at Nanjing University, Louis joined the French Army where he served as a second lieutenant in a mountain infantry battalion. After a couple of years, Louis left the army and joined Paribas where he worked as a financial analyst—first in Paris, then in Hong Kong.
Louis left Paribas in 1998 to launch Gavekal with his father Charles and Anatole Kaletsky. The idea at the time was that Asia was set to become an ever more important factor in global growth, and that consequently Gavekal needed to offer its clients more information, and more ideas, relating to Asia.”
Clearly, LVG and Gavekal were right on the money in 1998 catching the global growth trend of the past two decades. LVG has made a name for himself as a prescient, well-respected, big picture, macro strategic analyst and thinker among the small community od non-Wall Street, big-picture macro strategists . And so after seeing the video above, I decided to catch up with other recent interviews with LVG to get a broader perspective of his recent views, which include the following found on YouTub:
Structural Inflationista (Guest: Louis-Vincent Gave) on The Market Huddle
What's Next for Markets? Macro Expert Louis-Vincent Gave on Bankless
How China Dominates the Global Export Business | Louis Gave on Mauldin Economics
You will not find the views I am summarizing here in traditional financial media. The Wall Street consensus does not yet see or understand this global economic shift nor the impacts that have already occurred as a result, are still occurring, and will continue to occur.
II. What are the structural challenges in Western economies?
LVG underscores the unsustainable nature of Western welfare states, referring to them as systems designed on a "Ponzi scheme" logic, where an aging population is increasingly reliant on a shrinking workforce to fund pensions and social services. He highlights the demographic and fiscal imbalance in countries like the United States, Canada, France, and the UK, where birth rates are falling, and life expectancy is rising, creating a structural gap in funding essential services like public health and education. LVG points out that many of these governments have turned to borrowing to finance deficits, which has driven their national debt levels to unprecedented heights. According to LVG, one of the clearest signs of this fiscal recklessness is how public investment in infrastructure and future-oriented sectors like education has diminished while ballooning pensions for retirees have become a larger share of government spending.
This situation has been exacerbated by low productivity growth in many developed economies. LVG mentions that despite these challenges, Western governments have not taken the necessary steps to reform their welfare systems. Instead, they continue to expand benefits, making it politically impossible to address the root causes of fiscal imbalance. LVG believes this trend will lead to a slow degradation of public services and economic growth unless decisive actions are taken to either raise taxes or reduce entitlements—neither of which is politically feasible in the short term.
III. What does this mean for bond markets?
LVG’s long-term outlook on the bond market, especially in developed economies, is one of inevitable decline. He describes the current bond market as being in a "slow-motion train wreck" as inflation continues to erode the value of fixed-income investments. LVG explains that the traditional role of bonds in a diversified portfolio—to provide stability and income—has been compromised by the policies of central banks, particularly in the United States and Europe. Years of near-zero interest rates and quantitative easing have inflated bond prices, making them overvalued and unattractive relative to their historical yields. This has forced investors to seek alternatives, such as equities and commodities, to preserve their capital against inflation.
LVG further supports his thesis by discussing how inflation is not a transitory issue but rather a structural problem exacerbated by supply chain disruptions, geopolitical conflicts like the war in Ukraine, and the energy transition. While central banks have started raising interest rates, LVG argues that they are constrained in how much they can hike without triggering recessions or defaults on massive government and corporate debt loads. As a result, the bond market's "slow-motion demise" is likely to persist, with inflation continually outpacing bond yields, leading to real losses for investors holding long-term government bonds.
One of LVG's most notable investment conclusions is his assertion that the traditional 60/40 portfolio model—60% equities and 40% bonds—no longer serves as a viable strategy. In the current economic environment, where bond yields are low and the threat of inflation is high, LVG argues that bonds no longer provide the diversification or risk mitigation they once did. Instead, he suggests that investors replace bonds with commodities, particularly energy stocks and gold, which he believes offer a better hedge against inflation and currency devaluation.
IV. What are alternatives for bonds?
According to LVG, energy stocks and related commodities are undervalued relative to equities and bonds, and they benefit from a long-term structural demand for hydrocarbons, particularly in emerging markets. He believes energy, with its potential for strong cash flows and growth as global energy demand rises, is a more reliable asset class.
LVG also discusses gold as a crucial asset, particularly in the context of gold as a safe haven, especially in times of global uncertainty and inflationary pressures. LVG points out that central banks around the world, particularly in emerging markets, are increasing their gold reserves as a hedge against the instability of fiat currencies and geopolitical tensions.
One of LVG’s key points is that the demand for physical gold is driven primarily by emerging markets, especially India and China. These regions account for the majority of global physical gold demand, with two-thirds of it coming from these nations. He explains that gold often reflects the economic performance of emerging markets rather than the developed world, as it serves as a store of value for individuals and central banks in those regions.
LVG also highlights how the sanctions imposed on Russia and other nations have led to a shift in global asset allocation, with many countries diversifying away from U.S. Treasuries in favor of gold. This trend has been further fueled by the weakening confidence in Western fiscal and monetary policies. Consequently, gold has become a key asset for central banks seeking to reduce their exposure to the U.S. dollar, as well as for private investors in regions with strong economic growth but volatile currencies.
V. What is the new investment frontier?
A central theme in LVG’s analysis is the significant investment opportunities in emerging markets, particularly in Asia. He contrasts the overvaluation of US assets with the relative attractiveness of non-US equities, especially in countries like China, Brazil, and Southeast Asian nations. According to LVG, the potential for growth in these regions is supported by robust domestic savings rates, favorable demographics, and a growing middle class, which is driving demand for goods and services. LVG emphasizes that emerging markets, particularly China, are increasingly dominating industries such as automotive manufacturing, nuclear energy, and solar technology, sectors where the West has traditionally been a leader.
One striking example LVG uses is China’s rise to become the world’s largest car exporter. While many Americans may not see Chinese cars on their streets, LVG points out that in regions like the Middle East and Latin America, Chinese vehicles are rapidly gaining market share. This shift highlights China's broader strategy of moving up the value chain, transitioning from a low-cost manufacturer to a producer of high-tech goods, including electric vehicles and nuclear power plants. LVG argues that this industrial and technological transformation in China and other emerging markets will provide significant long-term returns for investors willing to diversify away from US and European markets.
VI. What does this mean for global energy markets?
LVG is a long-standing advocate of investing in energy markets, particularly hydrocarbons, which he believes will continue to see strong demand over the next decade. Despite the recent downturn in oil prices and concerns about the energy transition, LVG remains bullish on the sector. He asserts that the demand for oil and gas will be driven largely by emerging markets, where populations are growing, and economies are industrializing. Countries like India and Indonesia are witnessing a shift from motorcycles to cars, which will significantly increase their demand for oil. While many in the West are focused on reducing oil consumption through renewable energy, LVG points out that hydrocarbons remain the most reliable and scalable energy source for much of the world.
VII. How is China’s continuing evolution impacting all of this?
In his interviews, LVG delves deeply into China’s rapid economic and technological transformation. He explains that China’s rise as a global power is driven by its need to become self-reliant and technologically advanced, particularly in the face of geopolitical challenges and foreign opposition. LVG recounts how China, from the mid-19th century to the 1970s, was economically devastated by foreign powers, leading to a collective determination to avoid repeating this history. Today, China is investing heavily in industries like nuclear energy, solar power, and automotive manufacturing to reduce its dependence on foreign technologies and energy sources.
One of the most remarkable aspects of China’s transformation, according to LVG, is its success in building world-class infrastructure, including high-speed rail, telecommunications, and energy grids. This infrastructure development has enabled China to support its massive industrial base, which now includes cutting-edge industries like electric vehicles and nuclear power. LVG notes that while Western countries may still view China as primarily a manufacturing hub for low-cost goods, the reality is that China is rapidly moving up the value chain and becoming a leader in high-tech industries. This shift has profound implications for global trade and geopolitics, as China continues to challenge the dominance of Western economies.
In the next Section, I will tell you about LVG’s thoughts on the broader geopolitical landscape. Then, in Section IXI what I think, and in Section X, why should you care and, more importantly, what more can you do about it. However, I have hit a new paid subscriber threshold, so you must now be a paid subscriber to view the last three sections. The X Project’s articles always have ten sections (sometimes more). Soon, after a few more articles, the paywall will move up again within the article so that only paid subscribers will see the last four sections, or rather, free subscribers will only see the first six sections. I will be moving the paywall up every few weeks, so ultimately, free subscribers will only see the first four or five sections of each article. Please consider a paid subscription.
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