Transcription
Hello everyone and welcome to another edition of Triangle Investor Interviews. I'm your host Lucan Wvalovich. And before I announce my guests, just a quick reminder of a disclaimer. This interview and all my interviews are not a recommendation to buy or sell any shares, products, or services. Always do your due diligence and consult with your financial advisor. I am joined today by Louis Vincent Gab, economist, geopolitical analyst, investment strategist, and co-founder and CEO of Gabel Research, one of the world's most respected independent microeconomic research firms. I'm so happy to have you in my show, Louie. Thank you very much for joining me today.
>> Thanks for inviting me and thanks for the kind words. Um, very much appreciate it.
>> No, thank you once again for coming. Uh, we have a lot of things to discuss. I really just like I said before we hit the record button, I like your approach, really like your uh interviews. I watch them regularly. So, basically, I don't know where to start. We have we really have a lot of things to cover but maybe we should start with uh the thing that is probably the most interesting for the retail but not just the retail I mean for everybody and that is market crash risk. A lot of people are terrified of 2026 stock market crash. How high is the real risk right now to you and what could actually trigger it? I mean, how how do you assess the current stock market today? Let's let's start with that.
>> Sounds great. Uh and you're right, this is probably the single most important question. So, look, uh it's always weighing risks with opportunities, right? Um now, I think when you look past back through past cycles, um usually bad things tend to happen to economies, bad things tend to happen to markets either when the cost of capital goes up, i.e. interest rates move much higher or more importantly the cost of energy uh moves up. Uh you know one of my core beliefs is that economic activity is energy transformed and um and also that you know most businesses most entrepreneurs can withstand one punch. Uh so if you think of like higher interest rates as a punch to the face that you know most people can take a punch and then stand back up. Um it's when you get the second punch that you end up being lie down on the ground. And um and so for me the the the typical one-two punch combination that I'm always worried about is higher interest rates and higher energy prices. Now to be very clear today energy prices are pretty low very low uh everywhere around the world and interest rates are also very low. Um so so that on that front on a on a pure fundamental basis that doesn't seem like you a backdrop where you'd have to worry too much. Uh having said this so this is a good the good argument and I don't want to be like a Truman two-handed economist but the bad argument is that you've probably had a lot of capital deployed uh in recent years partly because the cost of capital was too cheap, capital was too available. you've had a lot of capital deployed uh in fundamentally unproductive means um whether in crypto um whether in uh and I think everything linked to uh to tech uh and artificial uh intelligence um and frankly in private equity and private credit a lot of capital was deployed on the premise that very high returns would be achieved and we're now reaching the point where we're realizing that these returns were an illusion. Uh that private credit uh is not going to be returning 15% a year that private equity is not going to be returning 15% a year. uh that AI um may not you know return multiples of the money uh invested neither will neither will crypto. Um and so you right now I think we are going through a reassessment of what the real return profile for a lot of these asset classes asset classes that you know have attracted hundreds of billions of dollars um and and so the risk I think is very much there. It's not as much a fundamental risk as a risk of look for for 10 15 years we had too low cost of capital was misallocated and now and now needs to be repriced and and I think we you know right now we are entering this phase uh we are entering this phase where you are seeing the air come out of the crypto bubble you are seeing the air come out of the AI bubble you are seeing uh you know private credit start to hit the wall um so I think if you're very exposed to these assets classes, there is actually a lot to worry about. Um, for me, uh, AI is probably the, you know, the the most important one because that's, you know, that that's really driven equity market valuations. We've gone from a 40 trillion market cap in the US 3 years ago to a 70 trillion market cap for the US. Uh, it's really driven a lot of of of recent years. And you know I think for a while as you see very often in bull markets especially bull markets linked to capital spending what you saw was a period where um in the up you know it's always the same story of markets in the in the up phase of the bull market you get rewarded as a company for deploying capital you get rewarded for spending money u and then comes a time where the market starts to say hold on where's all this money going to come from and then you get rewarded for actually getting rid of the assets you overpaid for in the bull in the bull market. And you just witnessed this. Look at Oracle. What was it 6 weeks ago, maybe two months ago, Oracle came out and said, "I'm going to spend 300 billion dollars on data centers." And the market loved it. Like the Oracle share price goes up 20%. It's like, "Yay, party. Amazing." And then within a week or two, the market's like, "Hold on, where are you gonna find $300 billion?" Um, and so the CDS spread, basically the cost of funding, uh, for the Oracle debt starts to go up. Uh, and then it starts to take up all the other guys as well. The cost of funding for Facebook, the cost of funding for Google. Um, and so now we've entered the phase of the cycle where companies are no longer rewarded for just announcing capital spending plans. Um, now they're being they're being asked, hold on, how are you funding this? And you've seen this with Soft Bank. you know, the Soft Bank share price is down 40%. In the past four weeks, uh you've uh you've seen this with Soft Bank in Japan. You've seen this with Oracle in the US. So, um I would say it's a long-winded answer to your question, but do we risk a broader crash? I I still don't think so. Do is there a big risk on AI, on crypto, on uh on a lot of the private credit, private equity? Uh I think absolutely there's a big risk.
>> Yeah. Uh great answer, agreed 100% with everything you said over here. But that imposes the second question. Where to invest? Uh if we really see the big stock stock crash, which assets will protect people best, gold, commodities, cash, something else? I I know that you've said uh that in the world of persistent deficits and del globalization, gold is the only true natural reserve asset left. So is uh but on the other hand we have gold uh 4,300 uh today. Is gold still a buy or has the trade become too crowded? What's your take?
>> Um the the the trade is crowded but it doesn't mean it's wrong. Um and you know you could have made a case that tech was crowded 10 years ago and it still was the trade for 10 years. So um so you look at gold you know when I look at an asset class uh first thing I start with is the fundamentals you know does this make sense um you know does a rise make sense and when you look at gold the fundamentals make sense it's uh you know you've got the big budget deficits that you highlighted perhaps more importantly gold in my book isn't a hedge as much against inflation which is what most people believe but gold fundamentally is a hedge against low interest rates Um, and incidentally, you've seen this in recent years, you know, for all the rise in the gold price. It's not Europeans, it's not Americans that have been buying gold. It's Chinese and Japanese. You look at the the gold flows, it's it's all been well, it's been the central banks buying on the one hand and chi Japanese retail and Chinese retail, which happens to be where you have zero interest rates. Um, so you know, if you start to think, okay, we're going to have a hit on private equity, we're going to have a hit on private credit, we're going to have a hit on AI, how do I hedge this, uh, what's likely the destination for short-term interest rates in the Western world is, you know, the central banks will cut interest rates. Um, and and that that that will likely mean gold becomes more attractive. So, the fundamentals are there, the momentum is there. The third thing I look at is valuations. Now, gold is expensive today. Um there's no doubt about it. But you know so logically what you should see you know cost of getting gold out of the ground is 16 17800 bucks. Cost of selling gold is 4,300. So gold miners should be out there either selling their production forward or just getting more stuff out of the ground. Um the reality is they can't uh they can't you know they they've spent 10 20 years looking for more gold in the ground which is why they've been pretty poor investments and not finding it. Um so you you know if you're sorry I just lost my earpiece. If you're in a if you're in an environment of um such price differential between cost of production and sales logically that's the valuation argument like production should go up but it's not happening and then you look at the investor positioning uh to your point is it a crowded trade um and look you know very few institutions still have meaningful exposure to gold uh yes central banks are buying but uh you know I you look at things like share outstandings in GLD, share outstanding in SGLD, the biggest gold ETF in Europe. Uh the shares outstanding are not at all-time highs. We're still below the highs made 3, four years ago. So, I know I think look, gold is is one way to to answer your question, gold is one way to to to hedge that risk, but there are others. Look, um I think what we know of bull markets, um and here, you know, somebody like John Kenneth Galbreth did some great work on this on the concept of the bezel, the concept of of you know, a bull market lasts long enough, you start to see big capital misallocation, you start to see uh frauds, etc. Well, you know, the US bull market's been going on 15 years. Um it's the old story of Warren Buffett of, you know, when the tide goes out, you see who's swimming naked. Um, I think what you're starting to see in the US is the tide going out on some of the more frivolous trades again, crypto, uh, AI, private equity, private credit. And as the tide comes out, you are starting to see who is swimming naked. Um, and that's a good analogy.
>> Uh, yeah. And now the reality is in most other markets, whether Europe, Japan, China, they're not in a 15-year bull market. The bull market is like 12 months, 24 months. the the frauds in China, the frauds in Japan, the frauds in Europe were revealed in the previous bare markets. We haven't had time to build up new frauds yet. Um, so I think today it's actually a lot less risky to be invested in China, to be invested in Latin America, to be invested in Japan or Europe because, you know, you've you've uncovered already all the I mean maybe not all uh but you've uncovered a lot of the the dirty secrets and the the dangerous plays of have already been found out. Um I think in the US we have that to look forward to. So, so yes, you know, the way I look at it is the US today is 70% of the world MSCI. It's roughly 22% of global GDP. This is a divergence such as we've never seen. When I look at the world of tomorrow, what are what is going to be the big growth trend uh of the world of tomorrow? I think the big growth trend is actually going to be the integration of the Eurasian continent through rail, through transportation, through it's going to be, you know, China doing more trade with Russia, doing more trade with India, doing more trade with Central Asia. Uh, and most US companies are not exposed to this. So, it's uh I you know I think you can own a lot of equities a lot of places uh even in an environment where AI blows up or US private credit blows up on a long-term view should still do fine.
>> Yeah. Uh, you mentioned China. I want to ask you about China. The US started the trade war but is China actually winning it right now? What's your take?
>> To be honest I think it's wanted. Yeah. Uh now it's wanted yes and no. It's wanted it. Look, the first thing I'd say is in a war, the winners are usually the ones who don't participate. Um there's the best thing you can do in a war is avoid it. Um now, to your point, the US started the trade war with China. You'll remember that Donald Trump said trade wars are easy to win. Uh the etc. Um, but I think when you know when you have the the boss of Rathon that comes out and says in 3 weeks we can't produce missiles and Ford shutting down uh factories because you know they need the magnets and they need the rare earths that come out of China. And when you have a meeting in soul like you just had where between she and um and Trump where the the entire topic of conversation is Tik Tok and rare earths which are in in you know very much two topics in which China holds all the cards because when it comes to Tik Tok like Cinping doesn't care if the US shuts down Tik Tok. It's like you know it's I'm not he's not a shareholder in Tik Tok and by dance he doesn't care. Um, and when it comes to rare earths, it's essentially the US having to come in and and plead for for access to rare earths. So, you know, the trade war started seven, eight years ago. Trade war was actually the wrong term. It was really a tech war. Uh, what the US did was tell China, we're going to ban you from getting access to high-end semiconductors, and in this way, your economy is not going to be able to grow. And you fast forward seven years, China's trade surplus has moved from 20 billion a month to 100 billion a month. China is now exporting cars, turbines, uh nuclear power plants when it used to export t-shirts and and tennis shoes. Um and and now the US is in a situation where it is forced to back down on on all of its threats against China. So essentially seven or eight years ago, you know, the US could put a lot of pressure on China and China then spent seven or eight years de-westernizing its supply chains uh at great cost, which is goes back to the very first point I was making that the best thing to do in a war is to not fight. When the US, you know, put its embargo on China and China decided to de-westernize its supply chain so that nobody could put pressure on it, this came at great cost to China, enormous cost. uh you know the stock market went down 2/3 the real estate market went down a third consumption was crushed the birth rate hald like China took a lot of pain economic pain financial pain to get to where it is today um and so today the the the shoe as is essentially now on the other foot uh and and China can now put pressure on the US and so the US is now at a at a cross you know at a crossroad uh I think where the US can decide said, "Okay, we're going to designify our own supply chains. We're going to build our own aluminum industry. We're going to build our own shipping industry. We're going to build our own um uh our own rare earths and our own magnets and and all these things." Uh but let's not kid ourselves that this doesn't come at a massive massive cost. It essentially means reallocating tons of capital in industries with much lower returns on invested capital. Uh now the US would be doing this at a time when it's running twin deficits of 12% of GDP. Uh it would be doing this at a time when government debt is already 120% of GDP and when the budget deficit is 6% of GDP. So it's like you know you're going to have to reallocate capital in the way that China did. You know for for almost 10 years China said no money to real estate no money to the stock market everything's going to go into industry. Now I don't think the US can do this like because the US is a much more financialized economy. U it's also starting from a higher debt level situation on all levels. You know when China did this consumer debt wasn't that high, government debt was very low. So China could afford to do this. I'm not sure that the US can u and politically it definitely can't. Politically this would be suicide. um you know to say look we're going to the real estate market is going to go down a third and and stocks are going to go down 2/3 you you'll be you'll have revolutions in the street so so the US is at this crossroad where essentially it can say okay we're going to follow the same road plan that China followed the seven or eight past seven or eight years option one or option two uh we have to get along with China uh and I think you know President Trump rightly has elected to go down option two.
>> yeah how will the US dollar uh react in this kind of environment? I mean this geopolitical and trade chess game if I may call it. How much life is left in US dollar?
>> So look, I think the US dollar has started a bare market. First of all, I think we have to acknowledge that you have an administration today that does want to weak a dollar. Um it's pretty obvious in everything they say, whether it's Scott Bessant, whether Donald Trump, they they want to weak a dollar. Now, you could say, "Yeah, that's fine." But they don't have control of the Fed, and the Fed dictates policy, which eventually dictates the dollar, which is true. They don't have control of the Fed for now. Um, this is going to change in the next six months. You know, uh, Trump's going to appoint a his own governor. Um, so, you know, the when you have, you know, when you have a government that wants a stronger currency, it doesn't mean you'll get a stronger currency. But when you have a government that wants a weaker currency, more more often than not, it's getting a weaker currency because, you know, the way the way the world works, it's easy to weaken a currency. It's very hard to strengthen one, but it's easy to weaken one. So, so, so that I think that has to be your starting point when you look at the dollar. You have an administration that wants a weaker dollar. So, from there, if you want to be a bull on the dollar, you have to make a pretty strong case. It's like, you know, what's going to be strong enough to counteract that? Uh now when you look at the geopolitics of everything when you look at how again China has just won the trade war when you look at how uh most of the global growth in trade is increasingly happening in emerging markets uh you know most that's where the growth in trade is happening and increasingly that trade is happening in non- US dollars which of course was the big lesson of the Russia Ukraine war uh and the sanctions we impose on Russia when we impose sanctions on Russia we being the Western world. I say we because I'm French. We being the Western world. Um when we imposed uh sanctions on Russia, essentially we said uh we're going to cut you off the dollar, the euro, the pound, the Swiss Frank, and you're going to be unable to fund your trade. Um in in any event, within 3 years, Russia trade with China had tripled, Russia trade with India had tripled, Russia trade with Brazil and South Africa had tripled. Uh and all of this was funded in other currencies. Uh so all of a sudden we found out that actually you could fund trade in other currencies from the dollar. Uh and in most emerging markets there is a desire to reduce dependency on the dollar. Maybe not for geopolitical reasons maybe not oh we don't like the US etc. simply because if you look at the past 30 years you've had a number of crises because dollar was made unavailable to emerging markets you know. So if you're in Thailand, Indonesia, you know, 97 98 American banks don't want to lend to you anymore, your entire economy implodes. Um, and you know, and you know, you wipe out your entire middle class. Um, 2008 because US banks, you know, got overextended on domestic mortgages, they they all of a sudden, you know, Korea can't trade with Indonesia because that trade can't get funded. So there is I think a desire within emerging markets to reduce the dependency on the dollar because that dependency on the dollar leaves you know emerging markets very vulnerable and and now all of a sudden there are other opportunities. It's like oh we can trade in local currencies and at the end of the year we settle in gold we can trade in remmbb we can trade in uh in Brazilian realis like lots and lots of things. So, uh, bottom line is, you know, the way I look at it, the the US current account deficit has never been this big. The US is sending more money abroad than ever. Um, and it's sending more money abroad to a rest of the world that increasingly will need fewer dollars. So, yeah, I think the price of the dollar is heading lower.
>> Again, great point. Uh, we didn't touch on Europe. European equities have dramatically un underperformed the US for the last 15 plus years. Is the valuation gap finally justified or we are on the verge of the biggest regime shift in relative performance since the early 2000s?
>> So first everybody's underperformed the US in the past 15 years. Uh not not just Europe. Uh not that I'm defensive about it. Uh but it's uh you know the the US has been truly outstanding for for 15 years. Uh Europe was bad but but in in essence so was a lot of other places. Um, look, I think the the main argument for there's two bullish arguments for Europe, but there's a lot of bearish ones. The bullish ones are one, it's not very expensive, and two, um, when emerging markets do better, Europe tends to do well. Like I've I've always looked at Europe as a sort of der low beta play on emerging markets because, um, we do have a lot of worldclass companies in Europe, the Seammens, the Lits, the Schnidels, uh, the LVMH etc. of this world that uh tend to sell disproportionately to emerging markets. And so when emerging markets do well, all of a sudden we get this acceleration effect in Europe. And we get it on two fronts incidentally. We get it because emerging markets um we sell stuff to emerging markets and then when people get rich in emerging markets, they turn around and very often they come and spend their money in Europe. They buy assets here. They'll buy a house in Sanrope or a house in Marba. uh they'll send their kids to boarding schools in the UK. Um you know lot lots of such factors. Um so so that's the the bullish argument for Europe today is look emerging markets are doing better. China is being massively reflationary. Interest rates are falling in Latin America. Um commodity prices are creeping higher. So lots of reasons to think EM are going to do better and Europe will participate. So that's the bullish case. against that. The bearish case for me uh is very much one of massive political uncertainty in that uh it seems likely to me that you know in the coming quarter year the the Russia Ukraine uh war will come to an end. Um and then this will leave Europe confronting a a very simple choice is what do we do with Russia now? Um, do we uh and sorry it will come to an end without having had regime change in Russia. Like if there's regime change in Russia, of course that's a completely different can of worms. But assuming Putin is still in power, which I think is a fair assumption at this stage.
>> Yeah.
>> What's going to happen, I think, in Europe is you're going to have countries like Hungary, like Slovakia, like Germany, like Austria that are going to say, "Hey, let's do business with Russia again. You know, I like getting cheap energy. I like selling stuff to Russia." Meanwhile, you're going to have countries like Poland, the Baltic countries, the Scandinavian countries. They're going to say absolutely not. You know, these guys are war criminals. Uh we absolutely should never do business with them. Um etc. So, I think you're going to have a split uh within Europe that uh that is going to be uh that's going to be very very devastating. Um, and I, you know, I'm not sure politically how we're going to manage this one.
>> Yeah. Uh, final question, Louie. What's the one big trend you think will completely change the world in the next 5 to 10 years?
>> Look, again, I think for me the ma the major trend that people are forgetting about is is essentially the integration of the Eurasian continent. You know, I live in Hong Kong. I like to say that, you know, I actually live in the center of the world because within a 5-h hour flight to Hong Kong, you make a circle, you actually have more people living in that circle than outside of it. Um, and the you could say, yeah, who cares? It's been like this all the time. The reason this matters is that when I first moved there 30 years ago almost, um, twothirds of the people in that circle were living in the countryside and a third were living in cities. Now, twothirds live in cities. Uh and the reason that matters is that economic growth happens in cities. Uh it's in cities that people exchange ideas. It's in cities that you have universities that you know you have factories that develop new processes that you can start building integrated supply chains. Growth happens in cities. Now the story of so within that circle that 5 hours flight from Hong Kong you have 67 of the top 100 cities in the world by population now. And these 67 cities came out of the ground almost independently. And now you're starting to link them with roads, with canals, with telecom systems, uh with university exchanges. Um and this is just starting. You know, there are still no direct flights between Beijing and Delhi, between Shanghai and Mumbai. You know, you know, the capital cities and the financial capitals of the world's most populous countries that are neighbors don't have direct flights with each other, don't have university exchanges, don't have any of these things. All this is going to happen in the next 5 to 10 years. Um and so I think this is going to be the big growth driver uh go going forward especially since politically there is now a real push. You saw it in September in Tanzhin with Modi she and Putin walking hand in hand uh hugging each other publicly etc. there is there is now you know a real push for for more economic integration which which fundamentally makes sense because you know if you look at Russia Russia's business model for 200 years was extracting stuff out of the ground and selling it to Europe well that no longer works China's business model was producing stuff and selling it to the US and that no longer works and India's business model was training very smart people and shipping them to the US the UK Canada Australia and waiting for them to send money back and that als also no longer works.
>> So all three countries have to find new business models. Now when you think of it, Russia today has the cheapest commodities,
>> China has the cheapest machine tools and cheapest cost of capital and India has the cheapest labor. So if you put all this together in a stew and you mix it up, it makes for a very very potent combination. And so I think that's that for me is the big trend going forward.
>> Yeah. Uh, another smart thing you said over here. Uh, I want to thank you for coming to my show. It was a great chat as I really expected and uh, looking forward to host you again sometime soon.
>> Thank you very much for having me. Great to be here.