Ep653: Louis-Vincent Gave – Your Success Comes Down to Portfolio Sizing

Andrew Stotz 00:01
Hello fellow risk takers and welcome to my worst investment ever stories of loss to keep you winning in our community we know that to win in investing you must take risk but to win big, you've got to reduce it. Ladies and gentlemen, I'm on a mission to help 1 million people reduce risk in their lives to join me go to my worst investment ever.com and sign up for our free weekly become a better investor newsletter where I share how to reduce risk and create grow and protect your wealth. Fellow risk takers this is your worst podcast host Andrew Stotz from a Stotz Academy and I'm here with featured guests. Louis Vincent Gave, Louis, are you ready to join the mission?

Louis-Vincent Gave 00:41
I'll try my best.

Andrew Stotz 00:43
Something tells me you're gonna do a good job. With that. Let me introduce you to the audience. Louis-Vincent Gave is the Chief Executive Officer of Gavekal, a Hong Kong-based company he co-founded over twenty years ago with his father, Charles, and Anatole Kaletsky. Gavekal has grown to become one of the world’s leading independent research providers to institutional investors around the globe. Louis has written seven books. His latest, Avoiding The Punch, published in 2021, deals with the challenges of building resilient portfolios in inflationary times. And I can say as a young analyst in Thailand, occasionally these Gavekal reports would come across my desk, and they were always interesting and fascinating. So Louis, take a minute and tell us about the unique value that you're bringing to this wonderful world.

Louis-Vincent Gave 01:34
Well, first of all, thanks, thanks again for having me. Luck, I think, if I'm going to be perfectly honest, gaff cow sort of got lucky, we were in the right place at the right time. You know, we were sitting in Hong Kong in the early 2000s. And it was pretty obvious when you were sitting there, that China was going to be a huge factor for the global economy. And that there was a huge gap in understanding between China's role in the world, and basically people's understanding of it. And we thought, hey, maybe we can try to monetize that gap. So we started an independent research firm. It was a macro research firm, but with a strong China angle. And we really tried to build up our expertise on on China over the years. And like I said, we got sort of lucky because, you know, China has been indeed one of the important factors in the global economy for 20 years. And we've gotten in a position where people often turn to us to find out what's happening there. So we, you know, we've had a good, a good wave to serve. And I think that's been the bulk of our value added.

Andrew Stotz 02:43
And what is the angle for China for it for yourself and your company? And like, where's your angle? Like, I think about Andy Rothman at CLSA doing all of his surveys and stuff like that, which was, you know, fascinating and interesting. Obviously, you've already you have some background with Chinese language and other things. But maybe you could just tell us a little bit about what your angle?

Louis-Vincent Gave 03:05
Yeah, look, I think the real challenge for anybody in China and going into Andy's work, which is absolutely tremendous. The real challenge in China is always getting a clear picture. And, you know, the main complaint of many foreign investors is, oh, I don't know if I can trust the data. I don't know if I can even trust corporate accounts. And so, you know, basically trying to give people a bit of a clearer picture. Now, the point I always make, is that when you look at China, you're never gonna get a photography, at best, you're gonna get an impressionist painting, you know, you're gonna say, Okay, there's a lake over here and a tree over there, you're going to sort of see what's happening. And so the important thing is putting things into context to how to relate the economic data to the policy pronouncements to what you're hearing from corporates. And, you know, we tried to do that all we talked to the corporates we talked to, we try to talk to policymakers, although that's getting harder and harder. And, you know, listen to policy pronouncements and analyze the speeches and, and so know, the, the main idea is, you know, try to put together a picture that is as close to the truth while acknowledging that, in financial markets in general, you never get to the truth. You're always you can only, you know, try to approach the truth, which, incidentally, is one of the, one of the reasons that GAF cow, we were built around a culture of debates. We have very often debates internally, we publish these debates for clients, we have debates with clients that we also publish. And for the very reason that we acknowledge that, you know, there is no such thing as the truth in financial markets, it's so it's an ever evolving ever moving target. All you can do is approach it and when you approach it, it runs away from you. And so, I think that is one of the reasons clients appreciate it. research as well is we don't hide away from the fact that we will have very different interpretations of events as they unfold. And we're not, you know, we're not worried to, to present those differences of opinions to clients.

Andrew Stotz 05:17
Yeah, it'd be great to talk a little bit about China. And one of the things that, you know, I left America in 1992, I lived in, I grew up in Hudson, Ohio, outside of Cleveland, in about 85, or something, I moved to California and found a whole new world, you know, and just like, and I would say that I was leaving Ohio when the jobs were leaving Ohio, really. And then I slowly moved westward to I came to Asia in 1992. And, you know, here's where the jobs were happening. So I have a very different perspective on what's going on in America, you know, because I never really lived there for a long time. And then I look at China, and I never really was in China until about 2012, or something like that. And then I went and did my PhD at a campus there, which was just fantastic. And, you know, when I look at China, I just feel like, I don't see it the way that most Americans or maybe American politicians see it, that China is trying to take over the world, I can see some of the threads. But I don't get that feeling that China objective is the knockout the US in fact, when TPP came up, it was like a, it was a partnership, Trans Pacific Partnership Agreement, excluding the one biggest partner of all, and I just felt like, it seems like America was just positioning all along to use China to get the benefits they could get out of it. See, its development hoped that it went Americans way of being democracy. But eventually, when it became a problem, then the whole attitude changed. And all of a sudden, what could have been, America's number one ally in Asia, big has become now its number one adversary. But you know, what do I know?

Louis-Vincent Gave 07:02
I would say what was almost America's number one ally? Because, look, I think the greatest coup of American diplomacy, was Kissinger pulling China away, really from, you know, the Soviet Union from Russia, which fundamentally is China's natural economic ally. Because Russia produces absolutely everything China needs, right? China needs oil, Russia produces that they produce r&r, China needs that etc. So, logically, you know, these two economies Russia and China, should be married at the hip. But, you know, there's lots of historical weariness, etc. and Kissinger did a great job playing on that to pull China away, and completely isolate Russia. And I think the big mistake of us diplomacy in the past five, six years, is, you know, around 2016, the US decided, you know, what, China is actually a threat, it's no longer a friend, we need to isolate China. And you know, okay, that was a decision taken at the very top. Basically, President Trump ran on that platform, and was elected on that platform. So okay, maybe that's how democracy works. You decide, China is no longer a friend, it's now foe. In so doing, the logical thing would have been to say, Okay, if we want to isolate China, then now we have to get close to Russia. And instead, and I think this is where US diplomacy is failing badly is if you decide, China is now your enemy. And China's your big challenge for the next 1020 3040 years. You have to get Russia onside. But instead, what we've what the US has done is basically ensure that US and Russia sorry that China and Russia are now closer than ever. And I think that's a genuine failure of diplomacy, because individually, they're actually decently weak. But together, they actually make a formidable block, where, because they're very complementary. to each other. China produces everything Russia needs, Russia produces everything China needs. So the US really shouldn't try to pick a fight with both at the same time. If the US wants to stay the dominant world power, it should. It's the old British rule of divide and conquer. Or do what the Romans did. What the US is doing right now, is really uniting everybody. It's not only uniting Russia and China together, which is a mistake, but it's also you know, sort of spat in the eye of Saudi Arabia, which now all of a sudden Saudi Arabia is a lot friendlier with Russia, which you know, I never thought I'd see in my lifetime obviously still, you know, very angry with Iran. So, it's, it's, it's a little bit you know, how many fights Do you want to At the same time, and I know that US feels very strong, and it is strong. It's the by far the strongest country in the world. But again, how many fights Do you want to pick at the same time? I think more than one fight is too many.

Andrew Stotz 10:12
And another question I have is, you know, I always kind of looked up to, you know, senior people that were CEOs or executives or politicians or, you know, statesmen or your bureaucrats, and now I've just lost all, I used to think that, you know, maybe they made some mistakes and stuff, but I'm starting to believe that they're either absolutely incompetent, that they haven't really read history and really, you know, studied hard, or they're purposely just kind of destroying things, and I just can't make it out, and I'm not in the US. So I can't really fully figure it out. But I'm just curious what your opinion is about what's happening. I mean, think about Kissinger, and that, you know, really masterful move, but I don't see many masters these days, but what's your perception?

Louis-Vincent Gave 10:59
So, like, I, I can disagree with you. So I grew up in France, and I moved to the US in the early 90s, to go to college. And, you know, if you go back to, to that period, the US had just fought the first Gulf War, and won an extremely convincing victory, then, you know, you had the Mexican crisis and the Asian crisis. And I think that the perception of, of everybody, and especially everybody outside of the US, was they look to the US, and they thought, These are by far the smartest guys in the room, you know, there was a feeling of competence at the US Treasury at the, at the Fed that, you know, a feeling it was the days of the Washington Consensus, it was a feeling that, you know, these, again, the guys are at the very top of the you guys, they definitely knew what they were doing. But, you know, fast forward to today. And I think if you look at, you know, the mortgage crisis, the absolute or just more recently, just the absolute shambles of the COVID policies. And the, uh, you know, I would say the precipitous rollouts of the vaccines, you know, which have, you know, rubbed a lot of people the wrong way, and the, and how we've basically run roughshod over years of, you know, practice, medical practice, etc, to, to push something against the disease that really wasn't even that deadly. Then, you know, you look, more recently, I think that, you know, the biggest policy mistake we've made recently, is confiscating all of the assets of the Russian oligarchs, like, you know, Russia invading Ukraine is obviously a horrible thing, and perhaps confiscating the Russian Central Bank assets, you know, could be argued made sense, but confiscating the the assets of Russian oligarchs, it, within a weekend without court orders without debate in Parliament's we just decide your Russian we take your stuff, it undermines the very greatest comparative advantage of the Western world. You know, if you think of what's the great comparative advantage of the Western world, I would say, it's the rule of law. It's the fact that, you know, you can be brown, black, white, Christian, Jewish, Muslim, you go in front of a court in Paris, London, New York, etc, you've got the same fair shake as the next guy. And now we've added a little asterix to this, and the little asterix is, except if you're Russian, if you're Russian, we can just take all your stuff, no questions asked. Talk about cutting your nose to spite your face. Now, you know, I don't roll for the Russian oligarchs. But you know, the old story, it's better that 1010 Guilty men go free than one innocent men go to jail. By wanting to punish Russia, we end up punishing ourselves a whole lot more. Because all of our countries, the US, France, the UK, we're running twin deficits of 10% of GDP. And to do that, it basically means that we have to sell assets to foreigners, and to others foreigners buying the assets. It's the Russians, the Saudis, the Chinese, and why do they buy overvalued London or miami real estate? Because not because they think it's a good investment, but because it's safe, right? The reason all the Chinese buying Vancouver is because if things go bad in China, then they have somewhere to go. And now they're told, Well, if because Putin is a bad guy, we're going to take the Russians assets. And if you're Chinese you probably thinking What do you mean because Putin is a bad guy because C Jinping is a bad guy. So if you're a rich Chinese you think, well, this, this house in Vancouver isn't what I thought it was. So we've undermined the rule of law. We've undermined property rights, which again, is the very foundation that I think allowed the Western world to outperform the way the way it did for For so long, so to your point on the quality of our leaders for, for leaders to do this over the course of a weekend and not even realize what they were doing, really tells you about the quality of the people you're dealing with. And I think, you know, I've written a few papers on this, you know, how did we get there? And fundamentally, I know it's a bit of a cop out. But like, I think social media has a lot to do with it. The big problem is, we live in a cover your ass society, it's like cya. And what politicians don't want is 50,000 people on Twitter screaming at them. And so I'm sorry that I'm on my soapbox now. But the the big, the big challenge we live in is, if you're a policymaker, you're basically as we saw this, during COVID, we saw this with the Russia thing is you want to be seen to be doing something at all times, you don't take of like, it's got to be immediately. You can't like take a breath and say, Okay, let's study this calmly. And so you end up making big mistakes.

Andrew Stotz 16:05
It's interesting. I mean, it's a great angle. And I hadn't thought about it. To that extent, one of the things you notice in Thailand after many years is that the law is kind of a tool for personal power. So for instance,

Louis-Vincent Gave 16:18
a that's always been the case in Thailand, right?

Andrew Stotz 16:20
Yeah. And I suspect that, you know, it's, it's maybe a lot of places where a police officer has the law behind him to pull you over and get money out of you. Yes, and a politician or bureaucrat, has the ability to overwhelm you with policies and violations that basically eventually get money out of you. And so people see complexity and law and the overwhelming of law as the ability to have personal power over people. And I always felt like America was not, you know, was always a rule or type of place. And then now you're seeing is that, and I can see that when people look at it, it's, it's a bit of a mess. And I want to go back in time to 2008, because after the 2008 financial crisis, and I think there's a great book read, written by a guy named Peter Williamson, I think called hidden in plain sight. And he was the only I think, Republican or let's say, conservative on the committee that was investigating. Or as we know, in America, when there's a committee, it's called covering up, but there was a committee to investigate the source. And he basically said, Well, you know, politicians started forcing Fannie Mae and Freddie Mac, to have to own all of these lower and lower and lower quality assets and mortgage loans with all these good intentions. But everybody knew that there's a cost to having more and more lower quality loans. First, you have default, but second, you're bringing millions of people into the, into the mix, and now they're new buyers, and they're pushing up prices and all that. And then you actually cause this thing that now you then blame on bankers and say, you know, bankers went out of control. Well, Fannie Mae and Freddie Mac don't issue any mortgages, they desperately needed the bankers to feed them the mortgages that they could then say to the politicians, we met our targets and all of this done off budget, kind of in a quasi governmental enterprise. Just laying the framework there first. And the second thing is, as an American in Thailand, in 2008, or so what I saw was the Obama administration, I believe it was at that time, saw an opportunity to push FATCA. And the ability, I think it was this, there was something that came out about Americans that have money in Switzerland and then Switzerland, then there was a leak, I can't remember at that time. But all of a sudden, you saw this wave of American politicians and bureaucrats getting into the banking system all around the world. And as I say, it, I've said before, it's like if an Australian person goes to Hong Kong to set up a bank account, they have no connection to America, they're gonna still have to submit an American document to prove that this person is not an American for tax purposes. So I saw the weaponization of the financial system, and I'm just curious, like, where are you see the origins and where does that go, in particular with the financial system in this future?

Louis-Vincent Gave 19:16
never missed an opportunity, right? It was actually ended. So if you remember the world melt down, and g 20. Big speech was how we needed it, and basically offshore centers, so we needed to go after Cayman and BVI and Hong Kong, which he targeted directly. And we needed to do so go after the offshore centers, and we needed to go after bank secrecy in Switzerland and all that, as if offshore banking center were responsible for the 2008 crisis, right. Like you said, it was, you know, banks leaning too far above their skis. It had nothing to do with Cayman, it had nothing to do with Hong Kong. But the end result was indeed the end of bank secrecy. Just like probably in the next crisis, we'll get the end of cash, you know that the next big crisis will lead to the introduction of digital currencies. And with digital currencies, governments will be able to keep tabs on all your spending at all times.

Andrew Stotz 20:38
And do you think that's the end game? No, that's

Louis-Vincent Gave 20:39
where we're heading? Of course, that's where we're heading. Yeah. Okay. And I mean, the bottom line is, if you give governments the ability to have more power, they're gonna take it.

Andrew Stotz 20:49
And why is it that Americans don't see this? Or is it just that, you know, when you see an opportunity to grab power, you just people grab it? Because I mean, I put up a post on my LinkedIn, and I asked people, How many years before the First Amendment of the freedom of speech will be modified in America? Never one year, five years, 10 years, you start to realize like that, that it's potentially cracking. I'm just curious about that.

Louis-Vincent Gave 21:15
Well, so one of my pet theories, is that 20 years ago, we lead in China in the WTO. And part of the idea was, when they trade with us, they're gonna become more like us, because that's what happened with Taiwan. And that's what happened with South Korea. I think for 10 years. That's the way it was going. By and large, you know, we're getting freer and freer. And I think the emergence of big tech changed all that, as basically big tech and big data started, I think the Chinese Communist Party realized, hold on, we can have all this data in real time about everything that's going on, and hereby control society better. We'd be fools not to use it, and not to do it. And so, at that point, China started to veer in a different direction. Now, the reality is, if you look at the past 20 years, it's not that China's become more like us, is that we've become more Chinese. I would argue that today, the freedom of speech in the western world is a lot less than it was 20 years ago, there's a lot of things you can't say, without fear of being canceled. Look at the whole debate over COVID, you know, when it first came out, and if you said, Look, this is just a bad flu, you will run out of town, you were deep platformed. If you said, Hold on, the masks really do nothing. And especially the cloth masks absolutely serves zero purpose. You were again cancelled, like if you went on Twitter, or YouTube, and you said the cloth masks don't serve a purpose. You were cancelled, so on and so forth. So when you look at free speech, we've gone in the same direction. When you look at, you know, policies, I mean, look at look at the US, whoever you vote for, you end up with the same wars, you end up with the same, you know, budget deficits, the same growth and debt, it doesn't matter who you vote for, you end up in the same place. So, you know, they give you a little bit in the US a little bit of culture wars. It's like, Oh, if you vote for the Democrats, you get this side of the culture war, if you vote for the Republicans, you get that side of the culture war. But aside from that, like what's the fundamental difference?

Andrew Stotz 23:21
And one of the things living abroad that you really realize from traveling all around and meeting so many different people is that America really was the first place where there was absolute protection of freedom of speech. And you realize that it could also be the last place?

Louis-Vincent Gave 23:40
Why? Yeah, no, I think that's fair. I mean, there's a few I mean, I would say Switzerland's, you, you still have a lot of individual rights. You know, I used to think, and I wrote this to my great shame. Us, I wrote this about sort of six years, seven years ago, before COVID. As all these trends were becoming clearer and clearer, I thought, you know, the countries with common law and sort of British parliamentarian systems will be the best at withholding at upholding individual rights, etc. And boy, was I proven wrong during COVID. As Canada, New Zealand, Australia went way down the rabbit hole more than almost anybody. So, ya know, you're probably right on the US. And, you know, perhaps the reason on the US is, you still have a fairly you have 50 Different states, right, each with their own rights and prerogatives. And perhaps because power is more diffuse. That's, that's the saving grace. So, you know, New York may go stupid, but maybe Texas and Florida don't and stuff like that.

Andrew Stotz 24:46
It's in fact that the union of states is probably the thing that could save America. And what's interesting also for many people that don't truly understand the origins of the Electoral College as an example, what Most people think when they think of, for instance, a presidential election, they think it's a popular, you know, we should have a popular vote. But the purpose of the electoral college is that it is a union of states, it is the states, ultimately, that make the determination of the president. It is not a union of people. And so that's interesting. I had a couple of other quick things I want to just to get your picture on. One of them is I have my strategies that I do here for Thai clients. And basically, we do global, very simple, global equities, global bonds, global commodities, and then gold, stocks, bonds, commodities and gold. And I know that you've thought a lot about China reopening. And I'm just curious, between the China reopening and your energy crisis, you know, thinking that you've done, how do you think, you know, how would you put those asset classes into a context thinking, let's say from 12 to 12 months and five year perspective?

Louis-Vincent Gave 26:02
So five years is long time, so I'll just do 12 months. The look, I think China's reopening is the single most important macro development of 2023, I think there's two very important developments that people are sort of brushing over one is China reopening. And the other is most likely, Japan getting rid of its yield curve controls. Those are like two huge events that might not, I think people know they're there, but they're not fully thinking through them. Now China's reopening is super important to me, of course, because you get the pickup in demand. And you know, China's going to be a big contributor to growth this year. So I think that part, people know, by now they know and that's why you'd have copper rebounding, 30% and lumber up 40%, year to date, and ironore and all these things, Kate fine. I think the part people miss is that during the years of lockdown, if you were Chinese during the past three years, if you were a Chinese, you basically went to work. And then you went home. And you know you didn't go to the restaurant, you didn't go to Paris to buy LVMH handbags, you didn't do it, you didn't get to get to go on the beach, you didn't do anything. Now, this matters, obviously, for domestic consumption purposes. You know, today, household deposits are at record highs. So you got all this domestic consumption. Everybody sees that. There's always what you see and what you don't see. What you don't see is that most Chinese entrepreneurs, the guys who, you know, make our tennis shoes or tennis rackets or golf clubs, probably the teddy bear that's above your left shoulder over there. You know, all the guys who produce all this stuff, they typically run two sets of books, there's the money they bring home, to pay the bills. And there's the money they keep offshore, in the BVI in Hong Kong or wherever else. The reason I highlight this is that during COVID, for all the talk of French shoring and onshoring, etc, Chinese exports to the US went from 30 billion to 50 billion a month. Fastest acceleration, its look at Chinese exports, they went through the roof. And the US current account deficit as a consequence, went from 100 billion a quarter to 275 billion a quarter. Now, for the past, as the US is exported 275 billion a quarter. Now for two and a half years running. We should live in a world awash with dollars, there should be dollars all over the place. But these dollars have been stuck in bank accounts in Hong Kong or BVI, etc. Because usually these dollars get recycled pretty quickly the offshore Chinese dollars, but they didn't for the past two and a half years. So now as they start to travel again, these dollars, there's a look at it this way. For me, the Chinese COVID restrictions were like a dam on the Chinese liquid on the US dollar liquidity River. The US was pushing all these dollars abroad. But they just stayed in commercial banks. And now the dam is breaking. So you're going to have all this flood of dollars that is going to come back in the system. Now at the same time. The BOJ which has been a huge, basically anchor on global yields, you know by capping Japanese yields as they have. They've encouraged the Japanese savers to go you look for yield anywhere else look for yield in the US look for yield in Europe and Australia, wherever. And now that dam is breaking too. I think well, we it's not confirmed yet. We'll have to see what the new boj governor does. But there's a good chance to get rid of yield curve controls. So as Japanese yields come back up, obviously the yen will come back up. But I highlight this because you now have two massive trends, two huge shifts and trends that are going to be unfolding, both of which are fundamentally massively bearish, the US dollar and bearish global government bonds. So I think this year, we're going to see another basically big steepening yield curve as the US dollar goes down, all of which should be, you know, a weaker US dollar steeper yield curve that should be pretty bullish in emerging markets.

Andrew Stotz 30:11
It can you go back to the China argument there, I didn't fully catch what's happening now, the US was has been importing Chinese goods, but then all of a sudden there was this huge acceleration, that those dollars went to these to these owners of the businesses, much of it some of it offshore, but then they just didn't redeploy that into new expansion and all that they just let it sit there. And now it's getting redeployed, or?

Louis-Vincent Gave 30:38
It's right. Exactly right. That's exactly right. Look, if you were, historically, if you, I don't know, you don't want a shoe factory in China, and you earn US dollars in Hong Kong. In the past, you would use that money to go buy Vancouver real estate, or to take your girlfriend to Paris and biotin LVMH handbags or to go to Macau, or whatever else. This was the Chinese money that you saw floating around the world. But again, for the past three years, you haven't had the opportunity to do all these things. But now you do again, and you have three years of revenge buying to do. So I think it's going to be pretty epic. And so what

Andrew Stotz 31:15
is the knock on effect? So let's say that these guys take their money out of accounts. They're reinvesting number one in their businesses, as things start to recover. They're also feeling more comfortable to go and spend globally and all that what is the knock on effect then for dollar or for currencies or for economies and markets?

Louis-Vincent Gave 31:33
I think the first thing is, obviously the dollar gets sold for something else, it either gets sold for renminbi if it's brought back in, or for euros if it's to buy LVMH handbags, or for Singapore dollar if it's to buy Singapore for Thai baht if it's to go to Phuket. So it gets sold for something else. So the immediate impact is, is is a weaker dollar. Now, as you get the weaker dollar, typically you get you get stronger commodities, especially if the money is brought back into China to reinvest locally, whether in real estate that has come back and is now more attractive, especially that mortgage rates have come down 150 basis points in China at the same time. Or if it's, you know, to build a new factory. Or, you know, it might be that they say, Okay, I'm building a new factory, but I'm building it in Vietnam, given all the geopolitical tensions I'm building in Indonesia. But you know, wherever you build a factory, you still need the ironore you still need the cement bags, you still need the lumber. So, no, I think this is all an environment of that, where growth is going to be stronger than people expect inflation is going to be stronger than people expect yield curves are going to be steeper than people expect in the US dollar is going to be weaker than people expect.

Andrew Stotz 32:41
And so what would that would imply I think, from what you're saying, is positive emerging markets. You mentioned pretty much positive commodities, weak dollar strong commodity small, strong gold. Exactly. Okay. And then it just if you could just give a little bit more detail on the the Japanese store that you said about the ending of the yield control, how Japanese have been chasing yield abroad, but you know, all of a sudden, if the dollar is starting to fall or the cost of covering you're hedging that position also has been a problem. What are the implications there? Just so we understand it from let's say, equities, commodities, gold, emerging markets, developed markets type of thing?

Louis-Vincent Gave 33:19
Yeah, so look, Japan is obviously an ageing society. And so it's an aging society with outstanding amounts of savings, I mean, just crazy amount of savings and so you have an overall population that is extremely yield hungry and, and institutions in Japan that also yield hungry. And that's, you know, a remnant of the 25 years of deflation and etc. Now, the BOJ made it so that for 10 years, or more than 10 years, you couldn't get yield in Japan, right? You just couldn't. So the Japanese institutions and the Japanese private sector has had no choice but to look abroad for yield. And that might be in US Treasuries. And that might be an Aussie dollar or Brazilian bonds, or Indonesian bonds, you name it. If all of a sudden, you can now get yield. In Japan, it's almost like a currency peg breaking. You enter it to a very different world. You know, in my career, obviously, you know that the Asian pegs broken 97. That was for me a marking event in my career and the China revaluation of the renminbi, you know, because it had been pegged at a 28 for more than a decade and then, you know, pegged it, that was another key event. But now, where this for me, this is like the sort of potentially the third very big sort of, you know, currency peg breaking almost.

Andrew Stotz 34:46
Is it the opposite of what happened? I think if we look back at Thailand as an example, in 97, what we had was interest rates in Thailand. Were were high interest rates abroad were low. The Bank of Thailand had given permit for VIPs, Bangkok, international banking facilities to lend, and all of a sudden US dollar borrowing went from about 5% of total loans outstanding in Thailand to about 25%. That happened in a period from let's say, 92 to 96, or 97. And then all of a sudden, you had this big differential. And now when I'm thinking about it is that opposite in Japan, where yields are rising, and it's attractive, and they're bringing that money back or

Louis-Vincent Gave 35:26
exactly, that's, it's like a reverse Asian crisis, I think that's, that's a, that's not a bad way to put it. You've had, you've had pegs, you've had the bet central bank saying, okay, you know, we're keeping this here, just like the Thai central bank was keeping the exchange rates. And when they got rid of the exchange rate, everybody who had a US dollar loan got hosed. And here, it's, I would say, Everybody who's got a yen loan, is gonna get hosed. Because when they get rid of the yield curve, control, the Yen is going to shoot up on all the capital repatriation. But if you're sitting in Japan, and you have a US dollar loan, it's gonna be amazing. So it's, it is like a reverse Asian crisis.

Andrew Stotz 36:09
Interesting. I remember when I first came to Asia back in 92, that, you know, Japan was just, it was impossible to go to Japan, it was just too expensive. Just to stay one night, there would just take all the savings that I had, and then

Louis-Vincent Gave 36:20
dinner Dinner was, like, $1,000 a person. Yeah, no dinner in Japan and Tokyo. In the night. I mean, in the late 80s, early 90s, dinner was like 1000 bucks a person. Back when 1000 bucks, like was a ton a ton of money. You know, in the late 80s, early 90s, like the prices in Japan got to be very stupid. And yes, to your point, you go to Tokyo now. And it's very reasonably priced. And you're outside of Tokyo. And things are very cheap. In fact, I would say Japan is a little like the UK now, where you go to London, things are not stupidly expensive, but expensive enough, but you go outside of London, and like things are dirt cheap.

Andrew Stotz 37:04
So one last question is about this is what your thoughts are on oil price. And what's going to happen with that. I know you've talked a lot about it. You've written about energy and all that. But maybe you could just give us a briefing. But before you do, hold on. I want to grab that. That monkey on my back.

Louis-Vincent Gave 37:23
Oh, that's the monkey on your back. Okay, I get it. Yeah.

Andrew Stotz 37:26
One of the things that's interesting about this monkey is curious, George, and you were wrong.

Louis-Vincent Gave 37:32
That's made in Thailand? Nope. It says, made in Vietnam.

Andrew Stotz 37:36
This toy was made in Brooklyn, New York. Oh, wow. This toy is 57 years old. Okay, so there you go. And my mother kept it all my life after she bought it when I was a baby. And so I had it when I was baby. And when my father passed away, I went to all this stuff that we have at home, and I was like, Oh, my God, there's Curious George. So

Louis-Vincent Gave 37:57
there you go. You know, I have a lot of affinity for curious, George was my, my second son is called George. And when he was little, I think we did three or four Halloweens where I was the men in the yellow hat. And he was, and he was curious, George, I'll try to find you the pictures.

Andrew Stotz 38:11
Perfect. Yeah, get that. Tell us about energy and your thoughts on oil price, and then we're gonna move on to the most important question and the whole

Louis-Vincent Gave 38:19
show up. So look at my starting point in my own process is that actually, you know, energy is economic activity is energy transformed. So energy is essential. And you look through cycles, when you have a cheap cost of energy, you typically get strong productivity gains, when you have a high cost of energy, you get typically weak productivity gains through the economy. So energy is essential to basically our economic growth or economic well being. And the whole history of the past 200 years have really, you know, for 5000 years, there was very little economic progress in the past 200 years of economic progress is first and foremost, the story of energy. It's, we discover coal. And what we've done is we've gone constantly gone for the past 200 years, to more and more efficient uses of more and more efficient sources of energy. So you know, we start with coal, then actually with whale oil, but that's not ideal, but then coal, then, then oil, then natural gas, then nuclear. And, you know, the past 20 years have been an odd time in the energy space where we've actually said, Hold on, let's go to a source of energy that is more expensive and less efficient. Because for for 200 years, we were all about, let's find the most efficient at the cheapest cost and the most reliable, but here in the past 20 years, we've said, Let's spend six and a half trillion US dollars because that's what we've spent on solar and wind to go for a source of energy that is less reliable, more expensive and and less productive. And, and unsurprisingly, we're looking around and saying, Well, how come our growth is so weak around the world? It's like, well, you know, you can't have it all. And so, and this is, of course, a tragedy, because if we decided 20 years ago, let's do six and a half trillion in nuclear energy. By now we'd all be, you know, enjoying more or less free electricity, for all intents and purposes, and we wouldn't have to care about Russia, and we wouldn't have to care about Saudi Arabia, it'd be a much, much better world. But having said all this, I think unfortunately, this trend of walking away from efficient energy sources has gotten worse in the past 10 years. And our energy balances are actually incredibly tight around the world. Now, I think that the word tide going into the COVID crisis, the COVID crisis was obviously a huge setback economically. And, you know, the world rebounded from the setback, but China never rebounded, China always sort of stayed off the grid. And China was basically consuming a million and a half barrels less than it otherwise would. So China is now reopening, it's back to consuming a million and a half barrels. And at the same time, we now have Russia weaponizing. Oil. I think we saw that last week, when they when last Friday, when Russia announced that we're cutting production by 500,000 barrels per day. I don't think it's a coincidence, I think, you know, Russia is about to start its big offensive against Ukraine. And they want to like twist the knife into the Europeans and the Americans to stop supporting the Ukrainians. So the bottom line is, I think the energy situation is extremely, extremely precarious. And my big argument for the past few years, I keep telling clients look, this economic cycle will not break because of higher interest rates, because we are now in an inflationary environment. And the reality is, real rates are still very low or even negative in most countries. So it's not interest rates, it's going to break the back of the cycle. It's a spike in energy prices. So you know, and that was the theme of my book, of avoiding the punch, the conclusion of my book, which written two years ago is, look, you gotta be long energy names instead of bonds, like bonds don't do anything for you and your portfolio anymore. The new diversification for your portfolio is energy, and you find which way you want to own it, but you have to have energy, because this cycle will break because of spiking energy prices. And for now, energy prices are, you know, defined, you know, we can easily afford 80 bucks oil. And obviously, natural gas is very low. So, you know, it's fine. You still want to own energy, though. Because if and when the cycle breaks, there'll be because of energy.

Andrew Stotz 42:47
So let me go through a couple of quick points on that. The first one, you talked about six point point $5 trillion on solar and wind, was that in the US, or was that globally? No, globally, go? Okay. So we're seeing governments are ultimately subsidizing and companies are spending, and the combination of those two is 6.5 trillion over over

Louis-Vincent Gave 43:05
20 years, 2522 years, 23 years. But it's, and, and look, hindsight is 2020. Right, which is, I guess, is the point of your show about your worst investment. Maybe our worst investment is the six and a half trillion in solar and, and wind men, maybe that's the worst investment of all times. You know, give people the benefit. Like we didn't know that 20 years ago, 20 years ago, we might have thought, oh, you know, this, wouldn't it be great if this worked, where I find it frustrating, because we already have something that worked, and that was nuclear. But where I find also hopeful is that as we get close to this energy crisis, and as people realize, hold on, Russia is weaponizing energy and all these things, the discussion around nuclear is actually changing. It used to be a dirty word. And to me, it feels like it's less and less of a dirty word. And so, you know, that does give me hope for the future. Because, for me, we do have a solution to decarbonisation. It is nuclear. And as long as we embrace that, we can look forward to a day, you know, in five or 10 years where energy is, you know, the marginal cost of energy is almost free.

Andrew Stotz 44:13
The one thing, the one thing we could have predicted is any place that the US government aims, it's gone of money and focus, they just destroy it, whether that's the student loan market, and you know, causing massive demand mentioned mortgages, mortgages, you know, solar and wind, you know, just forget about the free markets, the US government can solve all these problems.

Louis-Vincent Gave 44:38
It's what, it's what Reagan said, forget, it's different this time. The most expensive words in the English language are, I'm from the government and I'm here to help.

Andrew Stotz 44:48
Exactly. And that reminds me of watching Milton Friedman talk and someone was saying, you know, but you know, capitalists are so selfish and you know, they're gonna ruin us and he said, you know, you think government bureaucrats are not selfish. You think government politicians are not selfish. So interesting. One last thing on the Germans are selfish. Yeah, exactly. Exactly. And we have to be I mean, that's the way we survive. As far as the oil price is concerned, why hasn't it moved? Why haven't people seen what you see? And what do you think is the catalyst to get us towards them?

Louis-Vincent Gave 45:22
Yeah, so I've been, I've been struggling. I've been, like I said, I've been an energy bull. And obviously, energy's gone the other way. So I've been scratching my head as to what am I, what am I missing? Especially while at the same time copper is as ripped and, and so I think there's different potential forces at work. I don't know if you saw but the Saudi Energy Minister recently said, Europe has successfully done its energy transition back to coal. So I think what's happened if you look at Europe, which is still a big energy consumer, but also China, but also India, the coal use has really accelerated massively, you know, last year 40% of German electricity was produced with coal. Now, coal happens to be by far, if you don't count the environmental cost, you leave those aside. It's by far the cheapest way to produce electricity. Like if coal wasn't so polluting, we do nothing. But coal. Coal is great, there's, we have it everywhere. It's easy to transport, it doesn't blow up on you, it's easy to build a coal power plants, it's easy to burn. So call it super easy. So I think perhaps, you know, one of the weights on, on, on oil is, you know, China's back to reusing coal in a big way India's back, Europe's back Brazil's back, so a lot of marginal buyers. So that's one thing. And then the second thing that, you know, I struggled with, because it's obviously a new development, is you have one of the world's largest producers of energy, Russia, and two of the biggest marginal consumers, China and India, that are now doing deals off market at 30% discount to prices and in their own currency. So can we still talk of an old markets when you have like all these different people like big major players doing deals off market? Maybe not right? If China can now buy most of its oil from Russia, and Kazakhstan, you know, at a deep discount in renminbi rather than US dollars? What is the what does the the US dollar price tag us having said that, if the price of oil is x renminbi, and the price of the price of oil in renminbi is, let's say, x, and the price of oil in US dollars, is x plus 30%. Then it is that oil that's undervalued, or is it the maybe that's undervalued, you know, as isn't over time, because what really matters in our economy is your ability to transform energy. So if China's as an ability to buy energy at a 30% discount, then maybe it's its currency that's 30%. too cheap, and overtime, the currency will come up to adjust to adjust for this new reality.

Andrew Stotz 48:06
It's interesting, you're talking about to summarize that you're talking about China, India, and Russia being kind of pushed to the fringes and having to do deals, and given the environment and everything. They're doing those deals at a discount. And actually, what you could argue is the petrodollar system has been in place for so long, that maybe there's also a lot of inefficiencies in all of that. And maybe part of this is, you know, going around corners, we see some of that, you know, happening also, I guess the stronger Yuan over time, remember remin B would also support some the Chinese equity market and maybe those fixed income, stuff that

Louis-Vincent Gave 48:44
like the I can't remember who said it. But you know, for your listeners, the documentary, if it's like Charlie Munger, Warren Buffett, like one of these legendary guys, who was asked, you know, how do you have a successful career in financial markets? And you said, Well, it's easy, you know, you wake up early, you work hard and you make sure your career coincides with a 30 year downtrend and interest rates. And yeah, and of the three things that the third one is by far the most important now, having a current strong currency like if you look around the world today, like having a strong currency is of course the way you make sure you have a structural downtrend in your in your interest rates, because nobody wants to invest in a structurally weak currency. The other way to have a structural downtrend in interest rates is make sure you start off with decently high real interest rates. So as you look around the world today, you know, where do you find real interest rates and high real interest rates and undervalued currency and the answer is no work. In Latin America, you still have positive real rates in China. And you still have positive, positive real rates in a number of countries in Asia, Indonesia, Vietnam, etc. So I think that's, you know, if you think okay, like jokes aside, if you want to focus on, you know, having the the tailwind of strong currencies and Lower, lower real interest rates going forward, you're not going to find that in the developed world, you're gonna find it in the emerging markets.

Andrew Stotz 50:24
Excellent. You know, I had a funny story with my neighbors came over to see me, they asked to talk yesterday, and they're young guys, maybe, let's say 30 to 35. And they said, Look, we, our family has this loan, and we've been paying it back, and we borrowed money to do some, you know, particular thing. And, but what we know, now we're seeing that we can't, we can hardly pay it, you know, the interest rates gone from like, point five to five. And we don't really know exactly what to do. And we think it could be unfair, it could be, you know, extreme. And I'm like, Guys, you never lived through real interest rates. 5% is just kind of I mean, look, go get a credit card, and you're gonna pay 15 to 20%. You know, look at the past, and you know, a 5% personal loan, that's unsecured is incredible. It just said, zero.

Louis-Vincent Gave 51:19
That's still a good deal at 5%. Yeah, well,

Andrew Stotz 51:22
What an introduction. And I appreciate all of that. I know, for the listeners, they get a lot of value from that. And I'll have links in the show notes to your website, as well as your books and other stuff. But now it's time to share your worst investment ever. And since no one goes into their worst investment thinking you will be tell us a bit about the circumstances leading up to and then tell us your story?

Louis-Vincent Gave 51:41
Well, look, the first thing I'd say is, I've got a long list of bad investments, you know, obviously, a lot of options I've bought over the years that have gone to zero, to many to count a lot of private equity and VC deals that have gone to zero. And you're also asking, you know, what's the professional rugby team? So that's, you know, that's a money, annual money bleed of consequence. So I could, I could have easily gone into that, but no, the real for me. And the real. My worst investment, the one and it wasn't the worst in terms of losing my money. Oh, sorry, are you there?

Andrew Stotz 52:57
I lost you. You said it wasn't the worst at losing money.

Louis-Vincent Gave 53:02
Yeah, sorry about that. Well, I guess maybe hopefully, we can edit it or, but so no, it wasn't the worst in terms of losing money. But it was the worst in terms of making me physically sick. In terms of you know, you turn on the Bloomberg, and you just you want to throw up and you losing sleep, etc. So it actually hubs back to my days at Asia equity are our former or former joint chop. And so I was a young analyst. And, you know, my dad, it was actually, you know, I grew up in a very privileged, my dad had been a very successful money manager, had made a lot of money selling his firm to Alliance capital in the mid 90s. And then he retired. And then so I'm in Asia, the Asian crisis hits, and you know, everything pukes, etc. And in August 98, he calls me up. And he says, you know, what, this thing has, I think, this Asia thing, it's, it's gone long enough. I want to buy, I'm going to put a million dollars, and I want to buy, which for me, you know, but again, I was getting like $50,000 a year, so that was a fortune. And I want to buy a million dollars, and I want to you like 2010 good companies that aren't going to go bust, you know, 10 good quality sort of blue chip Asian companies. And we'll put 10% in each. So you know, I do a little portfolio. And we put the money in and between August and October, it fell by 60% Yeah, like you know, that last puke you may remember like LTCM and you had Russia going bust etc. That last puke at the end. You know, Asia had already gone down sort of 50 or 60% and they went down another 50 or 60. And I was literally sick looking at these positions where on every individual position I was losing more than my annual salary. And then it came back down You may remember, you lived through the Asian crisis as well, October to December, it came back. And by March, we were actually making money. And I was very keen to take it all off. We gotta take a few, we're back to even take it off, take off, and he's like, no, no The problem was, so I was managing this for my dad. But this portfolio sizes were completely disproportionate to my earnings, just the size was too big. In essence, the I've never had possession of the size before. And it was completely disproportionate to everything else that was going on in my life. And that's what was making me so sick about it. And so, I did learn to I did take away two things, the first thing I took away, is I became a bit of a coward following this, and that's, I now if I start losing, I now put my things into buckets, where I'm like, Okay, this, I can lose 100%, and I don't care. Or if it's big, if I lose more than 10%, I'm out, because I just don't want to go through these things again. So you know, like when I buy options, or I do VC investments, etc. Like, if I lose 100%, I was 100%. But so I've become very clear in my mind what my risk tolerance was on individual positions. And so for me, I really split them into these two categories, things I'm happy to lose. And obviously, then I keep it small or bigger things and then I cut much, much faster. So that's the first thing. But the second thing I learned was, the portfolio sizing matters tremendously. And you know, these positions were just too large for who I was, at the time. And that's what made me sick. And I decided, at that time that I never want to go through something like that, again. I was literally not sleeping for days on end. And I thought I never want to go through that, again, which I think is really, the most important thing about investing is most people think you trade against the markets. But fundamentally, you trade against yourself. I think I think you do trade, you trade against yourself. And so you have to put yourself you have to know yourself. And this you can't really know until you get into these kinds of situations. But you have to know how you'd react. And you have to make sure that you don't put yourself into situations where you're going to react badly. Because here in these positions if my dad hadn't been behind me saying no, we're keeping it We're keeping it we're keeping, I would have sold like many times I would have taken the losses probably at the bottom. And then I would have also went once had recovered 30%, I would have taken the loss there and except it would have made all the wrong choices. Because I would have been driven by my emotions, more than anything. And again, I'll say it again, I think the problem in markets is you don't trade against the market, you trade against yourself,

Andrew Stotz 57:57
right? Maybe I'll share a couple of things that I take away from it. The first thing is the idea of kind of the phase of your career. I think about the 97 crisis, when I was an analyst, I was rising as a head of research and all that. And so I was just at the beginning of my career, I didn't really know much I hadn't been through much. And then and then we set up our coffee business coffee works that time also. And we didn't know that there was an economic storm, a nightmare, the economy was going to collapse by 11% in 2019 98. And it would be three years before we even saw a reasonable recovery. And the stock market would fall by 95%. In Thailand, in US dollar terms, I had no idea anything that was coming. And I think that when we get into stuff at the beginning of our career, we just don't have perspective. And that brings me to kind of the next point. And that is that this is the reason why it's important to make sure that you're investing with people who have experience, not because experience makes them better or that they can outperform. It's not necessarily the case. But man, they've seen a lot. And that makes a difference. And then the last part, I would say, you know, there's another thing that was probably keeping you up at night, and that is it's your it's your family money. Yeah, I have that relationship with father and son. I've had other guests on the show that have also talked about, you know, borrowing money from their dad and then losing it, and then all of a sudden, you know, just feeling awful. So those are the things that I would take away anything you would add to that.

Louis-Vincent Gave 59:24
No, no, I think that's, that's very true. And I have to say through it all. My dad was very relaxed about it all which, you know, I found out later because it was a small percentage of his wealth. I didn't realize how wealthy he was to be honest, at that time. So he was fairly relaxed about it because it wasn't life changing either way for him.

Andrew Stotz 59:45
But also he was doing what he said I want to invest in. Exactly. He understood it probably pretty well. So he'd

Louis-Vincent Gave 59:53
been he'd like you said he'd been through a few cycles by that point. He was sleeping. I was the one losing all the sleep

Andrew Stotz 1:00:01
Based on what you learned from this experience, and what you've continued to learn, what one action would you recommend our listeners take to avoid suffering the same fate?

Louis-Vincent Gave 1:00:09
Well, I think the biggest thing is portfolio sizing. Make sure that, you know, my father was very relaxed with it, because it was a small size of his net worth. And again, he was very comfortable with that. For me, it was many multiples of my net worth, which gave me just the sleepless night. So I think the main thing is, you know, obviously, investing is a marathon, not a sprint. And when you hear all these stories of poor people who blow themselves up, etc, it always comes down to portfolio sizing. It always comes down to, to being too greedy, it's i Oh, this is great. You know, I've done all the work, you know, I'm really confident about this. But the reality is, you know, as confident you can have done all the work in the world, and you might still turn out to be REITs. In the end, you know, the, the, you know, my father turned out to be right with this investment in the end, and he made money. But the big no, the biggest problem of it all is how do you manage through the emotions. And if it's, if your position size is too big, you're more likely to do the wrong thing at the wrong time. Because remember, like, if you've done the right work, and you own something, and it's tanking, if you're, if you're right on it, the guy selling at the bottom, it's because they're going through the same emotions you are. And, and, you know, emotions in markets are contagious. Like, you know, like one guy panics forces you to panic. There's nothing more contagious than emotions in markets even more contagious and COVID.

Andrew Stotz 1:01:46
A great discussion on Mr. Market there. So what is a resource of your own or any other resource that you'd recommend for our listeners?

Louis-Vincent Gave 1:01:55
Oh, there's so many guys, I'd love to read. I mean, obviously, so we actually publish a free newsletter through our private wealth business in the US evergreen Gavekal which I highly, highly recommend. It's burned by the CIO. They're called David Haye. And, you know, they will produce some of my stuff, etc, I highly recommend that. I think in terms of keeping my emotions in check, I find there's a guy I really like called Kevin, where he writes the macro tourist. And he's very good at sort of sensing market emotions, etc. So I definitely recommend him. I mean, there's so many great, great, great newsletters out there. But I would say, look, the most important thing, there's also a tremendous, like, so many different books, tremendous books out there. I would say the most important thing, though, if you're starting off, start off small. Figure out what were you good where you're bad. There's no magic formula. The most important thing is, know your own weaknesses. And don't put yourself in the situation that play to those weaknesses.

Andrew Stotz 1:03:00
Yep. We'll have links to all that in the show notes. And that way any of the listeners or viewers can come and check it out. Last question, what is your number one goal for the next 12 months?

Louis-Vincent Gave 1:03:10
Survive? That's my goal every year. My goal for the next 12 months is, look, I think we're, I'm actually I'm half joking. When I say survive, I actually think it's going to be a pretty good environment for a lot of emerging markets. And I'm trying to figure out the best way to play this.

Andrew Stotz 1:03:36
Well, you're perfectly positioned given your experience and your business there. So listeners there you haven't another story of loss to keep you winning. Remember, I'm on a mission to help 1 million people reduce risk in their lives. If you've not yet joined that mission, just go to my worst investment ever.com and join my free weekly become a better investor newsletter to reduce risk in your life. As we conclude, Lily, I want to thank you again for joining our mission and on behalf of a Science Academy I hereby award you alumni status for turning your worst investment ever into your best teaching moment. Do you have any parting words for the audience?

Louis-Vincent Gave 1:04:10
No, I look thanks. Thanks a bunch for thanks a bunch for having me. And you know, I'll definitely be looking up for to a beer when I'm in Bangkok.

Andrew Stotz 1:04:19
There you go. And that's a wrap on another great story to help us create, grow and protect our wealth fellow risk takers. Let's celebrate that today. We added one more person to our mission to help 1 million people reduce risk in their lives. This is your words podcast hosts Andrew Stotz sang. I'll see you on the upside.