Why Recessions Are Dead & How To Invest in The Debasement Era | Macro Investor Vincent Deluard

Vincent:
[0:00] If you think of recession as a 2009-like event, where we'll see, you know, sub-1% inflation print, massive job losses, 10% apartment rate,

Vincent:
[0:08] I really don't think it's going to happen, right? We have this kind of hyperactive policymaking where the Fed cuts just because inflation might slow below the 2% target in 12 months based on some, you know, number that, you know, they made up.

Ryan:
[0:25] Welcome to Bankless, where we explore the frontier of internet money and internet finance. It's just me today. David's out. So I'm here to help you become more bankless. I came into this episode with, I think, one question. What is the ultimate portfolio for the debasement era? Aside from crypto, of course. Vincent Delawarde is a macro investor. He's the guest today. He advises the big, big money, the sovereign wealth funds, the pension funds on what to buy and how to weather these storms. I think he shares a similar thesis to many of us in crypto, but he comes to a different conclusion on what to buy. A few things we discuss, persistent inflation, the 15-year dominance of US capital markets and why he thinks that's peaked, investing in China and India and why that's a good idea, fiscal dominance, why recessions are dead, the MAG7 concentration, AI bubbles, gold all-time highs, and of course, we discuss crypto.

Ryan:
[1:23] Stay tuned to the end for his takes on the debasement-resistant portfolio. Let's get to the episode. But before we do, I want to thank the sponsors, Bankless Nation. Vincent Deloart is a macro strategist, and he's an investor over at Stonex Group. Vincent, welcome to Bankless.

Vincent:
[1:38] Very happy to be here.

Ryan:
[1:39] So, Vincent, you know what we're trying to do over here is we're trying to make sense of the next 10 years and investing in life in general. And I always enjoy picking the brains of somebody who is studied in macro because I feel like that the discipline of macro causes you to look at this cross-section of all of the different areas from geopolitical to investing to monetary policy. And macro guys always give me the most comprehensive, interesting picture of the world. So that's why you're invited on this episode. We're hopeful you can help us out with that.

Vincent:
[2:17] Oh, you just raised the bar. I mean, All I can say is I'm going to try because that's, yeah, indeed, that is the job, especially in my case, because I work a lot with pension funds. And, you know, they often deride it as a slow money derided, the exciting guy, the guys who make a lot of commissions are typically the pot shops, not the pension funds. But for the pension funds, yeah, it is questions such as, you know, in the next 10 years, what is the expected rate and return on equities? What is the expected correlation between stocks and bonds? And even a small number, I mean, that's the power of compounding, right? A very small change consistently applied over time leads you to very different outcomes. So I think it's the right period, to be honest. I mean, investing is one of these things where it's almost the opposite of eyesight, right? Eyesight, you see better what's closer and the third is the hardest you see, especially now given, you know, the, let's call it unusual political situation we have in the US. it's very hard day to day. I mean, what's going to happen to, I have no clue, you know.

Ryan:
[3:20] It's very chaotic.

Vincent:
[3:21] Whatever, right? But like, if you give me five, 10 years, like, yeah, I think it gets clearer and clearer because these trends have been building on, I would argue, since early 2020s. I mean, much of the themes that people know me for on podcasts, things like secular inflation, things like the end of recession and things like fiscal dominance, really the seeds were planted.

Vincent:
[3:44] Out of even before COVID and they've been growing very steadily and yeah.

Ryan:
[3:50] Well, that's what we're hopeful to get is like the next five, 10 years and kind of what that outlook is and how we can basically prepare for that. I am curious though, since you talk to pension funds all the time, what's on the mind of a pension fund manager at this point in history? Like what keeps them up at night?

Vincent:
[4:06] There is the job answer and the marketing answer. And I'm going to solve the job answer because at the end of the day, that's the one that matters. Keeps a pension fund manager, an insurance manager up at night is I don't want to get fired. That's the first thing. That is the supreme constraint on the investor. At the end of the day, decisions about capital market allocation are made by people who don't want to get fired. The second part to this is I don't want to get in trouble with my regulator. And that supersedes any sort of, you know, kind of capital market concern. And that really informs their behavior. Like you, I think, you know, we kind of had this almost mechanistic view of markets as some sort of an impersonal machine, which was kind of the way economists model it, right? The efficient market hypothesis, you know, it's kind of this godlike machine. And it's not. I mean, at the end of the day, decisions about capital markets are made by humans who have very human constraints. They have mortgages to pay. They have private school to send their kids to. They have bills to pay and bosses to answer to and regulators. And these people may not be rational.

Vincent:
[5:20] The people themselves and the people, the answers may not be very rational. So that's the first one. On now turning to, I think, what you are asking me about, I think that right now the biggest question, especially the ones I talk to, because I tend to speak mostly to pension funds in Latin America, Canada, and Europe, is really the question about the US.

Vincent:
[5:38] Most people who are running portfolios today are running portfolios because.

Vincent:
[5:44] They have been riding that Mach 7 US wave. You know, if you did anything else, no matter how good you were, and then trust me, I mean, for 15 years before I was covering Europe and mostly European banks, And, you know, I was super happy to get, generally, I got the best bank. I was only down 10% a year, you know. So no matter what you did before, you probably underperformed if you were not at least market weight U.S. And if you still have a job today is because you've been overweight U.S. And the big question now is what do I do with this?

Ryan:
[6:20] Can we talk about that? Actually, there's so many different directions. I want to pull this conversation in, but maybe we'll start there, which is just the last 10 to 15 years in America's capital markets have been fairly historic. Actually, you tell me. So most of what we do on Bankless is like we touch macro, but we also were laser focused on crypto. So most of the time we're looking at like crypto price charts, not necessarily how equities are doing. But as I understand, the dominance of S&P and U.S. Capital markets right now, maybe they're not all-time historic, but they have certainly grown over the last 10 to 15 years. Can you provide some data on that? So what's the American capital market's dominance right now? And what's been that story over the past 10 to 15 years? Why are all the pension funds, why is everybody allocated to the U.S.? And why did you call this overweight?

Vincent:
[7:13] So to start with numbers, and let's do annual, so we cut off basically when Trump enters the White House, because I do believe this year is a break in that pattern, and I think that's the end of this cycle. But yeah, pretty much since 2008, if you went long, the MSCI US index, which is like the S&P 500, if you want, and short the same thing ex-US, you would have made about 8% a year with almost no volatility. This is like line goes up chart.

Ryan:
[7:47] Perfect. Wow. And so that means the US basically outperformed all the other markets by 8% per year since 2008.

Vincent:
[7:53] Yeah, and there were regional exceptions. For example, Chinese stocks had a weird spike in 2015 that was briefly reversed. There were, at times, Europe kind of tried to recover.

Vincent:
[8:07] LATAM had a couple, three, four months, bad bouts of performance. If you look at the world in general, it's just relentless outperformance of US assets, which, I mean, it's unprecedented in size, I think, but not necessarily in its occurrence.

Vincent:
[8:25] These type of cycles are actually, if you look at that U.S. Versus ex-U.S. chart over long periods of time, it works almost clockwise by very long decades. I mean, so if we start in the 70s, right? And the 70s is the opposite, right? It's a period when the dollar is being debased. We have saturation in the U.S. We end the decade with a 16% 10-year yield. We started with these very high multiples and 50-50s. We end up with the S&P traded at like 10 times earnings. At the same time, we are seeing massive outperformance by emerging markets. At the time, it's really Europe and Japan, especially in emerging markets are not really a thing yet. I mean, you still have a Soviet Union coming to China. But yeah, we have massive appreciation. I mean, the Swiss franc, especially the Deutsche Mark, the Japanese yen, big currency. effect. And also the rise of, yeah, European and Japanese multinationals. So 70s is kind of all about emerging markets, sorry, all about international markets. And then there is a period of, shorter period of US high performance in the 80s. That ends with a, I think that's going to be relevant for the future of the plaza core, when basically the dollar gets too strong and we have this coordinated intervention.

Vincent:
[9:42] Really forced interventions to lower the dollar and that That kickstarts another 10-year cycle of an outperformance by international assets. That ends in the mid-90s. Mid-90s, the U.S. takes the baton again. We have the Netscape IPO, the internet bubble, and we get to get very similar development, so for about a decade. And then that gives way, coming out of 9-11, 2002 recession, emerging markets really take off. We have the fancy acronym of the time is the BRICS. China is going to buy everything. The Brazilian Real famously trade for, you know, 1.5 to the dollar. You see Brazilians all over Miami. Euro goes to 1.6. Giselle, the Brazilian top model, has to be paid in euro. I think that was the absolute top for the euro. And then, yeah, since basically 2008, we've been in this U.S. Super cycle, which, again, I think is exceptional in its regularity and in its size And in terms of market cap, I think we're close to, maybe may have come down a little bit, but we're close to 70% of global market.

Ryan:
[10:51] 70%? Is this like all capital assets basically, or 70% equities?

Vincent:
[10:56] Equities, equities. If you add the value of all stock indices, you get 70% of US. Now keep in mind, we're about, what, 5% of global population, I would think. Yeah, 300 million out of seven. Yeah. 20% of GDP at best, probably around 10 or 15 when you measure purchasing power parity. so it's somewhat you know so it.

Ryan:
[11:18] Is odd i i think so so being like i think many of our american listeners will have just like this is sort of the you know the air that that they breathe and the water they swim in so they're not noticing that we've been in an american capital market super cycle since 2008 or so and maybe they're not looking internationally it seems very much like the S&P has become kind of the benchmark for returns in general. But why should that be the case? Well, it's because of this American capital market super cycle. Why did this happen? Because you started the date for starting this super cycle in 2008, which of course, that was a marquee year. It seemed at that time that America's financial infrastructure was crumbling,

Ryan:
[12:06] that the banks were failing, that it was the end of times. So what explains the past 15 years that we've had and the incredible performance?

Vincent:
[12:17] The start date, it could either be two... I mean, the reason why I picked 2008 is because I looked at the outperformance. Remember, when you have a major risk-off asset, when the U.S. Catches a cold, the Western world catches a pneumonia. So the U.S. actually outperformed during the subprime crisis, even though the U.S. Was the cause of the crisis. But I think this is more kind of a beta effect, like that. If I were to pick a real date, I would probably start around 2010, 2011. This is really where we saw the...

Vincent:
[12:49] So we had the Chinese stimulus going out of the week, it pulled off the global economic recession, commodity prices spiked again into 2010, 2011. And then that was kind of that prior cycle, the cycle of EM, commodity, China-driven, I think, peaks in 2010. Now, what happens in the U.S. over the same time? I would really break it down to three main macro factors and then maybe a market factor that we can talk about later. On the macro side, it's really this invention of the iPhone in 2007 and the rise of this kind of what will eventually become the Mac 7 U.S.-dominated app-based technology growth sector that really has, with the possible exception of China, that has no equivalent. And that's, I think, going back to this conversation about pension funds who are now trying to diversify the U.S. That's still the major pain point, is they want to get out of the U.S. Because they don't like what they see with Trump. They don't like what they see with the debt. But they can't let go of Microsoft, Apple. You know, it's the U2 songs, can't live with you, can't live without you.

Ryan:
[14:04] Because there's nothing else like it.

Vincent:
[14:06] There's nothing else. Like, you look at Europe, the best thing you got is SAP, which is kind of a boring German, you know, B2B cheapo version of Oracle. That's it. That's how tech sector is Oracle. But there's China, though.

Ryan:
[14:20] Yeah.

Vincent:
[14:20] But China is kind of its own ecosystem bubble. I mean, I don't think it's... I really think investors should have exposure to it, but the consensus... Of course, price create narrative, right? Sure. Because China had performed so long. A year ago, everybody was like, China is an investable, blah, blah, blah.

Vincent:
[14:37] And now... But yeah, China is the only exception,

Vincent:
[14:41] But you go to, you go to that time, you know, there's, there's one, one company, Mercado Libre, and it's, you know, listening to you. I mean, yeah, same, you go to Canada. I mean, Canada used to have, you know, there was Research in Motion and Nortel, but all these things are gone. You know, Europe, we used to have like Nokia and Siemens, but so, okay, so let me go back to your question. So first is iPhone and everything that follows. The second is share. You know, we went from secular decline in U.S. Conventional oil production, probably around, you know, 4 million barrel a day, where we were a major net energy importer. So when we're net energy importer, that means we're sending dollars abroad. So all else equal that, you know, that reduces the value of the dollar, right? I mean, you have to pay to give money to the Saudis, the Russians, and so forth. and suddenly the U.S. Becomes the world's largest energy producer. And if you look at the entire North American continent, you can throw Canada in there and you add nat gas, we are an energy exporter. I mean, a huge swing. If you look at the current account balance of the U.S., I mean, half of the trade deficit was energy and that flips into our surplus. I mean, this is really a historical... And then one of the ancillary effects of the shale revolution has been a surge in the production of NatGas.

Vincent:
[16:06] And NatGas, oil is a global market, right? I mean, there's some tiny variations between the price of Brent and the price you'll get out of Texas or Dubai, but it's within dollars, right? It flows, you can send it. NatGas, on the other hand, it's kind of hard to export. You got to liquefy it, whatever. So it's a regional market. Because we are finding so much shale oil as a by-product, We have too much gas that we can use, that we can't export. That causes energy costs to fall in the U.S., especially relative to Europe. My good friend, Louis Gav, has this saying, which I love to quote, economic activity is energy transformed. And suddenly, once your cost of energy drops, you know, that of your competitor, yeah, good things happen. And then the third one on the macro side has been, I would argue, a willingness and an ability to pursue much more aggressive policies than the rest of the world. When Europe went through fiscal consolidation, you know, if you compare, you know, Germany to the U.S., I mean, we've added... Close to 50% of GDP over the past 10 years in deficits when the German were basically flat. So we were willing to spend more money.

Vincent:
[17:17] And, you know, Canadian growth works. Like, I mean, if the government runs a big deficit, that's surplus for the private sector, that goes into corporate profits. And these were, I would think, the fundamental factors. Now turning to market factors, I would suggest two. One is the one that you went over with a great episode with Mike Green is the unique structure of the U.S. Stock market, where effectively the stock market is in charge of the pension system, which is a very odd idea, right? I mean, if you think back, you know, we've had old people since the beginning of time, and usually the way we deal with the people's, you You know, when people get old, they're less able to take care of their needs. It's the young generation that takes care of them, either directly in the household or, you know, the government taxes the young people to give money to the old people. Somehow, you know, in the 80s, 90s, we did that switch in the U.S.,

Vincent:
[18:14] moving from public funded defined benefit to defined contribution. It's going to be, OK, OK, just give the money to the stock market.

Vincent:
[18:23] Wait 40 years, put it into an index fund, and then you'll be fine. So the stock market becomes the vehicle for which we do generational transfers. And once you set that up, you create massive demand for equities. I mean, typically the advice for people is what you should have about 10% of our income in the 401k with a match by your company. So that's, yeah, that's about 10% of all income.

Vincent:
[18:51] And most of that goes to stocks. Even I, you know, I'm now unfortunately middle-aged. If I go by the target date fund that Vanguard recommends, it's going to be like 85% stocks. So we're putting 1% of our GDP into our stock market every month. And that increasingly happens in a systematic valuation agnostic index fund driven way, which I'm not going to repeat the argument. And Mike Reed makes this case better than anyone else, but it does have an impact on valuations. Even if he chose to ignore his point on the mechanism, passive, let's forget that. Just the fact that we put 1% of GDP every month into the stock market is something that other countries don't do. So I think that's one reason why U.S. valuations, the gap in valuation between U.S. Has grown. And then the last market reason for this would be a change in the nature of the financial surplus of the U.S. So we keep talking about the current account deficit, right? That's what Trump, you know, or the trade deficit, these are ripping us off. It's important to understand that, you know.

Vincent:
[20:01] A balance of payment is a mirror. There is the reality, if you will, or one side of the mirror, let's just say one side of the mirror is the flows in goods and services, the trade side. And then it needs to be offset by capital, right? I mean, if I buy more from you than I sell to you to the rest of the world, somehow I must be financing that. So either I'm borrowing the money from the rest of the world, I'm selling my house, I'm central bank, is accumulating the reserves somewhere. But at some point, capital has to flow the other way because, again, we're paying goods, right? So if the U.S. Has a deficit on the trade side, it has a surplus on the capital side. We're importing capital from the rest of the world. And I would say for most of the 2000s, when we had this international performance.

Vincent:
[20:56] We still had

Vincent:
[20:57] A big deficit, right? The U.S. has had a deficit since 1974 on the trade side. So we're still importing capital from the rest of the world. And it was very large. We talked about the twin deficits. That was a big thing in the first Bush terms.

Vincent:
[21:10] That was happening mostly on the fixed income side. It was the capital that China was accumulated or Saudi Arabia or Russia would end up at the Chinese Central Bank quite often or at the Monetary Authority of Singapore or the Kingdom Holdings in Saudi Arabia, and that would go into U.S. treasuries. This was one of the reasons why yields sell so much, especially the long term, is because we had this relentless bid. As the rest of the world had this massive capital surplus, trade surplus, capital deficit with the U.S., it came back into the treasury market. And then what happened in 2014 was Russia invaded Crimea. We put sanctions on Russia, seized a couple of trillions in their assets and froze them.

Vincent:
[21:59] And there was this

Vincent:
[22:00] Complete break in the pattern of saying, okay, we're no longer going to reinvest. Because the reason they were investing in U.S. Treasuries is because they thought it was safe. They thought, you know, that's the only reason why you have reserves is because it's in a name, right? Reserve is in case you need them at an hour of need. Well, it can be just taken away from you that that reserve is really no good. So, but at the same time, the U.S. trade deficit, capital surplus, remained as big. So the money kept coming. It just went into another asset. And that's where my story about the pension fund comes in. The U.S. equity market became the recipient of the, basically the U.S. Trade deficit, which is our capital surplus. And we benefited from, massive purchases from foreigners that really no other market experience like that. Like, you know, whenever I visit a pension fund in Canada, in Europe and in Australia, whatever, I spend 90% of the conversation about what goes on in the U.S. Now, when I go to a U.S. Pension fund, I don't talk about what's going on in Chile or, you There may be one question about Europe, making fun of them for being lazy and the French always being on strike, but that's about it.

Ryan:
[23:21] I mean, no wonder Americans kind of think that they're at their center of the universe, right? At the center of the world.

Vincent:
[23:27] Because I mean, I'm American now, so we are the center of the world.

Ryan:
[23:31] We really are. Right. Okay. So the reasons you gave, that was like very thorough and I've never heard it laid out like this, but the reason for American capital markets over performance over the last 15 years, the reason pension funds had to have assets, had to be over allocated in the US was because of tech, tech industry like no other, natural gas, a new energy, we basically discovered fracking and that came online very quickly, and then coordinated government spending. That in combination with our stock market basically became our savings account and the US pension fund basically. And capital account surpluses led to the continuation of treasuries being used as a world reserve asset and propped up treasuries as a store of value, I got to imagine strengthened the dollar on the back of that. And that accounts for the last 15 years. What's very interesting is when you were talking about the stock market, we had Michael Green on recently, and he was talking about the stock market being basically how Americans save their money. It's not just Americans though. If you're telling me 70% of world equity capital is in the US, it's really the world's savings account, isn't it? It's the world's pension account at some level.

Ryan:
[24:40] And what's very interesting about this too is treasuries are an American product. They're U.S. bonds, aren't they? The U.S. government debt, essentially.

Vincent:
[24:49] Well, they are a world store of value.

Ryan:
[24:52] They're a world reserve asset. The dollar itself as a payment tool is a world currency. This has played out, I guess this has happened over many decades. It wasn't just the last 15 years, but it's incredible how it's strengthened over the past 15 years at a time where I don't know that most Americans felt like America over the last 15 years was winning. I don't know if you'd turn to most Americans and they'd feel like, oh, yeah, we won the last decade. The average American doesn't really feel that way, actually. And yet they have won the last decade. Now, are you starting to see some signs of that trend reversing? You said this oscillates, right? You talked about the 1970s being very different than the 1990s being very different than the 2010s. So what is starting to change on this story?

Vincent:
[25:43] Yeah, these are all really interesting observations. I'm just going to second what you said about the gap between perception and reality. You know, it's kind of one of these stories where the grass is always greener and you don't feel it when you're winning, but you do feel it when you're losing.

Vincent:
[26:00] And I mean, as someone who moved from Europe to the US, I mean, you know, this has been the, really the single best decision of my life was to move to the US in 2006. And I remember in 2006, you know, this was kind of peak Europe moment. And this was not far from that Giselle Brunch on top of the euro.

Vincent:
[26:20] Yeah, I mean, I felt it. You know, I went to grad school in New York. And yeah, of course, it was expensive, but it was manageable. You know, and my parents were teachers, you know, and it's, I mean, the tuition was paid for. But, you know, it was manageable, which really would not be the case today. You can see it, for example, in this, that was a popular hashtag on Twitter was a euro poor. You got all these Americans kind of making fun of the Spaniards for being poor. You even see these revolts, right, in Barcelona, where the local population is trying to break down Airbnbs because they can't stand all these annoying, bratty American tourists, you know, going on Instagram, you know, treating our millennial culture as the background for their Instagram accounts. So, yeah, if you feel, if the Americans feel that they haven't been winning, try to, Try having the same experience in Italy, in Germany, or even worse, in Colombia or Brazil, where really, you know, the pain has been real.

Ryan:
[27:38] I mean, there's almost, Vincent, like, I'm kind of curious, just like emotionally and psychologically, if you were in 2006, rather, for like peak Europe, does this feel a little bit like peak America? I don't want to say it, but like, you know, 70% of all capital markets, America's in a pretty good position. What do you go to 80% from there? Or are you more likely to go down to 60 or 50%? To what extent does this feel like peak America? And like, what do you think the pendulum is going to start to shift back? And if so, how does that happen?

Vincent:
[28:09] Yeah, I'm going to give you another stat that I find fascinating is, so the world largest investor is the Norwegian pension fund. So Norway is a fairly small country, fairly prosperous, and they have a lot of oil in the North Sea. And in order to prevent what's called the Dutch disease, which is a tendency for countries who are blessed with natural resource to see very rapidly rising currencies and as a result lose competitiveness in manufacturing output, But what they do is they take the money they get from the royalty they get from the oil fields and then they invest it for a government-run scheme that has grown. The oil was discovered and it took off in the 50s, 60s. So it's almost 70 years now of surpluses. And yeah, it's the world's largest investor. At this point, if you add up their holding of the Max 7, just seven stocks, right? Seven stocks. It's more than 100% of Norwegian GDP.

Ryan:
[29:09] Wow. In their sovereign wealth fund, Norway's sovereign wealth fund has over 100% of their GDP just

Vincent:
[29:16] In the mag seven. In just seven stocks. I remember reading the headlines when we were doing the whole Greenland stuff, which was really, that was a lot of fun. I don't know, we don't talk so much about Greenland these days. I kind of miss this, you know, cherished 51st day, taking word of Panama. I'm like, oh, I mean, it looks quaint now. It's like, oh, my God, so you guys have 100% of your GDP in seven stocks of a country that's clearly talking about invading an island off your coast. I mean, wow, mind-blowing, you know? Another one for that would be the Swiss Central Bank. For somewhat similar reason, the Swiss franc tend to appreciate because they're basically the only well-run country in Europe. And Switzerland still has a pretty big industrial base. so that the central bank tries to, offset that and the way you prevent your currency from rising is by buying other countries' assets, which at this point includes pretty much everything.

Vincent:
[30:11] So they buy stocks, they buy the Mac 7. If you go on the Bloomberg and you look at the biggest holders of the Mac 7 stocks, you're going to see, of course, your BlackRock, your Vanguard, and pretty much for every US stock, you're going to see the Swiss Central Bank. I'm like, why? Why do you need hundreds of billions of dollars in U.S. tech stocks. I mean, your job is to clear the payments between Swiss private banks.

Vincent:
[30:41] And maintain stable prices in Switzerland. What part of the mandate requires you to own hundreds of billions of U.S. stocks? So long story short, all the antidotes, yes, they do tell me that it's, we had the point where it's ridiculous. I do believe that the peak U.S. Was early January when we had kind of the Rose Garden ceremony and we had this bout of triumphalism about the U.S. It was before we had a tariff, right? Or Trump is going to unleash the American beast and all the CEOs were lined up. And we had that last bout of foreign inflows. I do think that was the peak. And then there was the cold shower of the tariff announcements when the world realized that, oh, no, Trump is not this pre-market benign leader, but he's kind of an aggressive nationalistic leader. And then I think a lot of the people think that that bout of selling is over, basically, because the stock market has rallied, right? I mean, we had a bear market in March, April, and now we had an old-time pie. So the idea, okay, the foreigners did their thing, they sold, but now we sold the tariffs. We kind of like had an awkward truce, right? We got these deals with Europe and Japan.

Vincent:
[31:56] It's behind us. It's not behind us. I mean, people who say that have never talked to a pension fund. Like pension funds, I go back to my earlier conversation, are the slowest money on earth. And again, before they make any decision, they need to clear it with, one, will I get fired if I do that? And two, what will my regulators say? They do not, like the stock market decline in April was basically a matter of like five days.

Vincent:
[32:23] Like no pension fund changes their asset allocation in five days, okay? Especially in Europe, we're in vacation half of the year, for example, right? So, you know, you need the board, you need to talk to the politician, you need to talk to the regulator, you need to clear it. So that wave of selling by foreigners, I think is mostly 99% ahead of us. Maybe what we've seen has been on the currency side. I think the reaction, because on the currency side, these kind of foreign managers have more leeway than the allocation, like the decision, how much do we hedge versus not hedge? I think because the dollar was so strong and the dollar was also nicely, negatively correlated stock prices. So typically when stock prices go down, the dollar would go up against the euro and other currencies. So if you're a foreign manager, it was great, right? Because that was like having a put option if you want. But now we saw the dollar fall after the tariff. So not only the U.S. Underperformed, but the dollar. So from the perspective of foreign managers, it was, it was a double hammer. I think what they started doing is started hedging the currency. That was the first thing. And that's why now it's kind of a different correlation between dollar and risk assets, because foreigners are more careful when it comes to the dollar. But going back to this idea, can't live with you, can't live without you, They did not sell their Mac 7.

Ryan:
[33:43] I mean... I was going to ask about that. So, I mean, some of what you're saying does seem to make sense with some of the price action we've seen since the beginning of this year, let's say, where we see gold up, which represents some hedging of maybe some currency, right? We also see the dollar down, which is somewhat interesting.

Ryan:
[34:02] And yet, we do see US equities all-time highs and pretty much being propelled by AI. I mean, that's it. The MEG7 is all about AI now. It's all about reinvesting all of the retained earnings and large data centers and scaling up to the next super intelligence that's going to change the world. It feels like that may have kept the energy in MEG7, as you said. They can't live without the MEG7 because where else do you get AI, this transformational technology? It seems at some level that the entire kind of US economy at this point in time rests in the hands of AI, which means there's a pretty, I'm not going to say it's an existential question, but a very important question for investors is, is this AI thing real or not? I mean, are we going to get like a productivity S-curve or is this sort of, you know, is it 1999 and we're kind of blowing up a bubble? Because if that explodes, then all of the forces you've just been talking about, Vincent, of foreign, large, institutional pension funds will start to pull money out if the MAG-7 kind of disappears. And if that story becomes less rosy, let's say, what's your take on this? I don't know to what extent technology and analyzing AI is a core factor as you think about macro. But I know technology has got to be a piece of how you analyze the world.

Vincent:
[35:31] Well, I think these... Time to that answer, right? I mean, the answer could be it's both a bubble and real. It's a short-term, I would guess it's a, there is certainly an aspect of a short-term bubble.

Vincent:
[35:46] On growth, yeah, I think, don't have the exact number, but it was something insane. Basically, that CapEx from the hyperscaler accounted for about a third of GDP growth last year. I mean, This is not sustainable, right? You can have five companies and then that built up is going to slow. So there is a one-time, very reminiscent of prior cycles, if you think about the canal boom and then the railway boom and then the TMT boom, where when you lay out this infrastructure, it gives a kind of a one-time boost to GDP. And then, you know, after that big span, you have an air pocket. So very true. Over the long-term impact of productivity, I tend to be quite optimistic on growth. I think we are in an era of structurally higher growth. A lot of that is nominal because I believe the kind of inflation target is drifting higher. But yeah, real growth has been quite good. I mean, since COVID, we've averaged about 3% real GDP growth, which is significantly better than the prior decade. I mean.

Vincent:
[36:55] Again, in the 90s, we think about this long cycle. We had the 90s that was kind of higher trend growth, lower trend growth in the 2010s. I think maybe we've reset to higher trend growth. And AI certainly will be part of the story. I mean, but again, typically the stock market is a discounting mechanism, right? So, I mean, in 1999, people who are really smart could see that, you know, e-commerce was going to take over the world, and that Amazon would be a trillion dollar company. And eventually they're right, right? Except the stock price went down by 85% along the way.

Ryan:
[37:31] So Vincent, technology is often a deflationary force, but you see more inflationary forces ahead, I think. You've called yourself an inflationista. You're self-proclaimed, I believe. And I guess I take that to mean someone who believes in persistent, unrelenting inflation of the dollar, maybe some other fiats too. Talk about this. Why are you an inflationista?

Vincent:
[37:52] Because I'm... I love history. And, you know, show me the currency that has ended in a massive bout of deflation.

Ryan:
[38:08] Can you talk about maybe what you mean by inflation? So there's different definitions of inflation, let's say. And, you know, in the crypto world, we have a number of them. When you say you're an inflationista, do you mean, are you talking about CPI? Are you talking about real returns going negative? You fed funds minus CPI? Are you talking about asset price inflation? Is it all of the above? Let's get precise on what you mean by inflation.

Vincent:
[38:34] I'm going to disappoint you, but I will not be. I mean, we can go, okay, if we want it to be precise, if we want a numerical forecast, I'm going to go with the fact that the 2% target is dead as evidenced by the fact that It's been what, since February of 2021, the last 2% reading. So if you should kind of miss the target for five years, kind of like, oh yeah, I'm going to quit drinking tomorrow type of situation. We see the Fed cutting rates not once, but twice now with core CPI at 3%. That tells you that, you know, like it happened already last summer. I remember when we had a little Sam rule, yen rally panic, and the Fed cut by 50 bits for no good reason. Core CPI is at 3%. Now, core CPI is still at 3%, maybe even more. We'll see what happens next week. And the Fed, especially after the two-day job number, is going to cut in September.

Ryan:
[39:34] You're pretty confident of this, given Powell's recent speech?

Vincent:
[39:37] I don't necessarily think they're going to cut as much as the market thinks, because I think inflation is going to surprise to the upside. And I think the, There'll still be a tendency, mid-temptation for Powell to resist a bit more. What has it got to lose now? But yeah, and that tells you that 3% on the core is the floor. So I don't know what the target is, but I can tell you what the floor is. It's 3%. So that was kind of the nominal answer. And then in general about inflation, I would argue that one problem with my, I mean, any discipline really but especially i mean what i see in economists is is you know you can always break that you can go so deep into something that that that you end up you know kind of obsessing over over the tree and kind of miss the forest and on the cpi i mean i've had this conversation for you know six years now and i'll meet someone and who'll bring bring and someone who's usually very, very smart because it takes a lot of intelligence to understand how that CPR report is constructed and look at the lead lag relation between owner's equivalent rent and the imputed prices and what's happening to used car. And I mean, yeah, you can always break down in the same way if you listen to a symphony, you can always say, no, that's this note and then this note and then this note. Okay. Yeah.

Vincent:
[41:03] A symphony is nothing but a collection of notes. Same thing. Inflation is a symphony. It's the air we breathe. It's the water we swim in. And yes, you're absolutely right to include asset price inflation into it. Inflation is not just the month for a month change in a somewhat arbitrarily defined index called CPI. It is a broad mentality, a mindset that has to do with political arrangements, that has to do with the level of trust that we have with one another, that has to do with relations between generation, that has to do with geopolitics. And because I believe inflation is all these things, That's why I don't believe it was just a one-time accident, right? There's this kind of view that the Fed would love, like the transitory argument, just a one-time adjustment on the price level because we closed down the economy and then we had some supply chain issues, but we're going back to the oil world. No, the mindset has changed. We are now in a high inflation era. And then, of course, it happens in waves. Everything happens in waves. I mean, if you look at just the past, just with the recent past in the U.S., You know, the 70s, you had these free ascending waves.

Vincent:
[42:18] 1971, as we get off the gold standard, 1973, the first old shock, and then the biggest wave, 1979, the early revolution. If we go before, in the late 40s, there is inflation spike as we demobilize and we have to retool the economy for peace. Then there is another inflationary wave after the Korean War, and then there's another one in the mid-50s. So it's always a wave-like pattern. Again, I'm yet to see a one-time inflation wave. So that's why I think it's going to come back because at the end of the day, the causes that led, if we go with a policy explanation, that inflation was caused by COVID, it was not COVID that caused inflation. It was our reaction to COVID, right? I mean, COVID was deflationary in China. Policy. Policy, exactly. There's something in the air, right? That's why I talk about the psychology of permanent stimulus.

Vincent:
[43:18] Something in the air that led, oh my God, here is, I mean, I don't want to minimize it, but it was really a bad fool at the end of the day. I need to double my monetary base. I need to keep everyone locked up. I need to send checks. Like something happened. And it's the same people. Like, you know, who was the president during COVID? Trump. Who was the head of the Fed? Powell. Lagarde in Europe. Macron in France. I mean, it's the same people. So the cause, and again, the causes is what we call this inflationary mindset. They are still here.

Ryan:
[43:55] Okay. So this psychology of permanent stimulus, this idea that inflation is going to be maybe three to 4%, like that's the new normal. Is that a contrarian take in your circles, Vincent, among investors?

Ryan:
[44:11] In the crypto world, I ask this question, because in the crypto world, it's not a compare and take at all. In fact, we're probably even more aggressive on where we think fiat and dollars are kind of going than many in your circles. But I guess I'm asking because do you think the market has priced these things in, or are you still a profit in the wilderness when you say things like this?

Vincent:
[44:35] In the middle, I was a prophet in the wilderness definitely in 2020, 2021. At the time, the consensus in 2020 was that it was deflationary. I mean, remember we had negative oil prices, right? And I guess it's saying that the 10-year yield I think went below 1%, and we had close to 20 trillion in debt that was trading at negative yields. I mean, the only way that these people would have made money other than a pure Ponzi financing and hoping that, you know, they would be sending to someone else at a higher price would be if the price level would fall. I mean, we had negative yields all the way to, I think it was almost 30 years in Switzerland. So there was like 30-year price. We had these Austrian, Austria issued a 100-year bond. Even Peru did.

Vincent:
[45:25] So, and the yields were absurd. I mean, the U.S. should have, by all means, done it. But anyway. So that at the time was, yeah, profit in the desert. Now, of course, it's gaining a lot more traction. But if we, I mean, we can answer this numerically, right? I mean, you can see what inflation expectation from, you have two tools that people in on-worldly trade for inflation. One is a CPA swap, which, you know, basically you enter an agreement with a bank and I'll pay you X and you'll pay me whatever the CPI does. And that's probably, you know, if we look at long-term inflation, it's probably pricing 2.8. and then so a little bit above.

Vincent:
[46:06] Two, but still, you know, I mean, I would add, you know, at least still broadly consistent with a 2% target. And then the other tool is the breakeven, which is a difference in yield between nominal treasuries, which will just pay a fixed rate coupon, and TIPS, which will pay a fixed coupon. And then on top of that, are adjusted by inflation. So that gives you, if you work out the math, you see the breakeven inflation.

Vincent:
[46:32] Now, because of liquidity reasons and whatever, it's a bit less than what CPA swaps, right? But it's also broad. It's been going up. And I think it's, by the way, for investors who want, I think, kind of a boring, steady way to capitalize on this kind of higher drift of inflation and don't want the volatility that we see in crypto and gold. Having a position in break-evens is a very good way to do that. It's returned about 6% a year since 2020. It has positive carry and it's negatively correlated with stocks. So to me, that's kind of like the new bond is to be long break even. But my point is the process is not done yet. I mean, you certainly see more people talk about it. Now we have, you know, obviously this war on the Fed's independence. I mean, everything that the crazy, you know, crypto heads have been talking about is here. You know, we have 2 trillion deficit at full employment. We have a president that bullies the central bank. We have gold rallying by, what, 35% so far this year. I mean, it is here. What I still find stunning is that there is this kind of institutional inertia when it comes to the invasion target.

Vincent:
[47:50] It's like a fossil almost, or the town zone. You know, we still have council, even though they don't serve a purpose in the body. The 2% target kind of somehow survives in long-term bond pricing. So, no, I don't think I am. I don't think it's consensus yet.

Ryan:
[48:11] Not consensus yet. One thing maybe you can help me understand, Vincent, is it sounds like the way some of these large pensions and sovereign wealth funds tend to think through, you know, if they believe inflation is going to be higher, they'll buy some of these, you know, break-even type products, you know, and you said that returned like 6%. Why don't they just buy gold? Or why don't they just buy cryptocurrency? Or why don't they just buy equities in dollar terms or something like that? To what extent, I guess, are we seeing those assets increase because of the same underlying inflationista thesis that you're talking about? Which is just like, oh, another way to do this is you just sell bonds and you buy capital assets like equities or hard assets like gold, maybe for central banks and like cryptocurrencies, things with fixed supplies, even commodities fits in there. Is that all part of the same trade? Is this the reason essentially we're seeing cryptocurrency prices at all-time high and gold at all-time highs at the same thesis?

Vincent:
[49:18] Yeah, absolutely. I'm going to use the term of a good friend of mine who won a 314 research recently used the term the debasement mindset which i like basically we moved from a capital in capital preservation mindset where after the 08 the whole idea is like how do i how do i not lose money what's the the the driving, psychological principle and now it's you can almost say it's formal it's like how do i preserve, preserve my purchasing power. And yeah, there are many different answers to that. I would argue that there is a clear loser in there, that loser is long-term government bonds.

Ryan:
[50:02] So who's buying them? This is one thing I haven't been able to figure out, which is like, why is there still appetite for long-duration government bonds? Like who's buying this stuff? Is it still people who believe in the kind of the 60-40 type strategy?

Vincent:
[50:14] Yeah, there's a lot of that. Index fund, go back to my green, you know? I mean, Barclays Ag.

Ryan:
[50:21] It's, you know, 20%. You're just saying it's passive investors blindly dollar cost averaging their 401ks inside these things.

Vincent:
[50:27] Yeah, but that's a lot. Like I said, we put 1% of your GDP in there, and then you have a lot of regulatory demand. And again, going back to my earlier point on not getting fired and pleasing the regulator, usually buying government bonds is a good way to achieve both. Like, few people get fired. I mean, I guess the management of Silicon Valley Bank lost their job. But until then, no one had lost a job for buying a U.S. treasury. And then, yeah, it's the regulatory incentives. I mean, if the government tells you there is no capital charge.

Vincent:
[51:01] Sure.

Vincent:
[51:02] And then they could still do that, right? I mean, that's why we talk about all these, I don't know, it's maybe esoteric for the crypto crowd, but the SLR and standing group of SRF, all these regulation on bank capital. And a big debate right now is basically to trick banks into providing that bid for long-term treasuries. And if the regulator tells them, hey, you don't have to put any capital on it, you don't have to mark them to market, as long as the yield is above zero, they'll make money, doesn't matter. So you can always engineer demand for long-term treasuries. I mean, that's kind of the financial repression route, which is typically something that happens when you have that crisis. It's part of the playbook. and you can create that demand.

Ryan:
[51:47] Even that, is that a form of soft capital control, would you say?

Vincent:
[51:50] Yeah, it's part of the financial repression toolbook. It's basically you direct savings ultimately that banks are playing with people's deposits and you force them into an asset that they would otherwise not buy based on its own merit by tilting the scale in its favor.

Ryan:
[52:08] Let's talk about this maybe new regime that we're in. I've heard you and others call it a fiscal dominance regime and a fiscal dominance era. So is fiscal dominance the root cause of this inflation? If not that, what is? And can you give us a working definition of fiscal dominance and what this era actually means?

Vincent:
[52:29] What I think is the fundamental paradox of the current framework. And I would say the fundamental lie of central bank independence, right? It's the view that started, you know, after the great inflation of the 70s that, okay, we're going to put this, completely separate central banks and there will be this kind of like, PhD in the ivory tower with a single, oh, two mandates, but you really just, you know, keep in Europe when you have one price stability and it'll be completely separate from politicians because we can't trust politicians and they'll always do stupid things. I think that was never true. I mean, that was never...

Ryan:
[53:14] But you're saying that independence, that was a mythology that came out of the 1970s?

Vincent:
[53:18] Yeah, I mean, historically, the role of the... It's a very new idea, okay? Before the gold standard used to do that, right? They achieved that kind of disciplining factor. But the role of the central bank in any country has always been to finance the government. I mean, go back... Go back to Jesus with the coin, you know, showing, you know, whose face do you see on the coin, right? It's Caesar's. Give back to Caesar's what is Caesar's. That's the function of it. Treasury, right? It's to finance the government and it will always be, and then you cannot separate. I think that's the key insight from MMT, my monetary theory, is that you cannot separate fiscal from monetary. It's something that only works in economic textbook and you need to invent an economic history that never happened, right? Where money is somehow like exogenous and And then it's not like that. It's never been like that. So to me, the system was always going to break because it's built on a lie. And the idea that there can only be one king, there can only be one sovereign at the end of the day. Like if you have two things that are, you know, supposedly sovereign, at one point they will clash. And the question is, someone is going to win the clash.

Vincent:
[54:42] Either the monetary dominance, the central bank is going to force the budget. So that's typically what we see in emerging markets because they can't really print currency or the IMF is there. It's like, well, interest rates has gone up. You're paying more on servicing your debt now. So you're going to have to cut social security, immediate spending. I don't know how you do it, but an increase in interest rate will reduce the budget. So at the end of the day, fiscal policy is subordinate to the central bank. The central bank, by its decision, defines what fiscal policy is going to be.

Vincent:
[55:19] If the central bank high rates, it forces a tightening of fiscal policy. That would be the model around which the ECB was created, right? Because we have this 3% deficit target. Let's assume that people actually did it and it worked as the treaty intended. So we live in the mythical EU where everybody abides by the 3% target. Oh, the ECB has raised rates. We used to pay 2% on debt. You know, now it's 3%. We have about 100% debt to GDP. So 1% of GDP goes to servicing the debt. We have to cut all of the spending. So monetary dominance there. Now, fiscal dominance is the opposite. It's what we've seen in the US. Like we've seen that the central bank has been raising rate right from 0 to 5.25. And what happened at the same time?

Vincent:
[56:06] Spending has increased even faster. So the rest of us, you know, we haven't kept Social Security. We've increased the Pentagon to a trillion dollar. Government spending has been growing by, government spending X interest has been growing by 8%, 9%, which eventually leads to the problem of the government then calling the central banker, hey, You know, that, you know, extra $500 billion a year I pay on interest, I would very much like not to pay it, which is what, you know, Trump and Besson are doing. And we use all sorts of tricks before we get there, like issuing at the front end, like Yellen used to do it. But it's still the same idea, like the government tries to constrain monetary policy in an age of fiscal dominance. When in a monetary dominance, it's the central bank that constrains fiscal policy. Is this your interpretation.

Ryan:
[56:57] Vincent, of all the kind of back and forth between, you know, Trump and Powell, basically? It's like one thing that, you know, even his critics, maybe, maybe, maybe not, but some of his critics might appreciate about Trump is he just, he says what he's doing pretty explicitly. And whereas in previous eras, it seems like there was kind of a, I don't know, a mask, this idea that no, like, federal, you know, Fed independence is a thing. And the president, the executive branch, Congress doesn't interfere. We're a separate entity entirely. Trump just comes out with it and says, like, insulting things to Powell. You know, too late Powell. You know, you should be cutting rates already. Like, you're an idiot. you're incompetent. I'm about, I'm trying to hire your replacement right now. I've got job applications, all of these things. That's essentially what fiscal dominance looks like. That's what he's doing. He's setting rates as a president. I mean, this is what's going on. A lot of people pretend that's not what's happening, but you're saying this is actually what's happening.

Vincent:
[58:02] Oh yeah. And like you said, I mean, Trump says it. I mean, he literally says it. I, you know, every basis point that 25 basis point cost us x x hundred billions of dollars and i you know he kind of has this weird argument where he thinks that the the more powerful the country the lower the rate or so he's like look at the swiss right they pay zero so we should be below that like almost a, I mean, there are some weird things on Trump's economic theories. There are parts like, you know, he, same on the trade side, where he's very mercantilist. I mean, there are times where his arguments, even from pure, my country is doing so well, I should have low rates. I mean, every economist, you know, ears are bleeding when they hear that. It's like, no. But yeah, at the end of the day, it's a core, yeah, it's a fiscal dominance argument. And he makes it in the open.

Ryan:
[58:51] Even with his back and forth, Vincent, there's this idea that, oh, you know, Powell's resisting him. Powell is kind of bravely resisting Trump. Trump is trying to destroy yet another institution and we have to keep the Fed independent. What's sort of interesting is it feels like in Powell's last speech, there was, I don't know, some capitulation, something he is ultimately doing.

Vincent:
[59:13] It's a shocking thing. Even for me, who kind of expected it all along, is the ease at which people cave in to brute force. And even, you know, like the Fed was at least perceived to be this, you know, kind of bastion of independence and intellectual honesty and having, you know, academics. And man, it's like people who are really arguing the exact opposite of what they said, you know, three months ago. It's really shocking. And, you know, of course, they're all jockeying before the next position. I mean, you have hawks that are now saying we should cut, we should cut. Yeah, that's how power works. I mean, people respect power. They bend the knee in front of power. and that's what Trump is really good at in almost like a clownish, brutish way, like a mafia don type of thing, but he gets it done. Now, I mean, we can decry it and there is, There's a part of me now that feels worried about this, and I think most people do, a lot of people do, to some extent. But on that specific topic of monetary policy, I mean, I think it's going to be, I think it's probably bad short term.

Vincent:
[1:00:36] But over the long term, I think it's a necessary clarification. The old regime that was based on this lie, this myth, oh, the central bank does it, but we cannot do anything about it. And somehow money is this complicated thing that you should not, just don't worry about it.

Vincent:
[1:00:54] Trust me, I'm a doctor type of argument. It was wrong. And it should be part of the debate. The inflation, for example, that 2% target, did you vote for the 2% target? The way you ever asked? No, where does it come from? Some press conference in New Zealand 30 years ago, where, you know, literally, you know, an economist or a minister of finance was interviewed in New Zealand, had some issue, I think, with meal prices, whatever, inflation was running hot. You know, what's the right level of inflation? The guy kind of stumbled.

Vincent:
[1:01:29] There's only 2%. Think more than that. And then they try to rationalize it with saying, well, it's because of the lower, zero lower boundary and the... all bullshit. I mean, first of all, like what price level is optimal at all times? I mean, my answer about the inflation targets probably depends. There are times when 2% is too high, there are times when 2% is too low. And also it has distributional consequences. I mean, inflating away your debt, we may like it or not like it, but it's the way how it's always worked. It's one way we can walk around the debt crisis. And by, putting that corset by saying this God-given number is the truth. We are restricting our degrees of freedom. It should be part of the conversation. I mean, that's, yeah. Do we want more inflation? Do we want to pay less pensions? How do we deal with this debt crisis that we're having? Every option should be on the table. And the option that is taken should be the object of a wide debate. So that's the part to me that I find positive from this kind of trombescent takeover of the Fed is that it will make the truth emerge.

Ryan:
[1:02:44] So this has always been kind of the argument, like you, many people in crypto have been sort of early to this and they saw that fiscal and monetary were kind of the same thing. And the very simple story was all of this would lead to increased fiat debasement as all fiats debase throughout history and have. And assets that have previously held their position as reserve currency status, they're always destined to die. What's their shelf life?

Ryan:
[1:03:12] 60 to 70 years, something like that. And so that's all inevitable. And that is what is happening and going to happen to fiats and the dollar. I mean, is it really that simple? Is that basically what's playing out? I mean, have the crypto people and maybe even the gold bugs, have they been right about this? And it's just going to play out very matter-of-factly. Fiat will continue to debase. Inflation will continue to run hot. The debt will be de-levered through this process. We'll have, I don't know, years of this, maybe a decade of this. Things will reset. But in the meantime, all of the monetary, non-sovereign monetary stores of value, they will increase in relative price. Is that how this plays out?

Vincent:
[1:03:55] I'm in a really big picture. I would agree with that. Now there will be ups and flows. There will be cycles. There will be times when nothing moves in a straight line. There will be different winners and losers at different times. For example, now I would argue stocks should be part of that debasement portfolio. Like in the 70s, they would have been a pretty bad choice. And I think that's one of the common mistakes, I think, of the kind of crypto gold bug crowd has been to kind of.

Ryan:
[1:04:26] It's too maximalist.

Vincent:
[1:04:27] Yeah, and throw the stock market into that Ponzi fake price basket. When in reality, if what we're talking about is unconstrained public spending and constantly running the economy hot, a lot of that, I mean, the deficit of the public sector is the profit of the private sector. Ultimately, the government just buys services from the economy. So you increase profits, you financially repress, so you keep interest rate, which are costs for company lower. Yeah, stocks, stocks, and also for the discount rate mechanism, asset prices are going to do well. So it's not just, you know, buy, I mean, that's your thing, that's your thing, but like buy crypto and nothing else is probably not the right position.

Ryan:
[1:05:15] Yeah, I think there's a fear. I want to get into what you recommend is kind of a, or like your thoughts on a fiscal dominance, inflationista type portfolio. But I think there's a fear among crypto people of, you know, things like recessions that could happen, job market, stock market. Maybe there's this naive view that something like gold or cryptocurrency might be immune to that. But I think you have a take that like, in flesh, recessions are dead, man. Like that's not a thing that's going to happen in the era of fiscal dominance. What do you believe about that?

Vincent:
[1:05:45] Well, first of all, it's kind of an observation. I'm in my early 40s. It's really been only one recession in my lifetime. In the U.S. at least, COVID was obviously a blip, right? The only major recession we've had is 2009, right? Before that, 2000, it was kind of rapid growth. You can argue maybe 2001 there was one, but, you know, depending on the finish, it was very shallow.

Vincent:
[1:06:10] 90s, it was a great moderation. The 80s, it was a Reagan boom. So when it comes to portfolio construction, right, when we look at, again, I go back to this long-term treasury, so 60-40 portfolio, in the traditional 60-40, basically it works because your stocks do well when growth is good and your bonds do well when growth disappears, right? So the question is, are you going to put 40% of your portfolio to hedge against something that happens only once every 40 years? That seems to be excessive. So there's that observation part. Now, I think that the drivers for this are many. I typically point to technology. One side I love is the, the tangible book value of the NASDAQ index is less than 3%. So you say you buy the NASDAQ index, you have a lot of money, like $30 trillion. And then you buy it, and then, okay, I need some cash. I'm going to sell the Microsoft Office, the computers, the servers, and you get less than 3 cents on the dollar.

Vincent:
[1:07:16] So value, my point that I'm trying to make now is value is intangible. As opposed to, you know, back in the late 19th century, right? If you bought the Dow Jones Industrial Average or the transport, it's even in the name, right? I mean, you'd buy a railway track, you'd buy plants. And these things behave very differently, right? When we had a physical, tangible economy, well, you need capital gets used, right? You need to replace it. Tracks get broken. So there is this capex cycle over time. There is an inventory cycle because you need to move product instead of bits. There's a credit cycle because you need to finance these assets. So you have all these things that create security gallery in the economy, which we don't have when most of the value is intangible assets that don't need to be financed, that don't get used, and that generate no inventory. So that's the technological aspect of it. Then there is the structure of the economy.

Vincent:
[1:08:12] A fascinating stat. If you add the government sector, health care, share of people about 65, you have 50% of the U.S. population right there. So for this 50% of the population, their income has nothing to do with the economy, right? I mean, it's not because even if there's a recession, people are going to fall sick and they're going to draw on their Medicare and they're going to visit a hospital, right? The government typically is counter-cyclical even, right? Spends more in recession, less. And then the retiree, you know, it's the cost of living adjustment. It's the only thing that matters to them.

Vincent:
[1:08:48] Conversely, the share, combined share of construction and manufacturing is, I think, around 12, 13% in the U.S. And this is typically what we see even today. Like we had this, I don't know when it was published, but we had this bad job report.

Vincent:
[1:09:07] You know, we had finally construction employment rolled over. It took way longer than people thought, but we saw declining jobs in construction and manufacturing. We still had a positive number. Why? Because we had 50,000 jobs that were created in healthcare. And then there was this temporary drag from government because of the Doge tab, but I think that's going to flip back over. So again, my point is we still have a cycle. There's still a construction cycle. There's still a manufacturing cycle. They're just not big enough to get the economy going or rolling over. So all that it does at most, which I think is where we are now, is that it kind of slows down. And because inflation remains high, because of the kind of permanent stimulus story, we move from inflationary boom to stagflation. But we kind of miss the part in the economic season where we have deflationary bust, both inflation and output dropping at the same time. That's what I mean by recessions have been canceled. So like if you think of recession as a 2009-like event where we'll see, you know, sub 1% inflation print, massive job losses, 10% apartment rate, I really don't think it's going to happen. And then the final reason for that is the policymaking, right? We have this kind of hyperactive policymaking where the Fed cuts just because inflation might slow below the 2% target in 12 months based on some, you know, number that, you know, they made up. And then we have this, yeah, I mean, the fiscal span, I mean, just one last stat.

Vincent:
[1:10:32] So this year, we're getting about $30 billion a month now in tariff revenue. So that annualizes to about $300 billion a year. We've had some state cuts, which on the margin should have helped with servicing. We had those, which, you know, according to Elon Musk, saves a couple hundred billion dollars. We have extremely strong tax receipts. I mean, that's the part I think people don't realize is tax receipts are growing by 10%. It's 10%. Wow. Which again, one reason why I don't believe in a recession story, but we put all that together and still the deficit today is bigger than it was last year. So that fiscal impulse is always going to be there. It's just, yeah, it's almost a perpetual motion machine. So you put all that together, and I think it's, if you want to hedge against the risk, it's things running too hot, not too cold. And yeah, as you mentioned, one area I think of, where I kind of disagree with the crypto maximalist gold bug is, or there's going to be this sort of apocalyptic, destructive moment where the economy will blow and the Ponzi will deflate. It's almost like a religious view.

Ryan:
[1:11:51] It's a doomer, millionarist.

Vincent:
[1:11:53] First of all, if it does happen, I'm not so sure that micro-strategy is going to be the best store of value for anything. I mean, even gold for that matter. I mean, a goal in 08 lost a lot,

Vincent:
[1:12:07] but I don't think we need to worry about that because I don't think it's going to happen. Again, going back on how do, if the story is as simple as what we described, which is debasement, fiscal dominance.

Vincent:
[1:12:19] We're going to die.

Vincent:
[1:12:20] There's two ways you can die. We can die by fire or we can die by cold. And I think it will be death by fire this way. This is typically the way it goes. I mean, the one reason why I'm so passionate about this a lot of time in emerging markets, and I can see a lot of similar dynamic between the US now and Brazil 15 years ago or Colombia, and name the emerging market that died by, you know, debt-driven deflation.

Ryan:
[1:12:46] Never happens. The one thing the US does have that some of these emerging markets didn't have is the reserve currency though. And that counts for something. And you got to wonder what's going to happen there. But as we get to the end of this conversation, Vincent, this has been very fascinating because I think a lot of our listener base probably shares your core thesis. Basically, you articulated it the way many of us probably would. And that's why I'm so curious to ask you this next question, which is like, okay, construct a portfolio. I think a lot of bankless listeners have a portfolio that might be like what we call crypto barbell, where you have like a large portion of crypto assets, let's say. And then you have on one side, and then on the other side, you have something ultra low risk, something like US treasuries, like short duration treasuries. Give us an alternative. So a portfolio that's like a fiscal dominance portfolio, and inflationista portfolio, something that you would advise a friend or someone personally, not necessarily the pension fund portfolio, because we know those guys are a bit more risk adverse and they can't get fired and they can't do, you know, that you couldn't, you can get too crazy with them. But if you were to construct a portfolio for yourself or someone else based on everything that you know in 2025, what would be in it?

Vincent:
[1:14:04] I mean, the two things that you mentioned, I think, should be, they're probably not in the same proportions as what your question implied, but in general, and again, it's a bit counterintuitive given my belief in higher nominal growth and debasement over time. I like cash, I think, not necessarily because I think it's going to be the best.

Vincent:
[1:14:32] Way to to preserve purchasing power you won't but it's not the worst by the way the really the worst is the it's it's the duration rate so if you look at back even in the 70s like really you got you got matt it's duration that massacred you whether it was expressed in in bombs or or in stock but if you the cash rates you know more or less photo inflation more often than not we're above inflation which which if you believe the cpi at this point we still have technically i mean it's going to come down, but we have like, you know, 4% rate and inflation is, let's call it three. So it's not the worst deal. What I like about cash is cash is the option to buy something else at a cheaper price. It has this optionality value. And I do think that we are going to see there will be opportunities to buy assets. And then when this happens, you want to have some of that cash. I also think in general, diversification is going to be a lot harder to get in large part because of what you said, you brought up this whole, it's all one trade. Isn't it now i agree with that you know going back to to crypto in the early age crypto had a negative correlation to to stocks and now it's probably around 60 70 percent that makes sense but every time and that's a normal life cycle right it gets adopted and as gets adopted well if i if everybody owns it and you lose money in stocks then you're going to sell you know something else.

Vincent:
[1:15:54] So cash, for virtue of being cash, has a correlation of zero, right? It'd be still the unit of account, right? So a correlation of zero is not so attractive when you could get negative correlation, which we used to get with long-term treasuries or crypto, but long-term treasuries are not positively correlated with stocks. Crypto is also, so that zero is on the margin better. I think going back to the, if your template is kind of your crypto maximalist, I would argue for maybe more diversification, especially abroad. I would caution against trying to, you know, short stocks or even underweight stocks. I mean, I do think we're going to have a correction in September, October, like we may have started today. I think it's quite over the long term. I think this is still quite a good environment for stocks. Again, I go back to this idea that we're running the deficit at, you know, 70% of GDP and we're suppressing interest rates. So, yeah, it's not that hard to make money in the stock market. And yes, valuations are elevated. I get all of that, Shilopi, all these things. but it's not that insane to me. So what I'm hoping will happen is we are seeing this 10, 15% pullback September, October. If that happens, I would put money back into stocks.

Ryan:
[1:17:12] Wait, you think there's going to be a 10 to 15% pullback in September?

Vincent:
[1:17:16] Yeah, September, October. Yeah, something like that.

Ryan:
[1:17:19] Okay, wow. Interesting. So that's what that may be some of that cash is pure.

Vincent:
[1:17:22] Well, I mean, as a disclaimer, usually people go on these shows to show off their amazing track records and rewrite the past, I'm going to do the opposite. I've been saying that since July, okay? So I had a report that the August correction may happen in August, the August correction may happen in September. I mean, if I keep pushing it out, eventually.

Ryan:
[1:17:41] You're going to be right one of these days. So you don't believe in recessions, but you do believe in dips, in particular stock market dip. But, okay, the portfolio that you're dreaming up here is just no long duration bonds here. You do like a healthy cash position, something in integration bonds.

Vincent:
[1:17:58] So still market weight to overweight stocks. And then I really think people should look outside the U.S. I mean, going back to the early part of the conversation, I think we will see. Like we said, that 70% figure on the market cap is probably the peak. And we will see that the most interesting opportunities over the next 10 years are going to be abroad.

Ryan:
[1:18:21] Do you like the emerging countries, like sort of the middling countries, like, you know, India, Indonesia, Vietnam, those types of locations? Do you also like Europe and China?

Vincent:
[1:18:31] Yeah, I would actually favor China. India has been one of the favorites and it's done very, very well. It used to be that India traded a discount to a broader emerging market because of governance, because of productivity issues. And now it's about twice as expensive as other emerging markets. I think that that story has really been told, the political stability, the largest democracy. And what we see, I think also just peace between Russia and Ukraine is going to hurt one huge thing for it. I mean, India is a billion four country that basically has no energy besides coal. So, and again, keep in mind for emerging markets, you know, the biggest problem, how do I provide.

Vincent:
[1:19:12] Food and energy to my people because that's if you don't do that you get beheaded right so that's so same concern even in china this concern food and energy that's why they need a dollar because you need a dollar to buy food and energy and and that's why they need to explore right for india it's really on the food side depend which province but they did they had they're getting better but on energy side there's not much you can do except that when you have something as wonderful as these silly sanctions that we put on Russia, where the Europeans have a self-imposed cap on what they can pay, and then India can just buy it. And then because Russia has no buyer, they take in rupees, which is great, or India, because they can print rupees, not dollars. They buy 30% below spot. They can heat, feed, power their industry, and then they have some left over that they can re-export back to Europe at the market price. Oh, wow.

Ryan:
[1:20:02] I didn't realize.

Vincent:
[1:20:02] Yeah, I mean, this is not going to go on forever, right? I mean, if we have peace between Russia and Ukraine, that anomaly is going to go away. And I think that that had quite a bit to do with the massive rally of Indian equities. So with the Indian complex, I mean, I would actually favor, you know, China, where we see kind of that policy shift, certainly the best performing major stock market this year. That's the weird thing about, you know, you always want bull markets that no one talks about. And China has been, I mean, it's been volatile, but pretty much since they had a big stimulus announcement about a year and a half ago, Chinese equities have outperformed. I mean, look at the chart of Alibaba. I mean, you see the, you're certainly seeing the, the technological advancement on display with their big parade. And I understand that the argument, you know, that India versus China is basically a growth argument. It's like, well, long-term, you want to invest in the high-growth country. The high-growth country is India because it's got better demography, but China is screwed because of the one-trade policy. I would advise against this kind of fallacy of buying the highest growth because economic growth and stock market returns are different things. What matters for international investing is not so much the growth, it's the valuation at which you buy at. I mean, for any asset, the primary driver of your long-term return is the price you paid.

Vincent:
[1:21:27] You can buy a wonderful asset at a crazy price, you'll still lose money. So cheap valuation, cheap currency, hard to argue. To me, the biggest macroeconomic imbalance, the biggest fake price in the world since the late 90s has been the undervaluation, the suppression of Asian currencies. And we can go into why it happened with the 1998 East Asian crisis and then the reserve. But basically, we had an entire continent covering more than half of the world population that decided to repress the currency. And I think it's like a string that's accumulating momentum and I think it's kind of unwinding now. And then margins. Margin is really the big one. I mean, one big reason for this.

Vincent:
[1:22:15] When you're talking about the outperformance of the U.S. market, is the profit margin of U.S. Companies went from 7% to close to 15%. That's really powerful, right? If you can double the amount of profits you squeeze out of the dollar, it doesn't even matter that you're not growing that fast. It seems to me that China is in a similar position where the profit margin has been suppressed because of this excessive competition, right? Coming out of, you know, the real estate bubble started to deflate in 2017, 2018, and then the government directs all this money to the big four, the new industry, EVs, solar panel, batteries, and I'm blanking on the forefront. And basically every province, every city starts its EV company and then you have this massive attrition. But it worked, it worked. Now we have amazing electric EV that are completely well-lit. I mean, competition work and I kind of forgot that in the US because we have this kind of very illegal policy. But like, that's it. Now the winners have emerged and also the policy is changing. You see now the anti-involution, right? It's the government is saying, you know, we want companies to make profits.

Vincent:
[1:23:25] So I would see margins, potential for margin expansion. So yeah, China would be one. Brazil is another one that I think is interesting because they are the, it's not been the, the margins have been held back by interest rate. I mean, the CILIC, which is a benchmark rate in Brazil is 15%. 15% overnight. The inflation rate is 5%. You have 10% real rate. I mean, you can't make money in this. You can't invest in the stock market. I mean, why would you? What if you could make, you know, 1% a month just by being in cash? Again, at some point, this is going to normalize. When that normalizes, you'll see profit margins explode. It's also a weak dollar trade. You know, I think a lot of these kind of crypto, world, you know, believes in, you know, kind of secular decline of the dollar, loss of reserve status, which maybe I think eventually it will happen, yes, but maybe not in the time that they think. Well, if you believe that, buy international equities with both hands. Because, you know, for most emerging markets, there is original sin where they cannot borrow at least long-term in long-term currency. So if you want to build a cement factory in Nigeria or a car plant in Brazil, you're going to borrow in dollars. And if you have something like what we're seeing this year where the dollar is down 15%, this is insane amount of stimulus for you. I mean, suddenly the value of liability has dropped by 15%. You haven't done anything.

Vincent:
[1:24:54] So as the dollar falls, it stimulates growth in emerging markets. Emerging markets, as they have higher growth, the central bank has room to cut rates. the currency strength and it creates this self-reinforcing loop, which going back to our earlier conversation explains why these trends last for 10 years, because it is self-reinforcing. Once you make the switch to a weak dollar environment, it feeds on itself. And I still think we're in the very early innings of that.

Ryan:
[1:25:20] That's so fascinating. You're almost causing me, Vincent, to want to do an entire

Ryan:
[1:25:23] episode just on emerging markets and the story there in the context of everything we talked about. Just one last category in the portfolio. We don't have to talk about crypto because you know bankless listeners goes without saying how about gold you were saying you know the most important thing is the price you pay well gold is now all-time high price you pay for this asset do you think gold is still in that portfolio right now i

Vincent:
[1:25:45] I mean i've been kind of a strategy you know gold bull for a, Pretty much since I started writing about this secular inflation, fiscal dominance theme in about, well, six years ago now. So it's kind of, I may have a little bit of an emotional attachment to it, you know, once you're.

Ryan:
[1:26:02] Going back to this

Vincent:
[1:26:03] Whole like Max 7, can't let go type of thing. Yeah, I mean, you look at the chart, it's really going parabolic. So you think at some point it's going to break. Maybe I would still recommend, again, it's part of that debasement trade. One thing that does help gold is you have this kind of central bank bid, right? To your earlier point on who's buying this stuff, you know, central banks are not buying crypto, right? So we have this movement so far. I mean, maybe it will change in the future. But if we are seeing a decline in dollar share of reserve, I mean, so far, the one that has declined is really the euro. So what we've seen, if you look at the Compositional Reserve, is the dollar has actually been stable, but the euro has gone down, and then gold and to much less extent the Chinese euro have gone up. It's going to go into gold. And you still see the share. For example, you look at People's Bank of China, they probably have like 4%.

Ryan:
[1:27:00] Of their reserves. Is that where the net new reserve buying is going into primarily?

Vincent:
[1:27:04] Yeah, no, no, no, look at the report. The World Gold Council tracks, because they have to disclose this stuff. And, of course, you can say they lie about the gold bars are fake or whatever, but I don't know. Yeah, the buying, I think, lately, the central banks have been major, major buyers. Not just China, I mean, Kazakhstan, Asbar, Russia, obviously, because they can't get treasuries. So that's weeks ago. But even like Poland, Turkey, it's really a broad trend, which stands in contrast with the ETF market, where despite, going back to this idea of the, you know, the bull market in silence, right? You look at the shares outstanding in GLD or even GDX, the gold miners. I mean, it's, I mean, it's insane. Again, a good friend of mine, Rob Mullin, I don't know if you've heard of it, Marathon Advisor, he goes back and it's never happened to see a bull market of the magnitude of what we're seeing in gold with net investor outflow, at least in the US. So yeah, maybe, I mean, one place, you may want to switch between gold and the miners, for example, because, I mean, gold could drop by 20%. Oh, yes, for sure. but the gold miners will still be minting money at these levels. So maybe that's, you know, you take some profit from gold, you get back into the gold miners, but I still think it should be an overweight.

Vincent:
[1:28:27] Again, I don't think the market has fully priced this story. I think this story is going to play out on a very long timeline. And going back to your point on the dollar, the U.S. is the reserve currency. It's not like any other emerging market. I agree with that. Now, what does that mean? it means that the journey is going to be a lot longer. You know, we're not Turkey, we're not Brazil. And yes, if we had these policies in Turkey or in Brazil, maybe it would be a couple of years, could be a decade or more in the US. We have many tools we can wield before we get to the end. So it's still early.

Ryan:
[1:29:04] Vincent, I have thoroughly enjoyed this conversation. It's been exceptional. Thank you so much for joining us today. It's just like a wealth of knowledge.

Vincent:
[1:29:11] It was awesome. I hope to be back. Talk to you soon.

Ryan:
[1:29:15] Bankless listener, I got to let you know, none of this has been financial advice. Of course, all this stuff, financial markets, crypto, it's all risky. You could lose what you put in, but we're headed west. This is the frontier, not for everyone, but we're glad you're with us on the bankless journey.

Vincent:
[1:29:27] Thanks a lot.

Music:
[1:29:31] Music