From Neue Zürcher Zeitung's TheMarket.ch, December 22:
Louis-Vincent Gave, co-founder and CEO of Gavekal Research, talks about the most important developments in the global economy and reveals where he would invest his money with a view to 2024.
Louis-Vincent Gave is an astute observer of geopolitical and macroeconomic developments and their impact on financial markets. The analyses of the co-founder of the Hong Kong research boutique Gavekal are required reading for numerous investors worldwide.
In an in-depth interview with The Market NZZ, which has been lightly edited for clarity, Gave shares his views on the question of whether the US economy is facing a hard landing and when the Fed will cut interest rates. He thinks the point of «maximum pessimism» may have been reached in China. Gave sees the greatest investment opportunities in emerging markets, selected commodities and Japan.
«In my view, the stocks of the Magnificent Seven are overowned,overloved and overvalued. I don’t feel like chasing them»: Louis Gave.For the past few weeks, markets have staged a massive rally based on the idea that the Fed will deliver a series of rate cuts next year. This gave rise to a feeling among investors that we’ll have a beautiful soft landing. Are they right?
As you know, I’ve been a rabid inflationista for the past few years. I also haven't been calling for a hard recession. That’s still the case. I still don’t see that the US economy is headed for a recession, and I don’t think inflation has been fully dealt with. So given these views, you would expect me to believe that the Fed won’t cut at all. But I think there is an overarching political element to this next year. If you go to Washington D.C. today, anybody you talk to is dead worried that Trump will come back. While back in 2016, he only talked about draining the swamp. Now, he has spent the past three years blaming the establishment for his loss. There is a great fear in Washington as to what Trump might do when he comes back. With that in mind, any means is good to prevent him from coming back. If that means running massive budget deficits, and injecting liquidity into the system to goose up the economy, releasing all of the Strategic Petroleum Reserve to crush oil prices, then so be it. We’ll deal with the consequences on the other side.
So you’d say the Fed will indeed cut – but mainly for political reasons?
I think the perception at the Fed now is that they managed to put inflation back into the box and it’s not that big of a deal anymore. Given the political landscape in the US, the odds of Fed rate cuts next year are pretty high. If we see the smallest inkling of a slowdown, as soon as we start to see the unemployment rate tick higher, the Fed will start cutting. This isn’t a normal political cycle where your civil servants are going to be politically neutral. We’re well past that in the US.
The robustness of the US economy in the face of a rapid rise in interest rates has taken many investors by surprise. What’s behind it?
For me, a recession is typically a one-two punch. Most businesses and individuals can withstand one punch. They took the punch of higher interest rates and they were still standing. If they had received a second punch in the form of higher energy prices, that might have knocked them down. But that punch never came. Quite the contrary, gasoline and oil prices are going down. I think the rollover that we have seen in energy prices lately pretty much guarantees that we won’t have a recession. That doesn’t mean we can’t have a slowdown, but I don’t see a hard landing. Another important reason is the massive fiscal deficits the government is running. The fiscal deficit is currently running at $300bn per month, which is mind boggling. This late in the economic cycle, they should be moving back to a budget surplus. But the budget deficit keeps on getting worse. And again: I think that once we have a slight pickup in unemployment, the Fed will cut rates immediately. The real reason they’ll do it is to goose up the economy and markets before the election.
On the other side of the macro spectrum, China was the big disappointment this year. What’s your take on China?
First, I got the reopening of China wrong. You remember last year I told you that we would see a big reopening boom. That was wrong. I just thought that we had seen this movie before with the reopening in the US, in Europe, in Australia – in each case we had a big pickup in consumption. But not in China....
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