Good interview with Louis Vincent Gave - 2019

Have always been a big fan of Louis Vincent  and ran across this good interview with theMarket.Ch (thanks to Jesse Felder for bringing this to my attention).

Below are some responses I found worth quoting. There is a lot more discussed and I recommend that you read the whole interview.

Q: What's ailing the automotive sector? 

Louis Vincent Gave: There are a number of structural issues, but the most significant development has been the realization that the Chinese car market is done growing. For years, the Chinese market has been growing by two to three million cars per year. Financial markets have just extrapolated this kind of growth into the future. But that turned out to be wrong. The Chinese car market has probably hit its limit at 25 to 30 million units per year. In most parts of the world, the auto sector has stopped growing. It’s no surprise then that Germany has seen such a collapse lately. 

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You mentioned that in every bubble there is the belief that there will be another sucker who will buy the assets at a higher price. Who is that sucker today? 

Central banks. Bond investors think that the ECB, the Bank of Japan, now also the Fed again, will always step in and buy bonds. They don’t care if the yield on German Bunds is minus 50 or minus 200 basis points. The ECB will buy them.

And you think this belief will turn out to be wrong? That’s the big question: Will central banks continue to buy bonds regardless of what happens? And that brings us back to the subject of inflation. To me, this question is linked to energy. If energy prices stay where they are, central banks can continue with their crazy monetary policy. But if energy for whatever reason starts to shoot up, it will be much harder for central banks to say there is no inflation and therefore we can continue with our negative interest rate policy. 

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How will that war be played out?  

Washington has decided to move the battle onto technology, because that’s one of the fields where the US has a competitive advantage. If this was really just a trade war, would the US government tell the semiconductor manufacturers not to sell to Huawei anymore? Of course not. If it was just a trade war, the Americans would want to sell more stuff to the Chinese. So, the battlefield of the new cold war is technology. The US government tells the American companies to divest from China. Meanwhile, China invests hundreds of billions of Dollars into building new tech competitors and into developing its own semiconductor industry.

What will this mean for tech stocks? 

This is massively bearish for the tech sector. You get government intervention on both sides, that undermines their entire business model. It strikes me as crazy that the large US tech stocks are still performing so well. The battle field for the new cold war will be technology, and yet, investors go and buy tech stocks. This is insane. That is like buying real estate in Alsace in July of 1914. You don’t want to own the battlefield. 

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What’s a more intelligent portfolio? 

I would buy equities with an underweight in US, and I’d hedge them with energy stocks. Instead of buying bonds, I’d buy the likes of Total, BP and Royal Dutch Shell. They will give you the hedge in case energy prices go through the roof. Plus, they offer a decent dividend yield of 5 to 6 per cent. So, in a way, I see energy stocks as the new bonds.

How about gold? 

I’m not a gold bug at all. I never liked the idea of owning something that does not produce any cashflow. But we have to accept that the global rules have changed. In the past year, we moved to a world where central banks, which have been net sellers of gold for 25 years, have become net buyers of gold again. This is an important change. For 25 years, we had two marginal sellers of gold: central banks, and the gold miners. We have moved to a world where the only sellers of gold are the mining companies, and because of their dreadful stock market performance, they have not been able to invest much capital into the development of new mines. This is the kind of world where we can see a large upward move in gold like we saw this summer. And mind you, this was in an environment of a rising Dollar.

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Which equity markets do you like? 

I’m fairly bullish on emerging markets for the coming year. Look at what’s happening there. India just cut its corporate tax rate from 30 to 22 per cent. Look at the tax cuts in China, the interest rate cuts in Russia, Indonesia, India, Brazil. Don’t forget, emerging markets are still the places where cutting taxes and interest rates has an effect. When interest rates in Europe go from minus 40 to minus 50 basis points, that does absolutely nothing to the economy. But if interest rates in India go from 7 to 5 per cent, that means more mortgage demand, that means more people borrow money to buy motorcycles, and so on. This has a big effect.