Submitted by Taps Coogan on the 17th of May 2018 to The Sounding Line.
Veteran investor Charles Gave of Gavekal Research recently gave an interview to Macrovoices’ Erik Townsend in which he discusses many issues including: the potential for secular inflation, his view’s on China’s debt, the end of risk-parity, how to invest in an inflationary environment, and a warning that the private sector yield curve is now ‘totally flat.’
“We are right now at a point where… the private sector yield curve as I compute it is literally at zero, totally flat, which… is going to be uncomfortable, but if it stays there, we probably can survive. But if suddenly it starts inverting with short rates going up, which it can do perhaps starting in June with the next meeting of the Fed, then every time the private sector yield curve got inverted in the past we had a big problem… either in the US or outside of the US. Outside of the US it occurred if somebody had a fixed exchange rate system with the US. For example, like Mexico in 1994 when the private sector yield curve inverted, not much happened in the US but Mexico went bust and then it inverted again in 1997 and the fixed exchange rate between the Asian currencies and the dollar at the time, not much happened in the US economy but Asia went bust and then in 1999 it inverted again and we had a recession in the US…”
“Credit crises occur if one of two things happen. The first one is if banks borrow short term money from the financial system, or what-have-you, and uses this borrowing to buy assets with a different duration than the money that they borrowed. So basically they borrow short term and they invest long term. When we had the big financial crisis in 2008, the money central banks in the US had borrowed something like three times their capital to do transformation in the housing market and what-have-you. So the first reason why banks go bust is they make a big mistake in the duration between what they borrow and what they invest in. Then they are very sensitive to a liquidity crisis. The second thing that can happen is if there is a bank that buys in a foreign currency, like Thailand in 1997. If you borrow in a foreign currency then you are screwed if suddenly the foreign currency starts going up and you can’t repay and your country starts going down. When you look at the Chinese debt… all the loans in China… are financed by deposits which is the safest form of long term financing and moreover there is absolutely no borrowing in China from any other currency. So what I am trying to… impress on our readers is ‘Fellows stop thinking about debt the way you do. The only thing that matters about debt is if you have a debt to a foreigner. China owns 100% of its money to domestic citizens in China. So on a consolidated basis, there is no debt in China. France has a debt because 70% of its government debt is owned by foreigners.”
There is much more to the interview, so enjoy it above.
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