The EM Financial Stability Report Card | Rohit Goel on Emerging Markets, Dollar Dominance, and Term Premia
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The ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough. Thank you. Let's close this f***ing door.

Today's episode is brought to you by 2Creum. Learn more about how agricultural commodities can play a role in your portfolio by clicking the link in the description. We've got a very special interview today. I'm speaking with Rohit Goel, Partner and Head of Global Macro at Breakout Capital Partners. Rohit, great to see you. Welcome to Monetary Matters. Awesome. Thank you so much for having me, Jack. I really appreciate that. I'm really looking forward to it. Just a usual disclaimer, all the views are my own, not

from breakout capital or Rockefeller or any other institutions. But with that usual disclaimer out of the way, I'm very excited to have this conversation. Thank you for having me. I'm really excited, Rohit. We've got a treat today and let me explain why. So you

our head of global macro at an emerging market investment firm. We want to talk all about that, your views on emerging markets. But before that, you were a researcher for the International Monetary Fund, IMF. And there's a very important document, the Financial Stability Report. Everyone who's a big hitter reads this document. It is a very, very big deal in academic and central banking and policy circles. And you were a major contributor to that piece. And you'll

conducted major research in the emerging markets part of that piece you know you're not at the imf anymore rohit but my question for you is if you still were in that seat and you were in the process of writing the global financial stability report for the imf in the emerging market section if you still had that job that still had that role what would you write about now and why sure

No, I mean, that was a very exciting, I would say, stint and a rule. The job, as you can imagine, is to look at the distributions left half, what can go wrong, and try to sort of work with the policymakers to avoid the mistakes, right? The way we are right now, I mean, I think the glass will be half full and half empty. The glass half full in the sense that, look,

emerging markets did emerge from one of the worst crises in a relatively better shape with the balance sheets doing relatively better. We were expecting a record number of defaults back during the pandemic for emerging markets. We got

barely a handful and most of them have a market access right now. So from that perspective, that's a testament to emerging markets resilience and how they both the policy makers and the corporate sort of react to many of these shocks. I think from a forward looking perspective, the biggest challenge for emerging markets, if not all for some is more on the fiscal side. I mean, as we saw that many of the emerging markets were the first to

raise rates and obviously created a lot of monetary policy buffer right so many of them have that lever which supports their currency which supports their potential growth forward-looking basis but the biggest risk which we see in a lot of ems is more on the fiscal side that look if you start just because growth has been tightening because of high rates if you start loosening your fiscal

balances and you start to drive growth through either subsidies or excessive government spending, then that doesn't really gel well, both for financial stability as well as for your long-term FX prospects. So I think the biggest issue is more on the fiscal side that you need to still maintain your policy orthodoxy, even if many of the developed economies have chosen not to. And that policy orthodoxy is what? Don't have very large deficits and

Yeah. And don't borrow that much money? No, absolutely. In the sense that look, emerging markets being emerging markets, they don't have the perks of US of being an exorbitant privilege where the dollar is what it is. So dollar and US can afford to run these excessive pro cyclical deficits for emerging markets. They don't have that luxury. So if some emerging markets try to go down that path, and we saw that with Brazil,

last year that look, we'll do a lot of fiscal spending to support the growth. From a financial markets perspective, that doesn't really work out well. And in the long run, there's a net loss. So that's sort of a big question that look, you need to invest in more productive areas. Obviously, some deficits are needed. Emerging markets do need financing. But at the same time, they need to control the urge to just spend whatever they can spend just because that's the cue which a lot of DMs are sending.

to emerging markets. The bond tantrum episodes that we see in developed markets of late

emerging markets obviously are significantly more prone to those issues. And Rohit, I think it was 2020, the IMF started talking about how 60% of emerging market countries were in debt distress or deep debt distress. And I know this made the rounds on Twitter. A lot of the doom and gloom type people said, blah, blah, blah, blah. 60% are in debt distress, but it actually did

Did it turn out to be that bad? Were you the one who was writing about that debt distress? Why do you think the debt distress didn't happen? Is it as simple as the dollar weakened and that was that? Or is there more to the story? No, I mean, basically, I mean, IMF is a massive institution, right? So a lot of us are doing a lot of these things.

analysis, and that came from a different team, not necessarily from the financial stability team, but that is something which we did actively cover. And that was the point that 60% of EMs, including frontier markets, low income emerging markets, were either in distress or near debt distress. That was the point. And that was the highlight at the peak of the pandemic that if this is the condition right now, if the financial conditions continue to tighten, then we will see a wave of defaults across emerging markets. And

In hindsight, clearly that did not turn out to be true. Like we saw much less number of defaults. We saw much less number of debt distress in emerging markets. And I would say it's a combination of both. A, financial conditions globally have remained relatively supportive, right? Both on the equity market in general. And even though dollar has sort of

been relatively strong it hasn't really broken up massively it was quite weak in 21 and so on so that has sort of given some reprive to emerging markets but i would highlight in my view the big reason why the wave of defaults did not happen was primarily domestic for emerging markets that a ton of emerging markets realize that their back is against the wall

they can't spend like crazy and they need to rein in. So we really saw during the pandemic at the peak of debt distress that a lot of emerging markets

pulled back their strings. They started cutting the spending, they started doing the right things. And we can name quite a few. There is Sri Lanka, obviously, I mean, Argentina is a recent example of neoliberalism, but a lot of emerging markets took the right step that we don't have the funds to spend and market is not really supportive for indiscriminate spending. So I think that's a big reason why we saw that many EMs did maintain

the financial access to global international markets and the investors did not sell off that massively. And how, what is the correlation between emerging markets countries having access to financial markets and the level of the dollar?

If the dollar squeezed in March 2020 and from April 2020 to December 2020, it eased massively. Perhaps that is why the debt defaults didn't happen. And now the dollar is on the rise again. Is that imperiling market access or does it just make it less attractive for foreigners to borrow or does it actually impair market access? And if so, how?

Sure. No, I mean, basically, we are talking about the margin in a way. I mean, when dollar really appreciates significantly and emerging market currencies come under pressure, that does impact their financing access, right? Because that tightens the financial conditions domestically and their yields go up and then they have to start issuing at a higher rate, which is not necessarily what the global or the domestic markets

policymakers really want, right? So there is that tussle between investors how to do that. And second, if the dollar is actually rising,

in an appreciation environment, then the local currency assets actually take a big hit, right? Because global investors or dollar investors specifically, they don't really want to invest in local assets. So ultimately the only asset class that works is dollar hedged, dollar denominated bonds, which ultimately a lot of emerging markets don't want to go down that path, right? Because we have seen the original saying that that can actually backfire quite

quite quite solidly right so that sort of is i would imagine the relationship between dollar and the financing conditions and you would see that even over time as you rightly mentioned dollar has sort of gravitated in the last five years and the financial conditions have changed accordingly for many of these markets now one distinction i would imagine and want to highlight is between

frontier markets and mainstream emerging markets. Frontier markets purely and largely because they don't have a very deep domestic investor base and they do need a lot of financing. They are much more reliant on international markets to raise funds and to drive the growth. That is not necessarily true for large emerging markets like India, like many others. When dollar tightens, India will face a pinch.

because external financing will become a little bit tougher, but the things will be significantly more difficult for frontier markets where they don't have the domestic investors to tide them over. And who are the marginal investors in emerging markets?

debt because so much people question who will be the marginal buyer of US Treasuries. The answer is a lot of people have been willing to be the buyer. But I'm looking through JP Morgan. I'm not seeing a huge thing where they say, oh, yeah, we own Sri Lankan. We own Indian debt. I'm sure they do.

probably the sri lankan central bank owns a little bit probably sri lankan banks on it but who who is the buyer of of of this sure no look ultimately there will be four if i can categorize right i mean one is the central bank which generally intervenes at the time of stress and provide support to the market and then in terms of domestic we have domestic investors both pension funds and mutual funds which can come in but the third are the banks which sort of are

you know extension of the government in a way and the last which we pay a lot of attention to are the foreign investors right so these are the four broad i would say owners of emerging market debt and as this is unlike let's say us because obviously a lot of global central banks also hold u.s assets right so that's not true for emerging markets you won't find

US central bank holding emerging market bonds on their reserves and balance sheet. So of the four, and the point which you rightly mentioned is very true, that ownership, foreign ownership of domestic bonds, or in fact, domestic equities, both of them are almost at historical lows. Because two reasons, A, in the last 15 years, emerging markets as an asset class has really not done that well. So that momentum effect catches on and investors sort of keep

away from EMs, a lot of them. And the second dollar has been on a 14 to 15 year bull market, right? So both of these factors have led to a big foreign exodus, which is what we are seeing in the debt markets and which is what we are seeing also in the equity markets, not only frontiers, but a lot of big major emerging markets. And this strong dollar regime we've had over the past 15 years, I take it that's been bad for emerging markets. Why is it bad for emerging markets

equities as well as bonds. Because in one way, I think a strong dollar is actually quite good for countries that are not the US. Namely, if they are exporters, they get to sell stuff to America for a higher price in their own domestic currency. And it's bad for American manufacturers, good for American consumers. So in that way, if you think if the dollar is strong, let's say against the Thai baht, that it's for producers of

in Thailand and who are selling to America, it's actually good. So why would the stock market in Thailand and this bond market in Thailand suffer because of the strong dollar? Sure. So one is a pure translation effect, right? I mean, as a dollar investor and if dollar is appreciating, I lose more money, even if the domestic assets don't really go anywhere, right? So that purely, if everything else sort of remains same, that propels me not to invest in these emerging market assets on the local side, right? On the debt side, people

people hedge FX and then they can take the bets. But for a lot of the local assets, that is a pure play translation effect. But the second effect is, as you rightly mentioned, in that kind of environment, the exporters for a lot of emerging markets do benefit. But if you look at the overall index, if you look at the overall economy for a lot of emerging markets, a big chunk domestic consumption and domestic demand is still the dominant driver of their equity.

index of their overall equity market as well as the overall corporate side. So from that perspective, it does help the exporters, but it doesn't really help

the rest of the economy. And relatedly, the point is when dollar remains so strong, it ultimately tightens the financial conditions in a lot of these emerging markets, which means that they have to keep rates at a relatively higher level. I mean, if you think about it in investor terms, you need to offer the carry if you can't have the FX. So they have to keep the rates at a relatively higher level, which means that effectively they are doing the domestic growth.

because they don't want the FX to completely sell. So that's sort of the indirect channel through which when dollar remains strong, that ultimately doesn't really work out that great for emerging markets. And that correlation you can see in the assets. If you look at emerging market, let's take equity class, will be true for all local assets. Emerging market, equity class, relative performance, vis-a-vis let's say US or global equity markets and plotted versus dollar, the relationship is airtight.

In the last 45, 50 years, whenever dollar has weakened and we have seen an outperformance of not just emerging market, almost all international assets. Same is true for Europe and Japan. And when dollar has strengthened, almost all international markets have under. So that relationship sort of translates very, very strongly for financial markets.

Rohan, I'm going to ask a question that sounds simple, but it's really hard to answer. I would hate to have to answer this question. Why does the dollar become strong? Why does the dollar become weak? One thing I understand is when the Federal Reserve raises rates and jacks them up tremendously, like when Volcker did in 1980, that strengthens the dollar because capital rushes into the dollar. What else strengthens it? Why is the dollar so strong? Why was the dollar so strong in 2014 when interest rates were still at zero? Sure. I mean, I think there is a

beautiful framework the smile curve for dollar and that sort of explains how to think about dollar in general i mean on one end we have the goldilocks period which is that for us i mean the u.s growth remains strong especially in a relative sense that a propels domestic flows into u.s economy and u.s financial assets and b that also means that u.s rates on an average will be higher than

other markets, be it emerging markets or Europe or other international markets. So that means that that helps the dollar remaining strong. The other extreme is that we go from this

environment where growth is great and us is sort of outperforming two of extreme crisis level which is what we see during recessions 2009 which we saw 2020 even in those cases the dollar starts appreciating and that is because that's a demand for safe assets right when everything is sort of going down in terms all the assets want to be in dollar or us assets because that's sort of the safe haven right so in these two environments the dollar finds a strong support

it's in the middle when there is no major financial crisis and emerging market relative growth or non-US relative growth versus US is better, then you would see dollar sort of depreciating.

And that's the point we make that since 1975, when dollars sort of started to trade more freely, we have seen two cycles where dollar depreciated for almost eight years at a stretch. And that's not because of any structural reasons that purely because of this is how the cycle works. The dollar, US growth outperforms in a decade and then underperforms the next and so on. So that's sort of how we would think a dollar. In general, what we have seen

And that would explain what sort of happened in 2014 as well. I mean, we were emerging from euro area crisis and the environment was not really very pro growth or pro risk. So that supported the dollar because it was the other end of the curve. The other is what we have seen in the last few years is that even though financial markets overall are doing well, the global growth is relatively strong. US dollar has still continued to

do well contrary to a lot of our expectations. And that is sort of the disconnect which we have started to worry about that historically you would see that when

US growth goes up, emerging markets growth will also find a support or when US equity markets go up, emerging market assets will also go up, right? That's the risk on mode that we are in a risk on environment. In the last few years, we have sort of reached a zero sum game that US goes up, all the assets flock to US and the capital and all that stuff flows away from international markets and emerging markets and that helps US dollar. And that sort of is a disconnect, which in our view is

not really in line with what we have seen in the history or what we should see based on the fundamentals. And one reason why currencies go up or down is because of rates, interest rates. Another is growth differential. So the U.S., if the U.S. is growing a lot slower than emerging markets, emerging market currencies will

appreciate against the dollar dollar will depreciate. Is that what happened in from 2000 to 2007 with China grew so quickly that absolutely that's why or no no no absolutely yes that's exactly what happened yeah so that was sort of again the Goldilocks period for emerging markets but that emerging market growth was doing quite well if you're in a commodity super cycle of sorts and all emerging markets a large chunk of them saw their growth accelerating versus

And that sort of supported their economy, supported the financial market, supported the capital flows and the dollar sort of depreciated. And honestly, that is a cycle which we have seen almost throughout. If you plot multi-decade trends, that it's almost like a decade shift that in the decade prior, we saw emerging markets under stress and dollar was sort of appreciating. And then 2000s, dollar did really poorly and emerging market growth and assets did really well. And then 2010s, this sort of

In fact, just to put a number at the point that you made during that time, early 2000s, 2000 to 2005, almost 85% of emerging markets, their real GDP per capita grew faster than US.

that time period really both the productivity and the growth really accelerated for emerging markets. And the last five years, this story has completely flipped. Only 48%, less than half of emerging markets have seen their GDP per capita grow faster than the US. And that sort of is also reflected in growth and dollar trajectories.

And what is the differential right now between America and emerging markets, and in particular, emerging markets ex-China? For our audience, America is just growing so much faster than Europe. Europe is not able to catch up at all. And China, which has had remarkable growth over the past...

20 to 30 years is slowing down. It's slowing down from a very fast pace of growth. China was 30% of an emerging market index, maybe 40%. It's now less because the stocks have sold off so much. But I and perhaps some people in our audience are not as familiar with the other emerging market countries, India, Brazil, South Africa. These countries, they boast high rates of nominal GDP growth, but they also have often higher inflation rates. In terms of real growth, yeah, what are emerging markets doing? And

Are they growing faster than the US or not? No, I mean, look, the US has had an exceptional run over the last few years. The growth has been above output and sort of outperforming a lot of other direct markets for sure. This is what's happening in the US and for the China, as you rightly mentioned, it's on a structural decline.

2000 it was a 10 plus 2008 2009 and now it's at four and a half five percent we can debate about the exact level and then our view is that potential growth is much lower so it will continue to sort of coming down gradually shining bit if we can highlight is precisely emerging markets outside china and that is where we are seeing that a lot of ems are growing much faster both vis-a-vis what they were doing

versus their own history but also vis-a-vis us now the idea is if i the number which i just put that you know last five years only 48 of emerging markets have outperformed us on a per capita basis this number is expected to be 84 over the next five years so the idea is that this is precisely the cycle that a lot of emerging markets and we can go into the reasons behind that but a lot of emerging markets have fixed their balance sheets and their growth is on the mend

And for the next few years, they should start outperforming and the EM growth premium. And I'm talking EMX China, the growth premium should come back quite solidly. And we've already started seeing in a lot of EMs. Obviously, India is a

poster child of sort of financial stability and economic strength. But we are seeing even in markets outside of that, like Brazil growth has been outperforming steadily. It has other issues on fiscal and inflation, but in terms of growth, it has done very well. Greece has done really well. So we can, Philippines growth, Malaysian growth has been pretty stable. So the idea being that there are a lot of emerging markets outside China, which have got their house in order and which are seeing a pretty consistent steady

growth improvement and that honestly is the big

the reason why people invest in emerging markets and what emerging markets need to preserve. And what's the universe that you and your fund play in? Because I'm looking at emerging markets index now and China is still the biggest, but Taiwan and South Korea are the, respectively in the BlackRock index, the second and fourth weighting. And I believe Taiwan and South Korea have a GDP per capita that's higher than Spain, which we would call Spain

or Japan, we would call them developed market countries. So the label is a little different. Are you playing in South Korea or is that too developed market for you, even though it's still in the EM index? No, sure.

First, I mean, let me split it in two parts, talk about the index and then I can talk about how we sort of play. And that's in general a problem about emerging market equity index. It's very heavily geared towards China, Korea, Taiwan, or in India. So it's not necessarily representative of the broader emerging markets that we see. And there are reasons behind it, because when you create an index,

you need to have the liquidity you need to have the capital controls lifted you need to have a free float currency so that foreign investors can invest without a lot of the tail risks which is why a lot of the smaller emerging markets even though they have the economic weight or the financial market weight just because the domestic market liquidity isn't there or their currency is not completely free floating their overall weight in this index is very low right so that

is one reason why the index is not necessarily representative of emerging market opportunity. And second, even if you look at a structural last 35 years, the index was created, it shifts a lot. Like back in the 95, Malaysia, South Africa, Thailand, these were like more than 45% of the overall index. China was not even there. And now they are barely anything less than 10% in China and Taiwan sort of dominates everybody else.

So that's sort of our view about the index in general that look, it's a good way to understand the opportunity in emerging markets, but it's not representative. So the way we invest, we don't really care so much about the index.

our target in general is to look at all emerging markets and frontier markets like the small markets like Nigeria, Sri Lanka. Obviously, they are not even a part of MSCI EM index is to look at all of them and see where we can find opportunities.

That's part of the reason why we believe active investing makes a lot more sense in emerging markets and not passive investing, because passive doesn't really give you the true exposure for emerging markets. In terms of our hunting ground, we do all emerging and frontier markets as part of our universe. South Korea specifically is a part of our universe.

universe as well. And because both technically it is an emerging market and a lot of its companies do export and have economic exposure to emerging markets. So we do invest in Korea, but in general, I would say our exposure and our focus is a lot more on middle income emerging markets and not necessarily the Taiwan's and the Korea's and the China's, which are

highly represented in global investor portfolios. China is still a big part of the index, but I think China is a very unpopular asset right now. I'd say it's almost close to mainstream opinion that China is uninvestable and at worst and at best, it's just not worth the headache, even though China now trades at

What I perceive and what is it attractive valuation or a cheaper valuation on relative to its comparisons. But also, of course, you look at the index and the earnings growth for many Chinese companies, particularly the state owned industries is not simply there. And that's why, unlike in India where it is. And that's why I think you talked about active versus passive. I've spoke to some people who were in the investment business in the emerging market boom of the 1995. And as you say, like the...

I don't know, let's call it the Barclays Emerging Market Index, whatever the actual name of the proper noun, the bank that had that. The emerging market index of the day was, yeah, 20% Malaysia, but these were not companies you'd want to invest in, even though the economy was way, way smaller than China or other nations. So yeah, the index construction point is really key. But how are you thinking about China? No, absolutely. I mean, and that's sort of the view about emerging markets in general too, that, I mean, A, we're

we don't really like to trade in and out every quarter so from that perspective you can't really be super tactical in emerging markets you need to take a structural view but then things change over decades right because when economies are growing so fast and they're a lot more

New IPOs, new companies, more creative destruction and competitive churn. So you would see that things changing. That's what happened in China and Taiwan, right? Two and a half decades, there was not much economic or financial market. And then a lot of markets did really well. The companies came on board. We saw the entire tech boom in China, right? So all of a sudden we had a lot of companies which are making money, which are growing fast and where investors can actually invest.

and the ecosystem completely changed away from Malaysia's and the Thailand's of the words towards China and Taiwan. So that's sort of a view in general that things do change.

not just emerging markets, in global financial markets in general. That's the entire point about creative destruction. Now, specifically about China, I mean, we have been more cautious on China and our view has been that more on the economic side that these kind of economic transformations take time. It's not easy

easy or possible for any major economy to just completely pivot their economic model away from, let's say, infrastructure and investments to domestic consumption in a couple of years and still maintain the same growth levels. So those kinds of transformations, A, take time, and B, our view is that, purely if you look at China from a structural perspective, so what are the things that sort of matter for a potential growth for any market? It matters what are your demographics, it matters what is your debt to GDP,

it matters what is your productivity growth, right? So these are some of the factors which ultimately would determine at what pace you or any market should grow. And for China, that's the analysis sort of we did that if you look at China per capita income $12,500 and what are the markets historically or economies that cross that level, they were 19 which grew at 2.5% after crossing per capita income level, right?

None of the markets were even remotely close to China in their demographics potential. China's population is shrinking, working age population is shrinking even faster. None of the markets had a debt to GDP at China's level, which is extremely high, close to 300% of GDP. And most of the markets had a productivity growth, which was much faster than China. So that's sort of our view that look,

China was able to sustain its growth in the 2010s because of the infrastructure and investment push. Now that thing is past us. There needs to be a new economic model and growth will continue to come down steadily. And the potential growth is close to 2.5-3% level for China. So that's sort of our view in general on China. Now the part which makes it really interesting is what you mentioned about financial markets. That's a point which we hear from a lot of investors and we have been cautious on China in general too. Because

investors were overweight China, as you mentioned, it used to be like 35, almost 40% of the index, right? So a lot of investors were present there. The geopolitics is changing and growth is sort of narrowing down. So we would see some pressures on the Chinese market. Now in our view, what we have started seeing is there is a bit of a disconnect, that there is a big chunk of the economy or the market ecosystem which doesn't make money, but then there are a lot of companies, not just tech, even outside of tech, which are generating a ton of cash

which are growing decently fast, which markets don't give any credibility to. And that we can see in obviously price to earnings where it is very cheap. But if you look at price to free cash and those valuation multiples which take into account the cash generation, you would see China is even cheaper. So that's why we have started to sort of think that when we hear

The market sentiment that China is uninvestable and everybody should invest in EMX China funds and not necessarily China, that gives us a bit of a pause that look, even though the growth is slowing, but maybe the sentiment has reached such extreme levels that assets have started to become quite attractive. Case in point, like last year, China grew 20% in dollar terms. And with

within emerging markets, it was one of the top- - China grew 20%? Wait, in the stock market or the GDP? What do you mean? Sorry. - No, no, equity market. China- - Yeah, China was up 20%, yeah. - Yeah, sorry. In dollar terms, grew 20% top 10 emerging and frontier markets, right? And that is despite all the doom and gloom and the volatility that we have seen in the markets. So the idea is at some point of time,

If the assets are generating cash and if assets are strong and that's not true for the entire index, that's not true for the entire economy. But China is a massive market, right? You can find stocks, you can find sectors which are insulated against geopolitics and which are still growing and generating cash. And because there is such a big foreign investor exodus, right? A lot of the assets are trading very cheap.

That's sort of a view in general. We still have to be cautious on China. It's a volatile market, reacts massively to any kind of new slow, which is not really what we focus on. So we have to be a bit cautious on that side, but a lot of the assets can start looking to be attractive. And the last point at the risk of sort of overbeating the point is what we saw in the last three decades in a way is that China economy really grew very fast, right?

But if you look at just financial markets end to end point 1990 to 2020, 2021, it did not really do anything, right? Because there was a massive share dilution and it completely crashed in the last few years. Despite being an economic superstar, the financial markets were pretty painful for a lot of investors. The next few years might actually be difficult. It might actually be different that the economic growth is slowing and going to its potential GDP growth level, but the financial markets purely because the starting point is

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Again, I spoke with Russell Napier and he told me that a huge company in the MSCI China index when it launched in, let's say, 1992, was this company that made pens that were very low quality. And so if that's kind of the apple of your index, surprise, surprise, the equity performance is not going to do well. So maybe you say that there are higher quality companies now. And Rohit, how do you think about the valuation as well as earnings growth and

returning capital to shareholders via dividend or via buybacks. Because number one, like a lot of state owned companies don't really grow their earnings. And it's amazing how China's GDP is up, what, 50 times over the past few decades. But a lot of corporate earnings growth has barely budged in some instances. And the earnings growth isn't there. Just because the GDP is high does not mean the earnings growth will be high.

And then also, even if the companies are growing its earnings, if there's concerns about the governance and there's a political connection, worries that the government could find it, is the shareholder really going to feel comfortable that that capital is going to be returned to them either in the form of dividends and buybacks? Are you seeing, there's been a lot of people moving their lips about talking about how China is going to do all these buybacks. There was a program that was widely telegraphed from the People's Bank of China to lend to companies to buybacks.

via banks to buy back their own stock. Are people following through on this or is it mostly kind of just lip service? And also, can you speak about policy trial balloons? You know, the People's Bank of China and China saying we're going to do stimulus, we're going to do stimulus versus do they actually deliver? Sure. Yeah, a lot of questions. Let me split it in the sense that the point is absolutely true. I mean, you start from the GDP growth.

on a nominal level and that needs to translate into a the revenue growth for corporates and then depending upon how the margins play out that needs to go into the earnings growth right ultimately that earnings growth needs to translate into investor returns and that's a factor of a where the starting valuations are and b that's a factor of the buybacks and the dividends or the shared valuation right a that part is absolutely true that in terms of

the nominal GDP growth translating into earnings growth that hasn't really been that strong for China. And part of the reason is that you need to separate between private entities and SOEs. So SOEs, extensions of the government, so they have slightly different or muddled objectives, not necessarily profits, but more inclusive nature of the growth and extending

loans to the sectors where private sector might not want to. So from that perspective, we see a disconnect, but then there is a chunk of private entities, both tech and non-tech, that have actually been investing a lot in innovation, that have actually increased their productivity a lot. And there we do see earnings growth and free cash sort of coming quite nicely. So for the overall index, it hasn't really mattered that much, but within the index, you would

as is true for all things emerging markets, that there is a big disconnect between SOEs as well as private entities. Which is why, for instance, when the Alibaba episode happened in China, that was a very big trigger event because that meant that obviously that the state is sort of flexing its muscles and there'll be excessive state intervention and the private sector, which was allowed to flourish post GFC, even before that in China, that has reached its tipping point in some way.

That's a sign which we see, try to see in a lot of emerging markets and specifically in China. Now, the one thing is after earnings growth, especially if you're a dollar investor and you look at US, one of the reasons why US markets have remained so buoyant is because people have been giving dividends and there have been a lot of buybacks and that has helped the equity market quite a lot. In China, it's the other way around. If you look at China versus EMX China,

Even the EPS growth, the earnings growth has been pretty high for both of them.

for most of the emerging markets ex-China, their earnings per share has tracked their overall earnings growth. But for China, it's a completely different animal because they've been issuing so many shares and doing these dilutions, which actually hurt the investor, right? Which is why China's, despite the fact that economic momentum has been there, the underlying returns for investors have remained pretty weak. Add on top of it all the geopolitical concerns, all the corporate concerns that you rightly mentioned,

make the investors more concerned, right? So that sort of the ecosystem, I would say in China in general. So our view is again, that it's very easy to get swayed by low valuations, that O valuations are very cheap and we should just go all in on China. Cheap markets can remain cheap for a long time and expensive markets can remain expensive as long as the fundamentals deliver, right? So for China, the main thing is it's A, very volatile and B, very difficult to just

go a blanket over it, you have to pick the right spots in China. Like the property sector bonds, even for the very high quality companies are still under a lot of pressure, despite being the third year of transition. So people can talk about these being great value opportunities, but they can turn out to be value traps all the same. So it sort of depends what kind of investor you are and we need to sort of sift through that.

On the last point you had on the policy volatility and how the government is sort of doing all the trial balloons, I think they are also learning on the job in a way, if I can put it that way, that they are also trying to see which in policy measures, how the market sort of react to that and how we can adopt them. So that's why there are some announcements which happen. And then the follow through is relatively and the B, I think we as investors also understand

read too much into that in the sense what we saw after October 2022 when the markets reopened. China's stock market was up 60% in three months in dollar terms because everybody's, oh, China's reopened, just go in, government will do consumption stimulus and this and that. Nothing happened and over the next one year, it just kept on trickling back to normal. My view in general is that the market has become so reactive to a lot of these

policy news, a lot of these trial balloons by the government that that has added to a lot of volatility in the Chinese markets. And that doesn't really help the investor. It doesn't help the investor and B doesn't help the policymakers as well. Right. Because you want to introduce a policy that, OK, we want to slowly and steadily revive the growth over the next couple of years and we want to rebalance the economy. And if the financial conditions price everything in two days or everything in two weeks,

doesn't really help the policy efforts. So our view is that look, it's not that easy to do the entire economic transformation that China is doing.

And growth potentially will be slower than 4.5%, 5%. So rather than hanging on to the 5% growth number, and we can debate about what the actual on-ground growth is, because there's a lot of research on China on that too, just maintain a slow and steady growth rather than hitting a lot of financial stability issues that we saw in the last couple of years. And Rohit, at breakout...

capital, what is your mandate? Are you equity only? Are you long only? If you thought the Chinese 10 year at 1.5% was, you wanted to short that, could you do that? If you wanted to buy Chinese property bonds, could you buy that? Could you put on positions in rates and credit or is breakout capital long only and equity only? No, so we are ultimately equity investors. So we invest in just equity market, public market stocks, mid to large cap companies.

We do end up doing a lot of research for non-EM assets and non-equity asset classes. That's part of our sort of global macro mandate and thought work. But in terms of the final assets that we invest in for our investors, those are public market equity stocks, mid to large cap names.

And if there is a macro theme, it can always be expressed in equity market terms as well, even if not necessarily FX or bonds. So those channels can always be found as long as it sort of still satisfies our overall investment rationale. All right. Well, now let's take a turn from one of the cheapest emerging markets, China, to one of the most expensive, India.

India's the stock market, the earnings growth has been there, but the stocks have gone up more. So the valuations are quite high. Perhaps you can give us an approximation of what the PEs are now. What do you think about India? No, I mean, yeah. So India is the other end of the extreme that unlike China, where the sentiment has been pretty weak in India, we found the other way around. So price to forward earnings right now, 12 months forward is close to 21 and a half, 22 times, which is

one of the most expensive markets within emerging markets, but also is pretty expensive versus its own history. And we have seen cycles that these things sort of can turn around. Only exception with India we would highlight is that there are reasons why that has happened.

So obviously, right now, the last couple of quarters have been slightly on the weaker side for India. And we have seen the assets coming under pressure in the last six odd months in Indian equity market. But if you want to create a three to five year view on India, it's one of the markets both on the economic side as well as on the financial market side that has really increased.

broken out. If you look from the economic side, we have seen a lot of fiscal consolidation. We have seen subsidies going down. We have seen digitization and we have seen premiumization of consumer. All of these factors are a structural break from what used to happen sort of before. So India's economic growth from that perspective is in a pretty decent level and relatively non-volatile, if I can put it that way.

we can talk about five and a half, six. I mean, those things are sort of tradable materials at the margin, but from an investment perspective, India economic growth is here to stay. And it has a lot of levers to grow that sort of further. Now in terms of financial markets, which is where, how do you sort of justify these valuations? The thing is that the way we look at India, it's almost like an asset class of its own. It generates the most number of billionaires

If you look at the steady compounders, which is the number of the type of companies where which have grown their earnings and return steadily. So not just a one year wonder or a two year wonder, but over the last 10 years, we have steadily done well. India and China have

China recently has lost it, but in general they have seen the largest compounder creation. So the way we look at it is India 15 years ago, 10 years ago was a very different animal that there were only a handful of large cap stocks.

that any investors could invest in. And then at that point, India's financial stability and ecosystem was also at a very different vantage point. Over the last 10 years, India has fixed a lot of its balance sheets. So the financial stability concerns are very much at bay. Economic growth is growing fast and there are a lot of companies which are quite

high quality and are growing decently fast. Now, whether this 22 times, 21 times earnings multiple can turn to 2019, absolutely. I mean, those

turns can still happen. But if you see a market where the fundamentals are strong, where the policymakers are doing the right thing, fiscal consolidation, not less subsidies, more digitization, even on the monetary policy side, no excessive rate cutting, maintaining the real rates and so on. If you see this kind of an ecosystem, then we would want to be investors. And the same point that I made about China is true for India as well, that both these markets are so big that

you can always find stocks in sectors which satisfy your investment criteria. So even if there is a certain sector, like for instance in India, it was always about consumption, right? That India has 1.4 billion people, the consumers will grow and so on and so forth. That led to a lot of consumer companies trading at 50, 60 times private price to earnings, which is unfathomable, especially for an emerging market investors, right? So they have come under pressure, but then there are other sectors, Capex, real estate, which...

is booming because of the credit cycle. So that's sort of the view on India that structurally it's a market which has really broken out both on the financial and on the economic side. The last few weeks have been a little bit painful, but that's okay. That's par for the course for a lot of emerging markets. And as is true for all emerging markets, specifically for markets as big as India, China, there are a lot of sectors to dive in and find the relevant stocks.

Yeah, so I've heard of this company and this is kind of a, this company is called Patanjali Foods. To be clear, I do not own this stock, but I think the founder of Patanjali Foods is a

famous guy who is a like a yoga instructor and he has hundreds of millions of followers and he's developed this product so he's kind of like like that kind of sounds like obviously the name is different but that sounds like something that could happen in the united states like mr beast you know the most famous youtuber he's selling all yogurt and then he has an ipo and it's called beast foods so i think is india kind of comparable to and by the way the kicker the price to earnings ratio is 67

And I'm sure if Mr. Reese did an IPO or perhaps, I don't know, the price-earnings ratio would be insane as well. Is India kind of comparable to the States in that you have, it is a robust financial market, which is good, but also you'd have some pretty speculative companies trading at extreme valuations that are basically relevant on personalities? No, no, absolutely. I mean, look, I mean, not to mention anything about Patanjali, but Patanjali,

talking about the ecosystem in general, right? I mean, when you have a stock market that is in a bull market for almost 12 to 15 years, right? You see a lot of startup companies coming up and actually becoming public or just becoming too large in the private domain. And you have such a big consumer base, right? I mean, India has one of the largest consumer domestic captive base, right? So you would see a lot of these companies coming on stream. And again, nothing about Patanjali, but in general, you do find that

in these kind of bull markets, some speculative accesses do happen. We see that specifically in India too, not just in terms of markets. There's a lot of speculation in the options and futures in the derivative space. So that's one of the signs that since things are booming, everybody's just punting quite a lot. Similarly in the financial markets, if you see, unlike US, if I can mention,

In India, the small and the mid cap have done extremely well over the last few years in this bull market. And that's sort of a sign that there are a lot of undiscovered firms which were never in the view of global or domestic investors, which have all of a sudden come into limelight and everybody is sort of piling into that, which is sort of the good part that look, more companies are getting discovered. You want the market to become more diverse.

broad so that there is a lot more investor participation. But at the same time, it's the mantra, right? I mean, all good things sometimes go too far, right? So it's the same thing. You find excesses and speculative activities in a lot of these small and mid-cap markets. Unlike the US, where

the trend is totally different. In US, the entire bull market is driven by the large caps, right? The small and the mid caps have done quite poor, in fact, if you look at the US. The way we look at India, that's another trend which both India and US have been the bull markets over the last two, 10 years, right? And this is how they sort of differ. In US, it's all been about large caps, not so much about mid and small. In India, it's a pretty broad

bull market, but driven by the small and mid cap. And in fact, the small and the mid caps are now much more expensive than the large caps in India, again, contrary to us. So it goes back to your point that yes, in a market like India, which is relatively young, which has a lot of consumers and which are growing really fast, you would see, or you could potentially see a lot of excesses. But honestly, that's sort of part of the game. We as investors,

need to decide where we stand, what kind of companies we want to invest in, whether we want to punt in these high speculative markets or just focus on steady eddy names and clip those coupons. Thanks, Rohit. So just for my understanding, so is your firm Breakout, are you overweight China or underweight China relative to the index? And then same for India. I mean, more broadly, I mean,

broadly in line with India. If we can mention it sort of changes, we've been live for two and a half years, so it sort of changes, but yeah, broadly in line with the index, if I can say that way. And India's rate has also increased big time, right? 2019, it was 8.5%, now it's close to 20%, right? For a lot of investors, investing 20% in India in itself is a big chunk of their emerging market portfolio. For China, we have been more on the cautious side.

Since beginning our focus has been that look let's just buy steady ID names which are not volatile. We are not chasing 100% returns.

every year, but more where there is more visibility into earnings growth and which are sort of insulated from a lot of the political volatility. And at Breakout Capital Partners, how do you weight macro analysis versus the single stock fundamental? And for example, let's say you're the head of global macro, which is your title. If you, let's say on Kenya, for example, if you have a super rosy outlook,

What do you do if your members of your team can't find any stocks that they like? In the verse, let's say your macroeconomic analysis of Greece is terrible, but the investing team is finding tons of stocks that they like. How does that process go about? And yeah, tell us about that because it's interesting. No, I mean, yeah, I totally agree. And this investment framework was really fascinating at Breakout, which we sort of

which is we have a top-down regimen, which is macro analysis and we have a bottom-up. So our ultimate mantra is if it's not definite yes, it's a no. So it needs to be a affirmation on both the sides for us to develop our conviction and invest in. And we have seen that there are economies which we like from a top-down basis.

It can be two reasons, either the bottom up team and the stock experts, they don't really like the stocks or they're not able to find because of liquidity concerns and all those issues. So we have stayed away from those markets and vice versa, that there are some countries where the

bottom-up stock experts they really like some of the companies but we have some concerns from a top-down basis right so i'll add both of them completely we sort of stay away the only exception i would highlight is sometimes it happens that we really like from a top-down basis and we believe in the quality of companies but because of liquidity issues or because of some other technical factors we can't really buy a stock then we can explore investing in a country etf but that's

I would say a rare exception and not really the norm. But ultimately, to summarize, if it's not a definite yes for both bottom-up and top-down, yeah, it's a no for us. How do you think potential tariffs... Yeah, I mean, that's sort of the big question in general, right? Everybody is talking about that. And our view is, again, that look, the two factors, right? The economic markets and financial markets. Our view, and we are doing more work on that, is that

Same thing happened in 2016. And obviously we saw that after those tariffs which you put back then, there was not much impact on China, on major emerging markets, or at least was much lower than what people were initially getting worried about. And that part of the reason is because a lot of these emerging markets have been very proactive

to take counter steps. Obviously, China is at the forefront of it, exporting to Europe and creating those supply chain paths. But a lot of other emerging markets have taken advantage of that. So that's a view that, look, if very strong tariffs do come, it would impact emerging markets. There is no denial about it. The global growth will take a hit and that could also be

both, you know, as I mentioned, strong of a dollar and inflation can go up and ultimately bad for the risk on mode and emerging market. So that's sort of the big picture, 30,000 feet view. But where we sort of differ are two nuances. I mean, A, emerging market

despite all the doom and doom about trade, emerging market trade is doing decently well. Emerging market exports are growing pretty fast. Not for each and every emerging markets, it never happens that way, but for a large chunk of them. Obviously, China gets all the limelight because of BYD and EVs and all that stuff. But a lot of emerging markets like Brazil in agriculture, Poland in a lot of categories where exports are growing. So point being that

they have ways to counter that. And the second point is how much of it is sort of priced in. And that's more art than science in a way when that happens. But yeah, that's a view that emerging markets overall will take a hit. But then emerging markets are so broad that you can always find emerging markets which

take advantage of that kind of a situation to create their own infrastructure. Like we saw with Mexico and near shoring, right? That's one example that people can talk about OGO, global economic fragmentation is happening, which is very negative for trade, which is very negative for emerging markets. Like that's the linkage which happens, but it's true for EMs on an,

But there are some EMs which did benefit from it, like Mexico, Vietnam, UAE, which is getting a lot of FDI flows. So same as our view on tariffs, that there would be a disruption if we see the extreme tail risk happen. We can always find winners in emerging markets that can take advantage of that reallocation. What do you make of Argentina and Malay? Oh yeah, I mean, it's fantastic. Like I used to work at the IMF, right?

Obviously, my experience with the entire urgent time programs has always been a little bit colored by that experience. But what Milley has showed us is fantastic. He has become a poster child of neoliberalism. That look, we need to take the drastic steps.

fix the economy and everything else will sort of fall into place. The big question was that, oh, he'll cut down all the spending growth will completely tank and how will the people on ground react and there'll be a revolt and all those issues. But his popularity rating is still pretty high because the point is that for a lot of these emerging markets, which have seen these

bouts of crisis over decades, a lot of the on-ground population, they realize that they need to take the tough steps in case they want to reach a sustainable growth level. So Millet has sort of set an example for a lot of markets and we have seen specifically in Latin America,

They can actually learn a little bit from that example. Take the right step, take the more policy orthodox steps and they'll be near term pain, but that's really good for long term gain. And it's not just Argentina. Sri Lanka is a very small example of the same thing. They took the tough measures. Their back was against the wall and things are sort of back to normal and booming now.

And so I'm looking at the Argentina inflation rate. It peaked in 2024 at close to 300%. And now it is, quote unquote, down massively. And so inflation is only at 120%. But that still is progress. Do you think that government austerity and basically, you

drastically cutting the budget, letting go tons of government workers, and basically that will reduce GDP. Do you think that that works a lot better when nominal inflation is high or truly out of control versus when it doesn't work is when there's very low inflation or deflation and then it just

It causes the economy to shrink and then tax receipts go down and it's a vicious cycle instead of a virtuous one. And I might say that's what we saw in Europe after the great financial crisis, 2009 to 2015. But perhaps you disagree. No, no, absolutely. I completely agree in the sense that, look, with inflation, that's always the you see this debate. What's the optimal level of inflation? Why do we even need inflation? We see many of these even more.

hardcore academics argue about that. I mean, we do need inflation in the economy to grow, but there needs to be an optimal level of that. Beyond that, it becomes pretty painful for consumers and pretty painful for financial market assets in general. Now, where Argentina was, and that was the

problem which we see a lot in a lot of these hyperinflationary economies, right? So inflation remains so high. So even though earnings growth in nominal terms continue to remain high because inflation is where it is, the financial markets don't really get any love from investors because they know that it's almost like a mirage, that you don't want to have nominal earnings growth purely on the basis of inflation.

Either your currency will continue to weaken or you will see massive devaluations. We have seen that for a lot of markets, Argentina, Egypt, Ghana, that they keep going into these hyperinflationary periods and then the FX devalues.

once every year, once every two years and so on. And that doesn't really gel well for really anybody. So the idea which Millet had done was that, look, we have these excesses, we need a strong portion. And that's precisely what it did. Cut down the inflation from that level is easier, right? I mean, you would see that the nominal GDP growth or nominal earnings will come down from where it was. But where the counter would be that the FX would stabilize. You would not see those

once every two year devaluation levels. And that will also spur the GDP growth on a more sustainable basis. So that's how sort of we think about

these things and specifically Argentina in general, that there needs to be a optimal level of inflation in the economy. And that sort of work out well, we don't really or anybody doesn't really need a 50% nominal GDP growth driven by inflation because you will ultimately end up losing money either through FX or through other channels. So in the United States and I believe

Other developed markets, there's inflation targeting and the target is 2%. In emerging markets, and I'm sure it's different, what is the comfortable level of inflation? Is the Reserve Bank of India, I think it's called, are they satisfied with 4%? Is that their target? Argentina maybe would be delighted if inflation went down to 20%, whereas obviously in the United States, that would be a total disaster. Things are relative. I think generally inflation is higher in emerging markets. And generally there's kind of more tolerance for that.

But that's also accompanied by higher interest rates.

Yeah. So what, what tell us about inflation in emerging markets as well as central bank targeting of that? Sure. No, I mean, and that's always a big debate, right? Even at a country level that, you know, what should be the optimal level of inflation that you should target. And a lot of the emerging markets end up coming at different levels. I mean, structurally speaking, obviously emerging market inflation is higher than developed markets apart from other reasons because of, you know,

inefficiencies, it could also be because emerging market growth is much higher. Right. So purely because of that, that channel sort of continues. And in a way, that's also nice because that gives the boost to corporate profitability and that sort of keeps the churn alive. That if you have more earnings growth, you would see more number of startups and more number of companies coming on board, which is actually needed quite a lot, especially in emerging markets, which are still growing. Right. So from that perspective,

Higher inflation is needed and preferred in emerging markets and a lot of these central banks sort of know. Now, the distinction also is within emerging markets as almost with all things EM as a moniker is just so broad. But when you dive deep dive, everybody is just so different. Right. I mean, what India targets with respect to their inflation is very different than what Poland and Greece sort of targets. So that ultimately becomes a factor of where they're

natural rate of unemployment should be and what the potential GDP growth should be. Like, for instance, for India, if the demographics are much stronger, overall growth will be much stronger, right? So they can afford relatively higher level of inflation vis-a-vis

Even countries like China, where demographics are under pressure, potential GDP growth is under pressure, you would expect that central bank to target inflation at a much lower level. And that's part of the reason why developed markets also target inflation at a lower level, lower potential GDP growth and lower sort of, I would say, natural rate.

Just because you mentioned China, the Chinese bond yields are really collapsing. They're very, very low. I know at the IMF, you did tons of work on emerging market bond yields, in particular, breaking them out into term premium, a concept. I guess I understand the concept. I never understood how people did the math.

What is that? Is that an ominous sign that there's just such a rush for safety? Usually that happens during or right before a period of severe disinflation or deflation and often a recession. You're right. And this is sort of sympathetic of what's happening in the economy as well. I mean, when we look at Chinese economy, what other two sort of defining factors in a way? Consumer demand is weak.

And there is almost like an overcapacity in a lot of the industrial sectors. So when you see those kind of

factors, you do expect the domestic growth and domestic inflationary pressures to remain weak. And that's what we have seen in China as well. Obviously, it's been in a pseudo deflationary environment for the last couple of years. And especially if you look at the PPI and not just the CPI, that's even weaker. And that basically reflects that there is a lot of overcapacity in some of the industrial sectors in the economy and the

inventory stock is very high and so on and so forth. So that's sort of the point in general that when it is banking so strong, it is a reflection of the underlying structural issues in the economy that the growth is not really booming. And at some point of time, the government needs to or might want to intervene either

through a fiscal package or through monetary policy levels to drive the growth and correspondingly stabilize some of these markets. I mean, we saw the same thing happening in 2008. The bond markets really, the bond deals collapsed and then we saw a sharp 100 basis point rate cut just to stabilize the growth and make sure that

people are not getting worried about growth and inflation and all those dynamics. Whether China will cut rates massively, the scope is relatively low vis-a-vis 2008. But that ultimately, whatever is happening in the bond market is a factor of all these economic channels which are manifesting themselves in the bond deals. And the second is, as you rightly mentioned, demand for safe assets. A big

thing which we saw in China is because a lot of the households were invested in real estate, right? So that sort of completely collapsed over the last few years. So there was a wealth effect, right? So people do need an asset to hold on to. Chinese government tried to pivot a lot of those household savings to the equity markets, which is why we saw the push that, oh, we will channel the money to domestic

equities and more dividends and more buybacks and those kinds of arguments, which worked out at the margin, but not really a broad-based success. So for a lot of the consumers, the bond market has sort of become like a safe haven approach. Now, the problem is that doesn't really solve the issue with China. If the households keep on saving either

in the bond markets or on the other assets, it doesn't really spur the risk taking activity in the economy. It doesn't really spur the consumption. And then you start going into this vicious loop, right? And that's sort of the big concern about China and the policymakers, how to make sure we don't go into this loop where the growth completely tanks. Now, the last point I would make is, and that's a viewpoint that ultimately governments and policymakers should not fight the structural decline.

If your potential GDP growth is close to 2.5%, 3%, it would end up there. And the question is, you can just manage the path and make sure it doesn't just collapse massively. But for any economy to continue to push growth above potential GDP growth level is just a short-term gratification issue and not really solves the problem. Rohit, we talked earlier about your cyclical view on the dollar. I take it you're a bear on the U.S. dollar.

Yes. Yes. What about your secular view? What about the long-term role of the U.S. dollar as a reserve asset where the U.S. government prints a lot of money? We issue a lot of debt that is bought by other countries and the other countries buy that debt with the money they get from running a trade surplus often with the U.S. So the U.S. has twin deficits of a trade deficit as well as a fiscal deficit. And

basically then those other nations hold those dollars as reserves in order to defend that thing. People have been, I think, predicting the end of the dollar system since before I was alive and perhaps before you were alive in the 1950s, 1960s. And here we are today. I read a great book in college. I think the book was written in 2010 or 2011 about the decline of the dollar. Barry Eichengreen wrote a chapter in it. And he's a brilliant economist.

wrote a paper for the Jackson Hole Federal Reserve meeting last year. And I was lucky enough to interview him on my previous podcast. And the dollar really hasn't budged that much. It has gone down from a few percentage points is my understanding. But what has replaced it has not been the Euro, has not been the Chinese Yuan. It has been like the Norwegian Krona or the Swedish Krona has gone from being 20 basis points to being 50 basis points.

which is not a collapse of the dollar regime. So that being said, how do you see this playing out? What is your review on the dollar being replaced both by other currencies, other fiat currencies, by gold, which is happening, we can talk about that, as well as the settlement layer of, is China trying to buy oil in some type of BRICS settlement currency? What are your views? Yeah, I mean, yeah.

Cyclically, very quick point, we are dollar bears and the view is relatively

simple let things go in cycles. Since 1975, we have seen dollar bear markets happening for seven to eight years at a row two times. That has nothing to do with dollars reserve positioning and structural positioning. That's exactly how macroeconomics sort of work. And dollar generally had eight to 10 year bull market. Right now it's in its 14th year of bull market. So at some point the question becomes that, okay, is it, you know, we have reached extreme levels or not. So that's sort of our conviction and view about dollar markets.

cyclically over the next four to five years. Now, structurally speaking, and we are broadly, I would say I'm in the Barry Eichengreen camp, which is the point that he has been highlighting that look, it will be a multipolar world.

It's very difficult to imagine, and it has always been difficult to imagine. I mean, since inception of money, there have been like six reserve currencies, roughly 90, 95 years of rain for all of them. And dollar is closely like 105, 110 year of its reign now. So it's very difficult to just come up and say that, okay, this particular currency or economy can just replace dollar, right?

Those things are gradual. It takes its time. When it happens, it can happen sharply, but generally it just happens gradually before we reach that inflection point.

Now, before that point, the point that you made in the research that Barry did with Sarkhan from IMF, I mean, that paper is one of my favorite papers, which highlights that we can look at the aggregate number or aggregate share of dollar, which has come down from 70% 15 years ago tonight. Now, 58% is now trickling down slowly and steadily to 57.5 and so on. So that change is marginal, but the

The question also is that if you want to understand the extent to which global reserve banks are de-dollarizing, it's not just to look at the aggregate amount because as we know aggregates are ultimately governed by the top four and five. What's happening to Europe, what's happening to developed markets, central banks and how are they treating their reserves? A lot of small and frontier markets are moving away from dollar at the margin.

And as you rightly mentioned, many of them are European countries, smaller markets which are moving to Norway and Sweden and these currencies. At the aggregate, it doesn't really make much of a difference to dollar. But the point is that this is a trend which is rightly underway. The second trend is gold. Again, we have been very positive on gold for a while and the same thing that

The entire thing started happening partly after Russia moved away from dollar reserves, but that has sort of escalated in the last couple of years after the Russia sanctions. And we have seen that the gold holdings of global central bank reserves is

on a rise quite sharply, almost on a secular basis and primarily driven by emerging markets. And these are not just, I would say the extreme emerging markets of Iran and those contentious countries, but Turkey, India, Poland, China, there is a pretty broad based trend for emerging markets to invest more in gold. And the point is, as you rightly also mentioned that, look,

dollar ultimately is the oil is needed for the global plumbing system, right? So it's not that easy to just completely change it overnight. But we are seeing a pretty broad based effort to try to diversify against dollar, be it as I said, to other smaller currencies or gold, or as you rightly mentioned, to either the Bitcoin or the central bank lines or through

through these bilateral trade agreements. We have seen India, which is at the forefront of many of these, right? It's trying to have a lot of these agreements, which are in local terms. We have seen in Saudi and China and all those markets. The issue is these things happen slowly. It takes time to iron out the kinks in these kinds of arrangements. But the main point for us is it is happening and everybody is sort of awake to that reality, especially in this new world order where the global economic fragmentation is something which is

more of a long-term feature. So that's sort of how we look at dollar that at the margin, it would continue to be chipped away into different kinds of buckets and we'll reach a multipolar world. It's very difficult to imagine Euro completely replacing dollar or CNY completely replacing dollar. That's in the foreseeable future in any case, but we will see alternatives coming in. And in the meantime, where dollar goes from here, I don't think any of these

Structural questions matter. What matters is more the cyclical factors where dollar goes from there rather than people just selling dollar and moving away from US. And so you said currency hegemons, the global reserve currencies tend to last for, I forget, 60, 80 years. The US's dollar regime has lasted for over 100 years.

But to stop being a reserve currency, you have to be replaced by something. So who is going to replace it? Is Chinese? I mean, when the dollar replaced the pound sterling, it's the dollar. The US had, I don't know if it already was the biggest economy, but it eclipsed many European economies already. So the natural analog would be China, which has been growing so much. But

But China, they do run a deficit, but do they have enough debt? Do they borrow enough money to all the banks around the world and just buy Chinese bonds? I think if they did that, the yields would be very negative on the Chinese bonds. Okay, not China. What about India? I mean, is it really going to be Europe, which doesn't even have a country? I mean, it's just a collection of countries, no fiscal union. Who's going to replace the dollar?

- Yeah, I mean, honestly, I would have to cop out on this question because there is no visible answer to that, right? I mean, if I have to pick a particular currency which will replace dollars,

very difficult to pinpoint anyone. As I mentioned, and as Barry also sort of stipulates, that look, it will be a multipolar world. That dollar, which used to be the king with 70% of reserve assets, you know, 15 years ago, that has come down to 58. Maybe it will settle at 50, 45%, and then there'll be a few others. There'll be a regional block where, you know, Europe becomes more active in the Europe space. And then there is something in the Asia space as well, right? So we are seeing this fragmentation that can lead to many of these regional centers coming up.

whether we have a model in mind i don't think we do as to what the steady state will look at now in terms of the question about when dollar replaced sterling back in the day right so when you look at the trends what needs to happen what needs to happen is

your overall economic might needs to come down right you stop being the largest uh economy in the world somebody else takes over then the next step they do is they take over the trade they become a very very important part of the global trade system and then slowly what happens is countries start trading in that respective currency right if you have become such a big player in the global trading ecosystem then you that that is what happened with the dollar that

back in the day, US became an important economy. Then US became a very important trade partner. And then more and more countries started trading in dollar, even though sterling was the reserve currency. And then eventually that

into the fact that look, if I need dollar to trade a lot, then might as well have reserve currency in dollar, right? Or that sort of supports the dollar's reserve base. And that is what happened when dollar sort of replaced sterling back in the day and along with multitude of other factors. Applying the same parallels and history never repeats, it always rhymes, so it's never be the same. We sort of see the same thing that US hegemony in global growth has sort of stalled.

US is sort of pulling back on the trade side, while a lot of other emerging markets, definitely China, are trying to put forward. So those are some of the initial signs that look, this is exactly what would need to happen for a reserve currency transfer to take place eventually. Now, what will the final solution be? Honestly, I don't have an answer, but it will be more puller spread into regional buckets than just one single dominating everything.

And so that chart you referenced earlier of the US dollar as a percentage of total reserve assets for foreign central banks, you said it went from 70% to 58%. I didn't know it was as low as 58%. I guess I'm out of date. And then also, is gold included as a reserve asset there or not?

It is. Yeah. It is. Okay. So gold has been going up as well. So I think if you exclude gold, it's not as low as 58%, but gold has been going up as well. You've got a chart from...

a blog piece from Breakout Capital showing net central bank buying and selling of gold since 1950. And central banks since about 2010 have been a big buyer of gold. From 1990 to 2010, they were a big seller of gold. So it just goes to show that central banks kind of sold gold when it was quote unquote cheap, and they're buying gold now that it's quote unquote expensive. So they're not out for the profit motive necessarily. Why are they buying gold so much? Is it because there's too much of the dollar?

No, but basically, I mean, I would say the causation is the other way around. The gold is so expensive because the central banks are buying. And that time the gold was so cheap because the central banks were selling, right? I mean, so that's sort of a structural demand which we have seen in gold. Okay, why are the central banks doing it? They're doing to sort of diversify their holdings. I highly doubt a lot of the central banks are doing it just to MTM and increase their profit share. It's more because the dollar has been so dominant for them that they, it's just...

especially after Russia getting sanctioned and their reserves getting blocked. It's a natural concern for many emerging markets that just have a more diversified book. So that's sort of one of the reasons. And that is ultimately translated into gold prices. Like historically, if you see the correlation between gold prices versus and basically inflation pricing is airtight, right? That inflation goes up and you would see the disconnect with gold.

which is like gold was always considered a hedge and all those things, right? In the last few years, that relationship has completely broken down. Fair value of gold by those, you know, the relationship should be close to $1,300, $1,400. Right now, gold is trailing at $2,600. And part of the reason is because there is this new investor base, which has got added over the last eight to 10 years, if I can, and specifically in the last few years, which is a secular buyer of

And that is providing a support to the prices. And would the biggest two central banks, emerging markets that are buying gold, would they be China and India? I'll have to check, but I'm definitely in the top five. India, China, Turkey, and Poland were amongst the top five. Yeah, actually, you've got the chart. Turkey's the biggest, China, and then Singapore, Egypt, and India. I didn't know Turkey is such a big buyer of gold. Yeah, it's...

It's also import imports. I mean, gold imports are also a big part for Turkey in general. It's almost like pseudo, you know, when we talk about India, Indian households used to invest a lot in gold and gold imports are always a big thing for India. It's sort of similar to Turkey in that regards. So maybe it just makes natural sense to do that. Plus also Turkey is in the middle of a lot of the geopolitical chaos. So for all we know, that might be a diversification strategy there as well.

So here's my final question for you, Rohit. On the dollar as a reserve status, here's what I think is the true privilege of the US dollar, which is that when there is a recession in the United States,

The government can borrow as much money as it wants, and there are buyers for it around the world. Every single place in the world, people want to buy it regardless of how low the yields are. Many countries, I think most emerging markets, when they have a recession, often the bond yields go up because people are worried that they're not going to be able to pay it back or that there will be massive inflation.

And that is why when people say, oh, because the US Treasuries have been selling off and yields have been rising, the US is behaving like an emerging market. That is what they're referring to. Do you think that the US bond market is behaving like an emerging market? And if not, do you think it will sometime in the future? I mean, I think it will at some point. Basically, what we have seen, not just emerging markets.

You know, bond trantums are always very popular in emerging markets because they don't have the privilege. But we have seen that entire ecosystem coming to developed markets. We saw what happened in the UK. We are still seeing what's happening in the UK in the last few months. France also flirted quite actively with that. So the point is that global markets are punishing all economies which are doing excessive deficits. We saw what happened in Brazil, too.

the us sort of stands out again because of the exorbitant privilege and the argument which you made that they can borrow as much as they want because everybody will pile into that and i think that's the fundamental question which investors will or need to start answering that is it really that big of a safe asset at one at one what point of debt to gdp do you start questioning the fundamentals and if the underlying assumption is that us can continue to borrow indefinitely

irrespective of what its growth level is, irrespective of what's happening in the economy, then I think that what's been happening can continue. But that's the underlying thing which I think will and should change, that there are natural

to how much a country can borrow, the natural limits to how much the investors will continue to pay for that. And we can somehow see that, right? I mean, the term premium, which you mentioned, that effectively is a measure of the investor competition for holding these assets, right? For most of the last decade, the term premium was negative because that was the safe demand for US assets that look, we will lose out on term premium, but we want to hold US assets because that's the safe asset

asset class to be invested in right now if you look at the term premia that has actually become positive and increased quite sharply over the last few years if you plot 50 year history is still less it's still like close to zero but the point is that it has started to increase quite sharply and that's an initial sign that investors are getting cognizant

of the fiscal risks of the treasury supply risk in the US. And at some point of time, that can start reflecting into the broader bond markets.

Yes, I would say that for a lot of the history, you know, 1990 to 2007, the term premium was a lot higher than where it is now. It's now 80 basis points. That's what term premium on a 10 year zero coupon bond. So it could get a lot higher. Rohit, we will leave it there. Thank you so much for coming on, sharing your insights. Where can people find you? Are you on Twitter? Are you in LinkedIn? I'm on LinkedIn. Yeah.

Nice. Well, until next time. Thanks. Jack, thank you so much for having me. This was really a pleasure. I really appreciate that. Thanks for watching. Remember to click the link in the description to learn more about the Tucurium Agricultural Fund Benchmark Index. Until next time. Thank you. Just close this door.