Hello, this is COI Time, a podcast series on markets and economies from DBS Group Research. I'm Teri, chief economist, welcoming you to our 144th episode. This is the year's last podcast. Now, we have a tradition. We end the year with Dr. Komal Sri Kumar, president of Shri Kumar Global Strategies, based in Santa Monica, California. He's a senior fellow at the Milken Institute and previously spent over two decades with the Trust Company of the West, known as TCW in most Circle.
Working on investment strategy and asset allocation, I find it delightful to review the year with Shri and then look forward to the next year. And if you have been to this podcast in the past, you know how a student insightful his views can be. Shri, welcome back to COVID time.
Thank you very much, Jor. Good to be back with you again.
I'm so glad to have you back and I'm glad that we now have this tradition of ending the year together. Sri, let's get right to it. Take stock of 2024, your views on the US economy, markets, fiscal position, and the Fed. And of course you may also want to comment on the elections.
Sure. Let's see. Let's start with the overall US economy. The US economy was much stronger than I had anticipated. And I, along with a whole lot of others, had thought that, uh, the sky-high interest rates that we have had since 2022 would, um, result eventually in a recession. But what I think, not just I, what the majority of the analysts failed to take into account was the fact that the amount of stimulus that was created on the monetary and fiscal side in the United States was so immense.
That even high interest rates, 40 year high levels were not sufficient to bring inflation down. We are seeing retail sales, for example, continuing to remain very strong. That's a reflection of US consumers. And Tuesday morning, Washington DC time will be the retail sales number will come out, the latest one. And the expectation is that it's going to be very strong as well. So the US economy has remained very strong,
but you talked about fiscal deficit more. That is where you have the fiscal deficit, which continued to rise both in dollar terms as and as a percentage of GDP. Uh, I learned when I began my career in 1978, 1979. That the so-called safe maximum ratio for the debt to GDP was 50%. The United States is running at 120%. We have France, which is running at 110%. Even Germany, which used to be a great country known for its fiscal, um, uh, rectitude, now has again the
situation is totally out of control. Uh, so the point here is, we have talked about that causing a problem for the United States, but the fiscal deficit is very large, dangerously high, but it has not caused a problem yet. And the reason I would say, and again, since I'm speaking to you in the heart of Asia, Timor, I would say the reason is we had thought the Chinese renminbi Yan would by now be an effective competitor. Or that the Europeans would get their act together and
a common currency, the euro would be dominated. Neither has happened, and both of them are actually very weak in the in the last several months, and I don't expect that to change. So the dollar got a reprieve, the fiscal deficit could run at a high level because there was
no alternative to the dollar. So in other words, You talk about teaching a class, and very many students are performing very poorly in terms of grade, but I can still turn out to be the best students because, not because I'm great, but because the others are much worse. So that's what we are going through. Now, I don't want to leave the topic of fiscal deficit yet. Go to 2025. Will this continue? I don't think it can.
Because the, you're going to have enormous amount of borrowing requirement on the part of the treasury. And even though Janet Yellen will stop being the Treasury Secretary on January 20th, we have Scott Besant, a former hedge, fudge fund manager who's the designate to take over. There's nothing much that he can do immediately, other than try to infuse some confidence, but he cannot change the numbers.
So it is going to be very difficult for that to happen, and my concern is if the tariffs are increased at the same time as the fiscal deficit is very large. The the tariffs are going to do two things. One, they are going to cause the prices to go up for US consumers and therefore, the US inflation rate will go higher up. I have repeatedly said that inflation is down only temporarily, it's going to pick up again and it's starting to happen. It's going to be pronounced in 2025 in my mind.
And if that happens, the US Treasury 10 year yield will again start to go up. I'm worried about it's hitting 5% again on the 10 year. Uh, and if that happens and the tariffs are imposed, even if it is not, uh, 60% or higher on China, for example, if it has increased significantly, and I think Trump has to do that because after threatening all the countries, he can't just walk away and say, OK, now I'm president, I'm not going to do it. That's not going to happen. He has to impose something.
And when he does that, not only is inflation going to pick up, the dollar is going to become very strong, the bond yields are going to rise, and that's going to be negative for the economy. And that in turn brings us to the Federal Reserve. Sorry to be long-winded, but you are, no, not at all, not at all to your question. Um, I think the Federal Reserve policy under Jerome Powell has been irresponsible. Uh, in 2020, we uh had the beginning of COVID in, uh, February, March of that year.
And at that time, the Federal Reserve's balance sheet was about $4 trillion and it was already 5 times the level of what it was when I, when, on what I call Lehman Day, September 15, 2008. So it went from $800 billion to $4 trillion and by March of 2022, 2 years later, it was $9 trillion. That's what I call the height of irresponsibility. When you
have COVID, to cure it, you need a vaccine. You cannot increase the money supply and hope that everybody will get well because the Federal Reserve's balance sheet has doubled. That's what he did at the same time, the interest rates were brought down to zero. There was $900 billion of fiscal stimulus in the final months of the Trump administration, and another $1.9 trillion in the first months of the Biden administration. So $2.8 trillion plus zero interest rates, plus doubling.
Of the Fed balance sheet. So no wonder inflation hit a 40-year high, uh, because you would expect that all of that would happen. And that is what we are fighting. And when the interest rates started to come down, they said, oh, the Fed has brought the inflation rate down, but it should never have gone to that level. And now that he's easing up, he's ignoring the lessons of 1973 to 1979.
When we had a very pliant Federal Reserve chairman under Arthur Burns, and who did what was required by Richard Nixon to, I, I say, I've written saying the monetary policy followed the dictates of the political cycle rather than the needs of the economy. And of course, we had sky-high inflation, and you had to have a very severe recession to bring it back. So those are my concerns for 2025. Uh, it appears as a Wednesday afternoon, uh, Washington DC time.
You're going to have again another rate cut. The first rate cut, which happened in September, was expected to be 5025 basis points, turned out to be 50. Why is he doing that? I have a theory, and I feel very strongly about it. I think the Federal Reserve is very much a political entity, even though Trump, uh even though Powell keeps repeating that he's apolitical. And the reason why he keeps repeating it is because
he just, that it's not true. So he has to keep repeating it because he probably doesn't believe it himself. So, 50 basis points without any reason, another 25, and he's going to do 25 more. And then there is a talk of passing in January. Is it because Trump is going to come into office and he doesn't want to oblige him? We're not clear what it's all about and why he's doing what he's doing.
So let's talk about that intersection of Fed policy and politics, because if it was Jerome Powell's, you know, Explicit or implicit desire to help the political cycle, it didn't work, Sri. The point that you made that when policy should have been tighter, it was not as tight, basically caused the cost of living prices that afflicts Americans today. Actually, a week before the US elections, I traveled through
San Francisco, DC, New York. I asked about 50 people who's going to win, and I was not exactly in the red state heartland, you know, these are liberal towns, and 46 out of 50 said Trump would win, and which was itself, you know, it was kind of shocking to me because looking at the polls, it seemed like a 50/50 outcome, but 46 out of 50 people that I asked said Trump would win and by and large they said it's because of cost of living.
So, by having an accommodating policy, by trying to stretch out the cycle, if the Fed's desire was to keep the Democrats in power, that didn't work out.
It did not, it did not help. Uh, that may well have been the reason why he did it, but, uh, now we are going into the political sphere, uh, which I'm not an expert to talk about, but there were various other areas such as talking about, uh, discrimination, equality, and whether it was coming from the Democrats or the Republicans. But what I think the elections missed is that the cost of living, as you said, very correctly so, uh, Tor.
That turned out to be the single overwhelming topic. Even on the economic side, the Biden campaign and then the Kamala Harris campaign subsequently said, look, we have actually done a lot in terms of economic growth. But that did not match the fact that the inflation had also gone up substantially. That was the dominating issue in the voters' minds rather than what was happening in terms of uh economic growth. And the reason is the following.
The economic growth and the unemployment rate being low benefits a whole lot of different people, but on the other hand, inflation is pernicious, and it affected people in the low and middle income groups. The higher income groups couldn't care less in high inflation, but I'm invested in the stock market and stocks went up even more. So I'm doing fine, thank you.
But the lower income groups do not have it, and that is where I think the, uh, they made a serious mistake in terms of the judgment that they made on it.
She also for me, one big takeaway has been when you and I talk about the rate of inflation, we're talking about a 12 month change in prices, but the people that I spoke with in the context of cost of living seem to be thinking about the cumulative inflation over the last 4 years, that they feel the prices are up 40%. They don't quite understand when I say, well, inflation is down a lot, they say, no, prices are up 40% in the last 4 years.
Right. That that to me, it makes a lot of sense. And you and I are not low income earners. We are relatively well off. But even when I go to the grocery store, and then I say, buy just a gallon of milk and bring it home, or a dozen eggs and bring it home, and you see that suddenly the gallon of milk here is, we are talking about 6 $7 US dollars for half a gallon. And you gasp, saying, boy, this is not the way
it used to be until about 2018, 2019. So it is clear that people do compare the price level today with the price level five years ago. And the reason is, for most people, that income levels have not increased by the same percentage. And that's why, uh, that, that, that is a very important comparison.
3, you touched upon the fiscal issue and I want to go back to that. I want to connect the fiscal issue with banks to some extent. The US has massive issuance needs going forward, and when they issue long duration bonds, banks are a big holder of that bond, those bonds, and we saw last year in the regional banking crisis episode that when you hold a lot of long duration assets in an inflationary tight monetary policy environment, the system can trip up a lot.
Now we had that crisis in early 2023. Silicon Valley Bank and a few other banks. We saw the Fed come up with very robust response by creating more lending windows and treating those bonds and par value and averted that crisis to some extent other than a couple of banks going under and being forced to merge. Now when I look at the data stream, what I find strange is that since then,
The US financial sector hasn't necessarily gone short duration. It still remains long duration, and we have all these large banks which are still saddled with a lot of large duration debt. So why haven't we seen the duration risk come down, because I would have thought that would have been the key response to the crisis. And going back to the fiscal issue, if indeed people should be worried about long duration exposure, then how will the US fund itself?
Should it, would it only issue at the short end?
Uh, here, let's first, you have 2 or 3 issues embedded in your question, so let me start out with the banking crisis first. Uh, they did again a study of it, um, under the vice chairman for regulation, he actually went through it and came up with the conclusion that the banks made a serious error.
But my conclusion is very different. If I were, if I had been the chairman and CEO of Silicon Valley Bank, And I heard day in and day out the chairman of my Federal Reserve telling me that inflation is transitory. And I, and, and 2021, you're talking about 10-year treasury is going just about 2% or lower than 2%. As the CEO of Silicon Valley Bank, I should go and buy it.
Because I believe my Fed chairman, and if he says that the 10 year yield is going to go down to 1% because inflation is transitory. And I buy during a period of transitory high inflation. And I'm going to get a huge capital gain when inflation and bond yields go down. Except that the Federal Reserve Chairman was wrong, inflation was not transitory, and the 10 year yield went as high as 5%. So they ran into huge losses. Now, what happened in response to that?
The regulators essentially stepped in, as you pointed out, and prevented that from becoming an overall crisis for the economy. They stopped quantitative tightening that had been taking place. And took the balance sheet of the Federal Reserve overnight, took it back to where it was about six months earlier, till about September or October of 2022, uh, and they did that in March of 2023. So you lost some uh important and valuable time. What
was the other thing that happened? People who had unlimited amount of deposits in the failing banks were made good by the federal government, by the taxpayer. Why? They should have borne the loss of anything over the insured amount of $250,000 US dollars. They did not because the Fed didn't want an overall crisis. But this is how they quote unquote solve the problem. You throw money at the whole issue.
And therefore, the problem goes away only that it will come back again next time because you haven't learned any lesson from it. Lehman Brothers, 2008, we threw money into it. Ben Bernanke started quantitative easing, which he said was a temporary measure. You believe it's temporary when it was, it goes from 800 billion to several trillion under his watch, that's supposed to be temporary. We are never going to go back to that level. So that is what is happening with
respect to the banking side. I'm very concerned for 2025. And the reason I'm concerned is you have a new issue, the commercial real estate issue, for where the major lenders are small and medium-sized banks are the big uh percentage of their portfolios go to commercial real estate. So, and there again, people still haven't gone back to offices. The demand for office space has gone down substantially, and
that is going to be a problem for banks' portfolios. Now, what you had another, I said you had several questions embedded. I'm going to go to another one. Why did they not reduce the duration? And the reason is, We, I, I'm a failing bank. I was, and then what I do gradually is that instead of keeping those assets where I bought bonds at treasury, say, treasury bonds at low interest rate, I'm going to move them into a long-term investment portfolio away from a trading portfolio.
And if I do that, I don't have to recognize the loss. In my mind, the loss is a, is a loss. Accounting doesn't, I don't care about accounting. You're holding an asset which has gone down in value, you better recognize it. Now, that's not what happened. They moved it in, so you have a lot of the assets which are sitting in long-term issues and they have a loss which they don't have to declare. And therefore, the incentive for the banks to reduce the
duration simply goes away. So the regulations are such that they encourage the banks to take undue amount of risk and not to cut it down. That is what has happened. Now come over to the fiscal side. You said that was the last part of your question. The fiscal side again, is, as I said, is irresponsible?
If they had followed the rules and they tried to issue the same amount of bonds, so in other words, if a 10-year bond is maturing, if you issue another 10-year bond, and you're paying a much higher interest rate to borrow for 10 years or 30 years, you will learn a lesson, and therefore, you will be cutting back on your fiscal deficit. On the other hand, uh, the Treasury and Janet Yellen, what they did was to finance it in short-dated issues. And we have a lot of short-dated these treasury issues
coming due in 2025. And she says that there's nothing wrong in it. I was not manipulating the interest rate, and this is what we were doing in terms of reducing the amount of risk that we have to run. That again is a time bomb. It is just waiting.
It's the same thing. I used to be critical of Turkey when they could not find a long-term capital flows or foreign direct investments coming in, they would borrow short term and 6 month, 9 month paper, and when there was a crisis, they would turn tail, go away, and cause a new devaluation of the Turkish lira. That is again the risk that we run on the US side.
Um, so let's go a little further on that issue, since we are talking about the risk on the balance sheet of financial sector and the CRE issue you just brought up as well. So you're talking about a scenario in which the tenure heads above 5%. Given the existing facilities that the Fed has, as well as that little trick you talked about that if you keep it, take it away from your trading book, you don't have to mark the market. Isn't the system capable of handling tenure at 5%?
Are you saying is, is the system capable of handling? Yeah, yeah, the system is capable of handling it, but the political consequences are what are not acceptable. Namely, if you have that go to 5%, the mortgage rate, which finally they are struggling to bring it down and people being able to buy houses. Because it's politically important for the administration to say more people are able to buy the home for the first time. They are now not able to. The housing affordability has
gone down substantially. And if the mortgage rate once again goes to, say, 7.5%, because the 10-year yield goes to 5%, uh, you have a political issue on your hand.
So related to that, Shri, there's a lot of talk about how since the global financial crisis, US households and corporates have been leveraged. Today, income growth is strong on the household side and earnings are strong on the corporate side, and therefore, debt service ratios are manageable even though interest rates are high. So what's your assessment of the balance sheet of US households and corporates?
The balance sheet, um, the New York Fed recently had a study showing that they are not very concerned about the overall balance sheet, um, of the US households. And that is correct in the sense that if you look at the totality of US residents. They've all benefited from the run-up in equity prices, the run-up in house prices. When you put them both together, your debt did not increase as much and therefore, your numbers look pretty good in terms of the household, uh, network position.
But the problem that I see is not in the aggregate, but I try to break it down and look underneath. The real issue comes with two, there are two problems. One, if you look at the Gini coefficient of income inequality, that has worsened in recent years. It started with the Bernanke decision to reduce interest rates to 0 or near 0 after 2008. And therefore, the low-income groups who could not afford to invest in equities, uh, found that they could not get
enough uh interest income. Retired people were also hurt because retired people are taught that they should be in safer assets. They were hurt as well. So now what has happened is with the new situation, you again have the low income people being hurt by the high prices and the fact that the interest rates are being brought down and they cannot afford homes. So I think that is where I think the issue is going to continue to be something that the Trump administration will have to face.
And the corporate balance sheet.
Uh, 00, no, sorry, let me finish one more before coming to the corporate balance sheet. So on the household side, and this is again, then we make the transition to banks and corporations. On the household side, I said the aggregate is not worrisome. However, there are two problems. The one problem is That the income distribution, as I mentioned, has worsened. And the people at the lower level of income are incurring more debt. They don't have equities to support them.
And so you have a situation where low and middle income groups, the household balance sheet has worsened. Not in the totality, but if you disaggregate the income groups that has worsened. That's one issue. The second problem is some components of the debt, particularly auto loans, credit card loans, they have increased and the delinquencies on credit card debt has increased substantially. And that is going to be a factor also for banks to take into account in 2025.
The expectation was Fed would successfully lower interest rates so sharply, bring it down again, inflation will be down to 2%, and therefore, uh, you won't have a problem and you, you will be able to pay your credit card debt. What I think we are going to find is that the Fed's ability to cut rates is going to be diminished. Inflation is likely to pick up, which means credit cards, the average credit card interest rate I was looking at in the last two days is determined to be 24%
per year. Wow. So why do you borrow 24% per year? Because you have a credit limit. Nobody asks you questions as long as you run up to that limit. And people are running up and when they run up to that limit, they are not able to make payments on a monthly basis. That's where the other issue is that 2025, it will become an important issue for the Trump administration to face.
And uh on the duration exposure as far as the US corporations are concerned, I mean, I talk about both in terms of, you know, equity and credit that companies seem to have, uh, you know, ability to pay decent dividends, their earnings are good, and their leverage uh doesn't seem to be particularly high. So unlike say the 2007, 2008 episode when we came into the crisis with high corporate leverage, this time, at least from that perspective, systemic risk seems to be more manageable.
Systemic risk in the corporate side is very much manageable. I would agree with you completely. Uh, one key provision here is, it is based upon their equity valuations and equity markets remaining very high. If that, again, gets damaged in some way, and especially because high interest rates, high bond yields turn out to be, to be uh a headwind for equities and corporate balance sheets, then you have a new problem developing.
Yeah, absolutely. I just want to take a little side through here because we're talking about corporate balance sheet. Uh you had earlier mentioned the CRE issue. The other thing that I would like you to talk about is the whole private market side.
The debt, private credit leverage loans. There's a lot going on that is not part of the public market picture, and I sometimes wonder whether the regulators or even the market pricing mechanism is catching all the risks that is shaping up in the private side of the business.
Uh, no, private side of the business is a completely new world. Uh, I, it is not picked up by the equity market. And as long as the public equity prices continue to remain high, that also supports the private equity side. Because anything, uh, any leverage seems to be manageable. Um, but the valuations on the public market, depending on how you measure it, uh, the S&;P future, uh, earnings is, uh, multiple is about 27 or 28 times a historic high.
And at that level, the private equity clearly is going to be damaged as well if there is a correction in the stock market. So I think the private equity issues are more hidden. That's why you don't talk about it. Second, I don't know that the regulators have the ability or astuteness to catch it, what's going on on the private equity side.
I also see, you know, so many private debt deals which are extraordinarily large and also you see companies sort of deferring their IPOs more and more maybe because of regulatory stringency, but also because they can just go to, you know, a small club of private investors and everybody's raising funds together and the international investors get together. I mean, it's pretty extraordinary. I, you probably saw overnight Shri Masayushi's son and Trump jointly announcing $100 billion of investment.
It is all privately funded. There is no public element funded,
and he's going to do that over the next few years. It is good for Trump as he, as a as a something publicity point as he prepares to assume office. But you just have to wonder at those huge numbers and if you would actually be able to accomplish it. It's one thing to promise that it is quite another one to actually deliver.
Given So's track record, I have my doubts as well. Um, Sri, at the beginning of this conversation, you were taking stock of 2024 and you were talking about inflation, but then you added that for 2025, you are worried that inflation has bottomed out and there are upside risk. Now those upside risks, in addition to what you have talked about tariff.
Would you have been concerned regardless of the presidential election outcomes, even under a Harris presidency, would you have seen upside risk to inflation in 2025?
I, um, let's take the campaign promises at face value. We don't know, of course, whether Kamala Harris would have done what she promised and if Trump is going to do what he promised, but I'm just, you have to make some assumption, and I'm going to say they are going to be close to 100% of what they promised. So, uh, on the Kamala Harriss side, there was going to be a lot more subsidies given for low income groups,
people to buy their first home. It's all very noble, but the question is, where do you get the cash to make all those payments? And on the Trump side, he's again talking about a whole lot of, uh, tax cuts. And many of them are going to land at higher income levels and similar to what happened with the December 2017 tax cut, which again went to the higher income groups mostly.
Uh, so in both cases, I think the deficit would have remained high, would go even higher, assuming they followed through on their campaign promises, but the Harris deficit would have been smaller than the Trump deficit. Uh, but both deficits would be higher than where they are today. So the issue then becomes, you have to say, perhaps Trump will not give all the fiscal goodies that people
hope to get. Uh, if you don't assume that this is just a horrible situation on the deficit side, what can happen to bond yields, what can happen to the US dollar as a result?
Right. Um, so should we, just to stay with that thread a little longer, uh, the thing that I've been tracking the last few months is that goods inflation, by and large, OK, supply chains have normalized. Energy prices are stable, but it's a services side where we see quite a bit of stickiness, if you will, from financial services to restaurants to recreation. Those prices seem to be sticky and then of course, you know, home
renovation prices and so on. So while goods prices have come down, there is this other part of the economy, the services side, which seems to show a lot of stickiness. So with 2025 in mind, um, tariff, who knows, you know, whether he'll do 60% or not, but on immigration, I think it's pretty clear that there'll be a lot of crackdown and deportation. Do you see a strong link between undocumented worker crackdown and service inflation?
Uh, I, I do. I think undocumented workers in particular parts of the country, California being one of them. Um, benefits immensely from undocumented workers being there. And the question is, uh, the deportation that is being threatened, how seriously would it be done? For instance, Trump said in a very recent interview, uh, the so-called dreamers, the kids who were brought as children, and they don't even know their home countries of their parents because they've never
been there. They are all English speaking. They don't even speak to the extent they're Hispanic, they don't even speak Spanish. And those people are very much American in terms of their behavior and their attitude. And he has said more recently, they need to be protected. So clearly it is, if you look at the, so that part, um, and already there is a going back in terms of how much the deportation would be done. And secondly, uh, the case about birth citizenship by birth.
And the idea is that you just because your mother came across the border, came into the United States, and delivered the baby on the US side of the border doesn't mean I'm going to allow you to be a US citizen. That again goes against constitutional provisions in the United States. It is going to be contested. It is going to be going up the level of courts. And even with the conservative majority in the Supreme Court that Trump has instituted from his first term, it's not clear that that
kind of a situation can persist. In other words, it's not clear that the Supreme Court would support that. So there are uncertainties. I am guessing that to a large extent the deportation is going to be, it's a great campaign team, but it may lose when it comes to actual implementation. Similar to the border wall, and remember, Trump was going to have a wall from end of border to end of border along Mexico, and I think it's probably now a few feet.
Is all that was, that was built uh during his term
and then Mexico was going to pay for it.
Mexico was going to pay for it and of course they, they used some very colorful terms in explaining that they were not going to pay for it.
Absolutely. Uh, Shri, I um have been reading articles about where the undocumented workers um are mostly in the US in which sectors. So of course, you know, agriculture, construction, uh, basic services, we all know, but one of the most dynamic part of the US The economy in the last 5 years has been the delivery economy, you know, all these DoorDash and so on.
And I'm reading that, you know, undocumented workers play a big role in supporting the delivery economy, and that is why extremely low cost of, you know, sending even the tiniest thing from one part of town to the other part of the town can be done. So if indeed there is a big crackdown, that is one more area which wasn't an issue in the past, could become an issue in terms of prices of delivery going up.
Um, she, uh, just in general, um, financial market outlook, the last 4.5, 5 weeks since Trump's election, we've seen the financial markets go strength to strength. Uh, a lot of stocks are doing very well. The expectation is on the back of deregulation and tax cuts, you know, financial sector will continue to benefit. Uh, in the, in the coming years. Uh, so your take on financial markets, especially with the context, you had already mentioned this before, that the valuations are extremely high.
Oh, my take on the market, um, clearly, um, If there are 21 positive and one negative, the positive is going to be coming from the deregulation move. There are regulations which are going to be um unraveled in the Trump administration. Some of them may happen even in his first month in office. And so we, you were talking about, uh, Tesla benefiting
and uh Bitcoin benefiting. Again, it is all going to come from less regulation and then the ability for you to be able to pay with Bitcoin, which will increase its attractiveness for investors and so on. So to some extent, that is going to be a big positive overall. The negative side, I think, is going
to come from interest rates. And my concern is that, uh, the basic, uh, industries, basic setup such as housing, um, prices of essentials may suffer if you have, uh, the, the 10-year treasury go to 5%. And if you have home prices continuing to increase and the mortgage rate remaining elevated. Um, home prices remaining high is not going to be solved by what the Democratic campaign suggested, namely giving money
to the people to buy their first home. That will only cause home prices to go up even further. What you need is more supply of houses, and that is, that is not uh seem to be in the cards anytime soon. So my point is there are lots of headwinds as well in addition to the positives that are there with respect to deregulation that has been promised.
Uh, so, but given the fact that you have such a high valuation for the overall market, I would look for some of, some stocks at least to be hit in the 1st 6 months of the Trump administration.
I, I fully, fully concur. OK, so related to that scenario, your view on the dollar.
Uh, we talked about the dollar not having any competition, uh, not the renminbi yuan, not the euro, not, not the UK pound sterling. Uh, so I think the dollar in the short term, short term, especially if the tariffs are imposed, I can see that going from 105, 106 on the euro to parity or even less than parity. Um. The issue here is, as we talk Tor, many of those other countries have severe political problems. Look at what happened.
The Canadian dollar is at a long time low, and again on Monday, uh, in the, in North America, we had the Deputy Prime Minister and Finance minister resign, Christia Freeland. And she in turn said, criticized the Prime Minister pretty scathingly in her resignation letter. Germany is without a government. The government just fell, and it's not clear that they can form one. France is borrowing at interest rates comparable to Greece. And the 10 year yield uh for France has shot up.
And while the government fell last week, I don't think France can have another government. So the euro is going to be weak because of its innate problems. The Chinese economy has issues which, as you know very well from your Asian base, uh, that is not going to go away anytime soon. I think the renminbi in term is likely to be weakening with respect to the US dollar. So I see a period of, and if, and again, if uh tariffs are imposed, that's going to be very
positive for the dollar. Positive being defined as strengthening. And if that's the case, you're looking for a stronger dollar in 2025, I would say stronger at least for the first half of 2025. Then you just, I, I'm not going to make a forecast beyond the first half because it all depends on how, what, how the policies change. Now, does Trump then not impose
the tariffs and then he goes back on them? And if Germany and France, do they get their act together in the second half of the year and push the euro from parity toward again 108 $109 US dollars per euro. Perhaps that would, those things would be very positive if that happened.
Uh, we, you and I don't coordinate on work, but on this issue we are like 100% aligned. I also think that 2025 is a year of two halves, so to speak, you will see almost uninterrupted Trump trades manifesting in the first half or maybe the first quarter at least.
And after that, all bets are off with respect to the dollar and then the US interest rates because There are certain internal inconsistencies in the Trump model, which right now nobody cares about, and he gets a free pass, but then as those internal inconsistencies come to the fore, then I think some of these trades would be far more challenging. But you're right, it's really hard to predict the next 6 months, let alone the next 12 months.
Um we've spent a lot of time talking about the US and I'm glad that, you know, you brought the discussion to the international for with the respect to Canada. Ah, Germany and France. Let's talk a bit about Asia and then perhaps EM as an asset class. Ari, it's not been great. Ah, although Indian stocks have done pretty well, but by and large investors basically invest in DM these days. EM gets very little love. Any chance of that turning around in 2025?
Uh, if the US dollar, uh, remains very strong, there are, of course, two issues here. On the positive side for emerging markets, uh, the US trade balance worsens. But the, the emerging markets are going to be able to export more to the United States. But Trump has also threatened that if that happens, he's going to impose a tariff on them, which again would cut back. So I would say that net net, it is going, looks like a negative year for emerging markets.
Uh, especially Asian countries which are so dependent on exports rather than domestic consumption. Uh, so I think 2025 is going to be a year of countries with a significant domestic base benefiting at the expense of those who are exporters. So what are some of them? India again is a country with a huge domestic consumption base. Indonesia is a country with a large population, and it has, it can develop its domestic consumption demand.
On the other hand, uh, Korea, Japan, China are all export dependent. And China has another problem, demographic, with the population getting older and therefore not demanding as much as young people do. You have an issue with how much they can depend on putting the uh products into foreign markets. And their, their key um trade partner, Germany is in trouble,
and the United States is threatening tariffs on China. So I think overall, those areas look to be uh difficult ones on Asia because of their export dependence. There are a few countries, sorry, were you going to say something? No, no, go ahead, please. There are a few countries in Latin America which have special characteristics which help them shine. Mexico because of its location. And the fact that very often, um, Mexico is used as a base as a substitute for China that has
been positive. On the other hand, Chinese products come through Mexico, and a lot of goods which are thought to be Mexican actually have Chinese components in them, which infuriates Trump that that is happening and that's why. He had this shouting match between Trump on the one hand and Claudia Scheinbaum, the new Mexican president on the other. Um, so that, despite that, if they reach an amicable settlement, Mexico can very well benefit from it.
Uh, um, let's see, and then the other second country I would mention, uh, in a positive light is Brazil. This is a country I've been traveling to for the last almost 45 years. And you never write Brazil off. It's a country with a huge population, very sophisticated bureaucracy, as well as a business sector, very knowledgeable. And even when they go into crisis, they come out of it. And so they can adapt
to global situation, so that they might do well. Brazil has developed uh actually links with China, and China uh into as an export market. And uh Brazil may be a beneficiary along with Mexico, but uh India because of population, Brazil, Mexico because of uh the special characteristics, but overall emerging markets, uh, doesn't look like a winning deal for 2025.
Ah, Sri, what about Brazil's neighbor, which always goes from crisis to crisis, but right now seem to be having a pretty decent moment, Argentina.
Yeah, no, when you, when you said the neighbor, I said Tur is obviously not talking about Uruguay. He has to be talking about. It has to be the bigger one. I, I'm both, I'm very impressed. And uh I was in Argentina about 2 months ago, very impressed by the changes that are taking place, um, and the policies instituted by instituted by Javier Mille, uh, the president. Those are the positives. Uh, the positives come from the fact that he has been very rigid in terms of not, uh,
printing money to justify any expenditure. And the people, I think, genuinely think he's an honest guy, and there was a lot of corruption in prior administrations, which the people believe does not continue in the Malay side. So those are the positives and the International Monetary Fund, your former employer, uh, they are very supportive of the Malay, uh, thing.
After all, it's a huge debtor to the IMF. They better be supportive, but, uh, rather than blindly supporting, which is what the IMF used to do before, they are currently in the process of supporting them. And essentially hoping that Malay wins, and I hope the same thing too.
The negatives come from the fact that there are a whole lot of extraneous things that he uses which have nothing to do with the economy or monetary or fiscal policy, namely calling the president of Colombia names and calling the prime minister of Spain as a communist. and he started a fight with neighboring Brazil and then it had to be resolved very quickly. Uh, he does all of that, but the question is,
I sometimes say, why do you do that? The people are not going to, your popularity is not going to go up because you call somebody a communist outside of your country. Uh, so I think it is a part of the personality that he's, again, full of energy and he has to say something on every, every different uh concept. But to the extent he sticks with the economics, and
so far his popularity has risen. Inflation has come down very sharply, and even though people are finding that their wages did not increase as much as population as the inflation, they're willing to give him time. They say, here is an honest guy who's trying to improve the situation. We have had 70 years of a fiscal mess. And it's not going to be cured overnight, so let's give him more time. So that, all of that part is good. Uh, the issue then, then becomes, can you stick with it?
And he did not get diverted by other extraneous issues and focus on the economy. That's what I'd like him to do,
right? And also just to maintain that you're not just him, but the entire administration remains clean because that seems to be something that the Argentinians really are fed up with. Um, Sri, a final question on the flavors of the moment crypto, gold, and AI stocks. Where do these things sit in your asset allocation distribution?
Um, I am very old fashioned, so I, I would explain my bias with respect to crypto. Even when the Federal Reserve policy is something that I do not like and I don't like the policy, I still think money should be created by a central authority. I need to be able to touch it. I need to be able to feel it. And so I'm not a believer in crypto that I'm not,
I'm not going to talk in terms of what might do. Yes, they can get a jump up due to the Trump policies, but I'll be really watching to see how far the run-up goes. Uh, you mentioned gold. Uh, I'm a big fan of gold, and the reason is that as currencies are being debased right now. The dollar can appreciate, we talked about the dollar becoming very strong, but it becomes very strong with respect to other paper currencies.
On the other hand, all paper currencies are losing value because everybody is, uh, Misusing the currency issuance, uh, ability. So I think gold has a, a significant upward move still, and rather than be between 2600 and 2700 an ounce, I can see it very quickly going up to the 3000 level, uh, and being sustained, uh, about that.
Now, if the, if the markets believe, especially on the Fed's side, that interest rates are not going to be cut any, any further or that interest rates can even be increased, that's going to bring uh the gold price down somewhat. But the political side of it clearly is to be uh profligate on the monetary policy side. And that I think is going to be uh boosting the value of gold longer term.
Um, profligacy on the monetary side, uh, are you suggesting that QT will end soon, even if the Fed can't bring inflation down to 2%?
They have already talked about ending quantitative tightening. And um the person who the uh the president of the Dallas Fed, who used to be the person at the New York Fed managing that situation, she has clearly indicated that that may be coming. Powell has also suggested that. So I had, so in other words, it's now at about 7.2, 7.3 trillion. And they are, you would think that they should take it back to the pre-COVID level of 4 trillion, if not to the Lehman Brothers level of 800 billion, but
no chance. It's not going to go anywhere there. I think you will be lucky if it goes to 6.5 trillion, and we are going to consider that a victory and we are not going to um do quantitative tightening anymore. That also militates against the dollar and it also creates more demand for gold. Because you know that there is going to be a lack of discipline on the side of uh the Fed policy.
Right, so basically for our followers and listeners, don't fight the Trump trade in the near term, but be very careful uh once the sugar rush goes away because from the dollar to the interest rates, lots of volatility could be in the offing.
That is very well put, I would agree with that.
Shri, uh, this has been fantastic as always. Thank you so much for your time and insights, and I want to wish you and your family happy holidays and a happy new year.
Thank you very much. I wish you a happy holidays as well and all the best to you and the family in 2025, Jamo.
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