The 60/40 Portfolio Is Dead Because Bonds No Longer Work | Louis Gave

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**Louis Gave** (1:00)
In the old days, the ultimate portfolio was 60 equity, 40 bonds. You rebalanced every quarter and you go to the beach and that delivered tremendous returns. That portfolio died with COVID. The 60-40 died with COVID and it remains dead because the policy settings have now shifted structurally towards far more inflationary policy settings. And in that world, I think you move from 60-40 bonds to equities to something to perhaps 60 equity, 20% precious metals, 20% energy. I tend to believe energy stocks are the new bonds in a world in which bonds no longer work.

**Adam Taggart** (1:52)
Welcome to Thoughtful Money. I'm its founder and your host, Adam Taggart. While much of Wall Street's focus over the past recent years has been on the AI hyperscalers, there are an increasing number of seismic developments happening internationally that investors need to be aware of. For example, as a basket, emerging market stocks have outperformed the S&P this year. And to name just a few others, Japanese bond yields have surged to the highest levels in 20 years, threatening to put an end to the carry trade.
A U.S.-driven regime change in Venezuela looks imminent. China continues to fire its monetary and fiscal bazookas with gusto in an attempt to pull itself out of its deep balance sheet recession. And in the wake of negotiating a tenuous peace between Israel and Palestine, renewed efforts are underway to bring an end to the Russia-Ukraine war. Which international trends are the most important for investors to be tracking right now? What are the biggest risks? And where lie the biggest opportunities? To better understand the situation from a non-U.S. perspective, we're fortunate to welcome back to the program Louis Gave, founding partner and CEO at Gavekal. Louis, it's a pleasure to have you on. Thanks so much for taking the time to join us today.

**Louis Gave** (3:02)
Thanks for having me on, Adam. I'm glad to be here.

**Adam Taggart** (3:04)
Thanks. Well, it's a pleasure to have you on. And as I just said there in the intro, there is a lot going on internationally. I don't guess this question that much anymore, but given it's been a while since you've been on and your purview really is in the international world, I'm going to ask you this general question. What's your current assessment of the global economy and financial markets right now?

**Louis Gave** (3:29)
So look, I think if you start off just on where policy lies, I think everywhere you care to look, you have very easy fiscal policies. China this year will probably be running a budget deficit of 10% of GDP. This is the second biggest economy in the world running a budget deficit such as, you usually don't see in peacetime. The US. I think this year will be running budget deficits of around 6% of GDP. You look all across Europe, all the European economies are somewhere between two and four and a half.
Japan, you have a new prime minister in Japan that's promising to really step on the fiscal gas. So almost every major economy is doing fiscal stimulus at this stage. Then on the other side of that, you have monetary policies that are being very accommodative.
Today, the US., you have twin deficits, budget deficits and current account deficits. That's probably together going to be in the double digit territory. You have unemployment rate below four and a half percent. The whole debate is how much the Fed should cut and how much the Fed should raise. You've got the ECB that's cutting interest rates. You've got the Bank of Japan that's sitting on its hands, the PBOC that's got its lowest interest rates in history. So everywhere you care to look, you have very easy fiscal, very easy monetary policy. The end result of this is reflationary trades everywhere are working. You highlighted in your intro that emerging markets equities are doing better than developed market equities. Well, emerging market bonds are also doing better than developed market bonds. You have most metals, obviously, gold and silver and platinum have been capturing a lot of headlines, but copper as well, breaking out to the upside. Pretty much, financials are outperforming in most major markets. Everywhere you care to look, reflationary trades are working. Except perhaps for one reflationary trade, which has sort of languished, which is energy. That's the one reflationary trade that has not ripped higher. And perhaps fortunately so, because as energy prices stay low, this creates a further boon to global growth. You've heard me say this many times, and you and I have discussed this in the past, but economic activity is energy transformed. So when you have a cheap cost of energy, that really supports growth, especially in emerging markets where growth tends to be more energy-intensive. You know, when you're building roads, when you're building buildings, when you're building stuff, it consumes a lot of energy. So when you think of Southeast Asia, when you think of China, when you think of India, when you think of Latin America, the low price of energy is a boon to most economies. Of course, not the guys who do produce energy. So if you're Saudi Arabia, it's not great news. But everybody else, it's pretty great. So today, you have low-energy prices, super-reflationary policies. Perhaps we shouldn't be surprised that things like copper prices are ripping higher.