Nouriel Roubini's Vision for a New Safe Haven Asset

For years, investors have relied on the classic 60/40 portfolio of stocks and bonds. The idea behind this was simple: bonds tend to go up when stocks go down, so the two things should act as a natural hedge. But when inflation spiked in 2022 and 2023, the 60/40 portfolio performed terribly and bonds failed to act as a safety cushion. In this episode, we speak with Nouriel Roubini, chief economist and portfolio manager of the new Atlas America Fund, an ETF that is trying to create a new type of safe asset that can withstand big risks, including stagflation, deficits, and de-dollarization. We also talk about the outlook for the US economy in 2025, and the big risks that the chief economist and portfolio manager of the Atlas America Fund sees on the horizon. Read more: Roubini Launches Treasury-Alternative ETF to Ride Trump-Era RiskCrypto Critic Nouriel Roubini Is Working on a Tokenized Dollar ReplacementBecome a Bloomberg - Business News, Stock Markets, Finance, Breaking & World News subscriber using our special intro offer at Bloomberg Subscriptions | Digital, All Access, Corporate & Student . You’ll get episodes of this podcast ad-free and exclusive access to our daily Odd Lots newsletter. Already a subscriber? Connect your account on the Bloomberg channel page in Apple Podcasts to listen ad-free. See omnystudio.com/listener for privacy information.

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:00Speaker 00

  Finance is increasingly being built on digital rails, but as the adoption of virtual assets, tokenization and stable coins grows, can regulation not only keep pace, but help accelerate it? Find out more later in the podcast.

• 0:15Speaker 01

  When you're a business owner interested in expanding to new markets, there's a lot to consider and countless questions to answer before making the call. The most important one being, are you ready? That's where ChatGPT comes in. Give it a goal, add your files and ask chat to help you map out different scenarios for the future of your business. So when growth is on the table, you've got an expansion plan ready to implement. Get started at chatgpt.com.

• 0:44Speaker 01

  Bloomberg Audio Studios. Podcasts, radio, news.

• 1:01Tracy Alloway?

  Hello and welcome to another episode of the All Bots Podcast. I'm Tracy Alloway.

• 1:06Joe Weisenthal?

  And I'm Joe Weisenthal.

• 1:07Tracy Alloway?

  Joe, do you remember, I think it was in 2022, everyone was talking about stagflation?

• 1:14Joe Weisenthal?

  Yes, of course, because we had, right, because we had, markets were low. So people were talking about recession. The Fed was hiking interest rates aggressively and inflation in 2022 was peaking. So it certainly seemed like we could have had the combo right then for essentially elevated inflation and some kind of recession.

• 1:36Tracy Alloway?

  Yes. And in fact, before we recorded this episode, I went back and I looked at a Google Trends chart for the word stagflation and like the peak in 2022 is just amazing. And then it sort of fell off because we definitely had inflation. We didn't necessarily have lower economic growth, but I think now at the tail end of 2024, some of that stagflation talk is beginning to creep back into, I guess, the, the economic discourse.

• 2:06Joe Weisenthal?

  Yeah, a little bit. I mean, what I would say is I would agree with you. There seems to be a couple of things going on that are very confusing, to say the least, but one is the sort of I don't know if it's acceptance or reality that like, like inflation has come down quite a bit, but maybe it's going to keep bumping up against the ceiling or maybe it's going to keep like bouncing off the floor, so to speak.

• 2:29Tracy Alloway?

  Yeah, that last mile is going to be difficult.

• 2:31Joe Weisenthal?

  There's still, and then on some measures, the economy still seems good, but you look at some of the PMIs, ISMs, other industrial measures, labor market measures, some seem to be slowing down. So like, I still think this idea of like, I don't know if I would call it stagflation, but this sort of unpleasant combination of not great growth, not great real growth and inflation that's still like at the higher end of what people are comfortable with feels like something that could very plausibly be the case for a while.

• 3:04Tracy Alloway?

  It's definitely in the air. So we need to dig into this particular argument and who better to speak to than Nouriel Roubini. He is of course, the chief economist and portfolio manager of the Atlas America Fund, which is a new ETF that has just launched. And he's also the chairman and CEO of Roubini Macro Associates, really the perfect guest to do this type of macro with us. So Nouriel, welcome back to the show.

• 3:30Speaker 04

  Great to be with you, Tracy and Joe.

• 3:32Tracy Alloway?

  Do you get the same sense that the, the risk of stagflation is starting to pick up again?

• 3:39Speaker 04

  Certainly is one of the risks that we have to consider. And I think that the question on everybody's mind, of course, is what will be the economic policies of Trump and their impact on growth and inflation. If I have to look ahead, I would say that some of his policies actually could increase growth and reduce inflation, being pro-business in general, making those tax cuts permanent, having, you know, government efficiency, deregulating the economy, maybe even increasing the production of fossil fuel and reducing the price of energy. Those go in the direction of policies that actually increase growth and reduce inflation.

• 4:22Speaker 04

  But on the other side, there's a long list of other policies that could be implemented. First of them, of course, tariff protectionism. An economic war with China. Secondly, draconian restriction to migration, if not mass deportation. Three, unfunded tax cuts and runaway fiscal deficits. Four, potentially an attempt to weaken the dollar in a disorderly way. Five, maybe trying to interfere with the independence of the Fed. Now, if that second set of policy were to be implemented, their impact will be higher inflation over time and lower economic growth. So those sets of policy will be definitely in the stagflationary direction.

• 5:06Joe Weisenthal?

  That was an amazing summary, by the way, of the two ways of thinking about paths. And I guess what's striking, listening to you sort of list off the two columns, is within Trumpism or within the Trump administration, it feels like there are several competing camps, so to speak. And we don't really know how it's going to resolve, but there are a lot of internal contradictions, whether on personnel or ideology. And to some extent, what you just laid out are sort of, I don't know, maybe the fork in the road, so to speak, of how things could go.

• 5:36Speaker 04

  Yeah, you're absolutely right. There is a spectrum of positions on a variety of economic issues. Some are truly protectionist, others like Scott Bassett says, we want to escalate as a way of de-escalating. And we're not going to know until after, of course, inauguration, in which direction the economic policy will go. I would say, however, the following observation. I think that the potentially more stagflationary policy will be constrained by several factors. One, of course, is the choice of some of the economic advisers, somewhere like Scott Bassett, understands markets and he knows that if you do things that are radically stagflationary, it'll be bad for the economy and bad for the market.

• 6:21Speaker 04

  So he's going to try to push down against those. Secondly, I think there'll be also significant impact of market discipline. If you have runaway budget deficits, migration restrictions, and tariffs that increase inflation, then the bond market vigilante is going to wake up, expect that inflation. Will be higher, real rates will be higher. And then rising in bond yield could lead to a correction of the stock market. If there is one thing that Trump cares about is one, the stock market. He also cares about the bond market because high bond yields imply high cost of borrowing. And that's going to be hurting the economy. I think the other constraint is going to be, of course, the fact that the Fed is still independent.

• 7:03Speaker 04

  If some of these policies were to be pursued, the Fed will likely cut next week in December. May not cut again or may cut much less than the market are expecting. Next year, in an extreme scenario in which inflation goes much higher, it could even increase interest rates. And that's going to be, so there is both market discipline and there is also Fed discipline that might constrain to some extent. Those stagnationary policies.

• 7:34Tracy Alloway?

  Setting aside the Trump administration and what they might do, and I realize that's that's a big thing to set aside right now. But the path of inflation, it has come down from the peaks that we saw in 2022, as Joe was talking about. Why did that happen, in your opinion? Because you were one of the, you were one of the few voices, I remember in early 2020, when the pandemic was just unfolding, that predicted inflation. And, you know, it it happened, but since then it has petered out a little bit.

• 8:06Speaker 04

  Yes, I mean, the reason why we had this burst of inflation during and after COVID were both bad policies. The amount of monetary, fiscal and credit easing exposed that turned out to be way excessive. Given the size of the economic shock that was relatively temporary. But second, there was also bad luck. There were three negative aggregate supply shocks that essentially reduced growth and increased inflation. One was the impact, of course, of COVID on the supply of labor, on production of goods and on global supply chains. The second was the impact of the brutal Russian invasion of Ukraine on commodity prices. And three, the kind of a zero COVID policy of China that further restricted.

• 8:49Speaker 04

  Global supply chain. So why inflation fell? In part was, of course, central bank gave up on quantitative easing, normalized policy rates. But if that was the case, we should have seen inflation falling dramatically, but probably a much stronger slowdown of economic growth, maybe a recession, the way most economists thought about it. Instead, we got the reduction in inflation, but growth, say, in the US has remained robust, above potential, two and a half percent in the last couple of years. So I think in part we also got lucky, and luck was that these three negative aggregate supply shock got reversed. First, we had the end of Covid, so supply of labor increased. We started producing goods and services.

• 9:32Speaker 04

  Supply chains got, how to say, unstuck. The impact on commodity prices of the invasion of Ukraine became reduced because there were new sources of energy coming from Middle East, US, and so on, that went to Europe. And finally, China gave up on its zero Covid policy. So we got luck, and on top of it, there was another set of factors, at least for the US, that maintained growth strong. One was that we had significant amount of migration, documented or otherwise. People estimated maybe up to 10 million people entered in the United States in the last four years, that increased the labor supply, increased growth, and reduced some pressures on wage inflation.

• 10:16Speaker 04

  Definitely, right now, politically, of course, migration is a hot topic, but from an economic point of view, it increased growth and reduced inflation. And we had also other fiscal stimulus that helped the growth from the Infrastructure Act, the IRA, and the CHIPS Act. And then we had got also, of course, the AI revolution has led to significant increase in CapEx. At least for the United States, I think it was a combination of a variety of factors that implied that inflation fell and growth remained robust, not so in other parts of the world.

• 11:04Speaker 00

  What's next for virtual assets? I'm Jacob Rees, host of Economy Scale, a series exploring growth in key global sectors. And in this episode, we're diving into the digital forces shaping finance. Shaun McHugh from Dubai-based Virtual Assets Regulatory Authority has this to say.

• 11:20Speaker 05

  We're seeing a lot of institutional players come in, digital asset dedicated hedge funds, high-frequency traders and that sort of thing, and folks who service institutional clients.

• 11:28Speaker 00

  As more capital enters the market, adaptive regulation is likely to become increasingly key. Reese Merrick of Ripple says.

• 11:36Speaker 06

  A lot of regulators globally would like to keep the industry at arm's length. That's the opposite here. I think also what you'll find is that regulation and frameworks can come out, but some of them are maybe a slight iteration on some 80-year-old policy and not actually in line with what the technology can do and offer. And again, that's very different in Dubai.

• 11:56Speaker 00

  Listen to the full episode wherever you get your podcasts. This series is brought to you by Bloomberg Media Studios and the Dubai Department of Economy and Tourism.

• 12:04Speaker 01

  With ChatGPT, you can do more than get answers. You can get things done. When you're running a business and looking to expand, you need a clear view of the landscape before making any decisions. ChatGPT can help you prepare. Connect your Google Drive, point to relevant files and reports, and ask chat to research competitors, industry forecasts, and market signals. It can turn the findings into a strategic deck in your team's template that you can review before presenting to your leadership team. Growing a business is ambitious, and ChatGPT can help you do it with confidence. Get started at chatgpt.com.

• 12:41Joe Weisenthal?

  I want to talk a little bit more about the dollar. And there are so many different ways that you can begin a conversation or about thinking about the role of the US dollar. You can think about the effects that tariffs will have on inflation or the strength of the US dollar relative to other currencies. You can think about the central role that the US dollar plays in global trade and finance. Whether there are possible rivals that are emerging. One of the things that we saw recently from President Trump was a threat that he put on his Truth Social account against any of tariffs against any country that would attempt to form a rival currency block. And he specifically mentioned the BRICS.

• 13:26Joe Weisenthal?

  I don't know if the BRICS is a real thing or not. It sometimes seems like a meme to me, but there is an organization called the BRICS. And sometimes you see headlines about dollar alternatives. In the short to medium term, is there a real prospect of some other currency? The Chinese yuan perhaps taking sizable market share in global trade from the US dollar?

• 13:48Speaker 04

  Well, I would say for now, not yet, but the dollarization process that could occur over time. And what could trigger it was, of course, that we have rightly or wrongly weaponized the dollar in the last few years for national security and foreign policy purposes, imposing a variety of sanctions against a variety of strategic rivals of the United States and the West. The issue about finding an alternative to the dollar is complicated because you cannot essentially replace something with nothing. And the question is, what's the alternative to US dollar? The former US Secretary of Treasury Larry Summers once jokingly said that people don't like the dollar.

• 14:33Speaker 04

  But, you know, Europe is a museum, China is a prison, Japan is a nursing home and Bitcoin. So for now is an experiment. So there is something of an happiness with the US dollar. But for the time being, I would say the US dollar is still dominant. And by the way, I would probably argue that the Trump.

• 14:57Speaker 04

  Policies regarding the dollar a little bit confused because on one side there is this concern that a strong dollar has led to deindustrialization, loss of competitiveness, large trade current account deficits, people free riding on the US. So there is a sense I would like a weaker dollar. But if you think about policy and economic fundamentals, tariffs will strengthen the dollar and threats of tariffs have led since election to dollar becoming stronger. Trump says, I don't want other country to unquote de-dollarize and I'm going to impose tariff on them if they do. So he wants to maintain the role of the dollar as a major global reserve currency. If that's the case, the man for dollar asset remain high, the dollar remain strong.

• 15:42Speaker 04

  In terms of relative growth, the US is doing stronger than Europe and other advanced economies that should strengthen the dollar. Terms of relative monetary policies, probably given these differentials in growth and inflation, the US or the Fed is gonna cut rate less than other countries, while in Europe where the economy is weak and there'll be more cuts. And overall, given the productivity growth of the US, the boom of new technologies, AI, you name it, capital flows are going into the United States. So I think there is this dilemma that fundamentals and policy would suggest that the dollar is gonna become stronger. But then that objective of trying to reduce the trading balance of the US

• 16:25Speaker 04

  to a weaker dollar, unless you have a big agreement on currency, it's hard to fathom how you're gonna do it. There are some ideas along those lines. It's gonna be, to say, challenging.

• 16:36Tracy Alloway?

  This is something I completely agree with. And I think I've said on the podcast before that it feels like Trump doesn't know what type of dollar he wants because instinctively, I think there's a sense that he wants to say the dollar is strong. It sounds good when you can say those types of things. And generally, it means that the US economy is doing well relative to others. But if he's serious about boosting manufacturing and exports, then he needs the weaker dollar. There's also that tension between Coupling the US economy from the rest of the world, maybe becoming more self-reliant, and also wanting the dollar to be at the center of a globalized financial system.

• 17:19Tracy Alloway?

  Are there ways that the Trump administration could like kind of thread the needle between those two different objectives?

• 17:26Speaker 04

  No, it's not gonna be easy, because either you want, you know, weaker dollar to try to improve competitiveness, reduce the trade balances and so on. But then the dollar will have to weaken. Or instead, if you want to maintain the global reserve currency role of the dollar, then the dollar is gonna remain strong. And by the way, the risk of doing an agreement to try to weaken the dollar is that that could occur in a disorderly way. Because if you do another, people talk now about a Mar-a-Lago agreement, because in the past agreements to move, currencies were always in resorts like Bretton Woods, Plaza, Loubra, Camp David, you name it.

• 18:09Speaker 04

  So, so people think about maybe getting together all major economies in Mar-a-Lago and finding an agreement where Europe, Asian allies and others let their currency appreciate the dollar weaken. But you know, if people expect that from happening, then capital is gonna suddenly move out of the US, because you're gonna have a massive capital loss, ten, fifteen, twenty percent on your dollar assets. And then you could have a spike in long rates, or you could have a correction in US equity. So how do you engineer an orderly weakening of the dollar without causing significant tightening of financial condition? That's also problematic. It's not gonna be very easy to be done.

• 18:49Speaker 04

  The other trade-off that I think is complicated is not just weaker or strong dollar reserve currency role, but also your tariff policies. Because on one side, if you impose the tariffs... The dollar is gonna strengthen. And on the other side, also, if you're gonna raise tariffs, you need revenues. But raising tariffs, if it's very significant, is gonna be highly inflationary. Now, some people within the Trump camp say, well, in 2018, 19, when we increased the tariffs on China, there was not significant increase in inflation because the RMB depreciated. And therefore, import prices did not increase very much.

• 19:30Speaker 04

  But suppose that you impose the tariffs and the currencies of all your trading partners weaken, then you might not get the inflationary burst of the tariff. That's correct. But then you're not gonna have an improvement of the competitiveness of United States. And therefore, inflation's not gonna rise, but your trade deficit is gonna remain very large. Vice versa, if tariffs are imposed and the dollar does not strengthen, other currency weaken, you might get actually some improvement of your trade balance. But then you'll have some inflationary impact of this. So in all these cases, there is not really a free lunch.

• 20:09Joe Weisenthal?

  Yeah, I want to actually dive further into this because a lot of times when tariffs come up, one thing people say is that, okay, well, it's a one-off. It's a one-off, right? The prices may go up at some point, but that doesn't necessarily represent a new inflationary trend that say the Fed would have to worry about. And perhaps that's true. But it also occurs to me that if part of the impulse here is to be less reliant on global trading partners for, say, various manufactured goods, and to have more domestic building, et cetera, of various things. This is happening at a time of still high resource utilization already. So the unemployment rate is at 4.1%. There are already a lot, there are shortages of industrial parts.

• 20:52Joe Weisenthal?

  Yesterday, we're recording this December 3rd, by the way. Yesterday, we got the ISM manufacturing, and it showed that electrical components have now been in shortage for 50 straight months. So over four years. So it seems to me that regardless of, you know, if you have this impulse to build more here, et cetera, you're coming At a time in which resources remain quite constrained.

• 21:16Speaker 04

  I think your point is very correct and valid. In some sense, actually, the US economy right now is not in a soft landing. Maybe in a no landing zone because growth has remained above potential. And inflation has fallen, but you know, core PC this year probably is going to be 2.8 even 2.9%. And next year may still remain elevated, especially next year if you impose tariff. If you do significant draconian restriction to migration. If you have runaway fiscal deficits that stimulate further demand. And if you have, you know, a policy of trying to weaken the dollar.

• 21:56Speaker 04

  So yeah, we live in economies already a no landing where resource constraints are significant. Labor market is significantly tight. Goods market are also tight. Imports can help you, but then if you're going to restrict the labor supply to migration restriction. If you're going to weaken the dollar, if you're going to impose tariff. You're going to make those inflationary pressure going higher. And then make trigger the Fed then having to act and stop cutting rates or maybe even increase them over time.

• 22:29Tracy Alloway?

  I mean, the counter argument to the no landing idea is that we have seen some signs, as Joe mentioned in the intro, of the labor market softening. And even yesterday, you know, we already mentioned the ISM, but we had PMIs as well that also looked kind of sluggish. Is there a possibility that the economy weakens significantly into 2025?

• 22:52Speaker 04

  Well, I would say that the risk of economy weakening significantly in 2025 will be one in which those sets of stagflationary policy are followed. If you really impose massive tariffs, if you deport millions of people, if you try to weaken the dollar. If you have a massive fiscal deficit that then lead to bond yields rising, creating that economic growth, it could be in a situation which growth significantly slows down and inflation goes higher. I think that's definitely a risk. As I pointed out at the beginning, however, there are sets of policies of Trump that are actually positive for economic growth. And some of those policies will be implemented. So.

• 23:34Tracy Alloway?

  Wait, if you had to choose from like column A or column B, what would be like the higher probability as of now?

• 23:41Speaker 04

  I would say that the impact on growth for next year is gonna be a wash because on one side definitely is pro-business, is gonna deregulate, there'll be some increase in capital spending, stock market is strong, financial condition are easy. So those are positive for increasing growth. But then some of the other policies, especially on labor market and tariff and protectionism and some increase in long rate are gonna weaken economic growth. So I think that the impact for growth next year is that if this year we're growing, say, 2.8%, next year we're gonna still grow above potential, but less, maybe 2.4. But

• 24:23Speaker 04

  I don't think there's gonna be a massive slowdown unless it goes really radical with the stagflationary policies. However, on net in an economy is already in a tight resource constraint, labor, goods market and otherwise, that is more in a low landing zone, where even before Trump was elected, the Fed was starting to say, wait a moment, should we really cut rate as much as we're promised, given that growth seems to remain robust, that inflation remains more sticky, that in that world, in my view, inflation is gonna be on net staying high rather than going towards the 2% target. So I would say the net impact on growth for the time being is a wash, but the impact on inflation probably

• 25:07Speaker 04

  be, the inflation is somehow higher. And that's gonna impose something of a dilemma for the Fed. Of course, there is a tail risk that it goes fully stagflationary. But as I pointed out, there are two major. Restrained one Israeli market discipline, the market would punish those policies and will have to reverse. I mean, take an example in the UK because there was a fiscal stimulus was excessive. Then suddenly the pound collapsed, bond yields went higher, you had a pension crisis, and this trust, Prime Minister lost power in forty four days. Now, that's not going to happen in the United States, but I think that people should not underestimate how market discipline can really punish even a country like the United States. So between the constraint of

• 25:51Speaker 04

  the Fed being still independent and the market discipline, probably excessively stack pressure policy will be constrained next year.

• 26:16Speaker 01

  With chat GPT, you can do more than get answers. You can get things done. When you're running a business and looking to expand, you need a clear view of the landscape before making any decisions. Chat GPT can help you prepare. Connect your Google Drive, point to relevant files and reports, and ask chat to research competitors, industry forecasts, and market signals. It can turn the findings into a strategic deck in your team's template that you can review before presenting to your leadership team. Growing a business is ambitious, and chat GPT can help you do it with confidence. Get started at chatgpt.com.

• 26:53Joe Weisenthal?

  So amid all of this extraordinary uncertainty, you recently, at the end of November, announced you have a new ETF, the Atlas America Fund, and it looks very interesting. You know, I think, like, I want to get into what it is, but I think, you know, when people think about, say, like, a well diversified or all weather portfolio, and it sounds like we all want an all weather portfolio because there's just so much uncertainty right now, as you've been talking about for the last several minutes, something that would thrive and be stable amid all this uncertainty. You know, for years, people talked about the sixty forty Portfolio and it had a certain, I guess I would say intellectual elegance to it because

• 27:33Joe Weisenthal?

  the two legs of it generally produce positive real returns, but also they had a sort of natural hedging component against each other. And so usually if stocks were going up and bonds were doing a little worse, and then when your stocks would go down and the bonds were going up, worked very beautifully for several years, basically until 2021. And now I'm not sure if people feel confident at all to go back into that. And people come up with reasons why it's very, there's a lot of distrust about using bonds or a heavy allocation of bonds as a good ballast for a portfolio. What is the sort of, before we get into the specifics per se, why don't you talk about sort of like the intellectual or conceptual framework behind

• 28:14Joe Weisenthal?

  your approach was to cut, which is to come up with a new sort of diversification strategy that can work across cycles?

• 28:21Speaker 04

  Yeah, the logic is as follows. I wrote a whole book titled mega threats where I argue that the era of the grid moderation where we had low growth and low inflation is over, even the era of the secular stagnation that followed the post GFC period where again, growth was low and there were disinflationary forces is over. And there are a variety of forces that are going to lead to stagflationary pressures in the global economy, both on the supply side and on the demand. On the supply side, I consider 10 factors from geopolitical

• 28:59Speaker 04

  fragmentation to deglobalization, protectionism, friend shoring, reshoring, to aging of population, restriction to migration, global climate change, pandemics, cyber warfare, backlash against liberal democracy and pro labor fiscal policies and potential gradual de-dollarization. Now, all these factors gradually over time reduce growth and increase inflation. And on the demand side, we live in a world of very large private and public debts are going to become larger. We're going to spend more on defense all over the world, going to spend more on dealing with climate change. Going to spend more to deal with pandemics.

• 29:41Speaker 04

  Going to spend more because there's going to be disruption coming from AI robotic automation. We're going to spend more because there are many people left behind. We need the bigger social safety net. So we spend more, we have limits how much we can raise revenues. So structural budget deficits are going to rise. And therefore, there'll be an incentive to wipe out the real value of nominal long duration debt through unexpected inflation. Now, I'm not talking about hyperinflation. Yeah. Or even high inflation, not even double digits. Let's assume for a moment that this supply and this demand forces imply that over this decade, inflation is not at two, but say five, six percent. It is very reasonable. We were at nine just two years ago.

• 30:25Speaker 04

  And I think these forces over time are going to essentially materialize. And the policies of Trump, some of them exactly go along the same stagflationary direction of lower growth and higher inflation that we described. So in that world, think of it this way. Bond yields ten years right now are about four percent. But if inflation was six, bond yields have to be at least eight. Six percent for expected inflation and two for the real. Because in a world of high debt and deficits, the equilibrium real long rate is not zero anymore. It's closer to two. Suppose the bond yields go gradually from four to eight percent. Then a ten-year treasury is going to lose thirty, forty percent of its value over time.

• 31:10Speaker 04

  And we saw what happened in two thousand and twenty-two. In two thousand and twenty-two, sixty, forty did not work. Did not work because sixty, forty assumes that there is a negative correlation between the price of stocks and the price of bonds. Risk on and growth, equity do well, bond yields are higher, the price is lower. So you make money on equities, you lose money on bonds. Risk off recession. Equities go down, bond yields fall, the price goes up, you make money on the bond part of your portfolio, you lose on the equity. But that negative correlation assumes that inflation is low and stable. When inflation is not low and stable, it's rising, then what happens?

• 31:53Speaker 04

  Bond yields are higher and you lose money on the bond component. And like it happened in twenty two, and happened again even last year, when bond yields are significantly higher, stock prices correct. And therefore, you get a positive correlation between bond prices and equity prices. Paradoxically, actually, in two thousand twenty two, S and P five hundred fell by fifteen percent, but the price of ten year treasury fell more, fell by twenty percent as ten year treasury yield went from one to three and a half. So in a world in which bond yields gradually could go from four to eight, the traditional defensive asset in a sixty forty portfolio, this long duration treasury, doesn't work anymore.

• 32:38Speaker 04

  And therefore, this is not an all weather portfolio or ETF, it's something of an alternative to the traditional defensive assets. An alternative to the forty percent of the sixty forty, it's not the sixty part.

• 32:50Joe Weisenthal?

  So we're just working the forty here?

• 32:52Speaker 04

  We're working mostly on the forty. And the point is that if you do believe the story, or even if you assign a meaningful probability that inflation is going to be gradually higher and nominal long bond yields are going to be higher, you have essentially twenty trillion dollar of long duration fixed income, mostly treasury, but also high grade, high yield or EM delta this dominated dollar. And it's significant gradual rise in those bond yields is going to imply that your defensive asset actually loses as much, if not more than equities. So then you have to think, in a world of gradually higher inflation. Which are the other alternative asset that provide you a hedge against inflation,

• 33:35Speaker 04

  against the basement of fiat currency, against desentralization, against geopolitical risk, against financial crisis, and against climate change? And the range of assets that we have chosen for this ETF is one that provides you a better hedge against those still risk than traditional defensive assets like 10-year treasury. That's the idea behind this new ETF.

• 34:00Tracy Alloway?

  Yeah, I find this ETF fascinating because it touches on so many different themes. You know, obviously, there's the macro and the risk of inflation. There's portfolio construction in the form of 60-40, which you just discussed. But there's also this idea of maybe creating a sort of like dollar or US Treasury alternative that is backed by real assets. So you mentioned, you know, the stuff that could do well in an inflationary environment and withstand some of those big risks. Stuff like gold, US property that is somewhat climate resilient. So I guess in the Northeast and short-term US treasuries where the rates will more or less follow inflation.

• 34:43Tracy Alloway?

  And one of the other interesting things about this whole project is Atlas itself is based out of Dubai, where there are, you know, it's very close to some very large pools of capital that have been investing in treasuries. Talk to us more about that angle, this idea that you could pitch it as a sort of Treasury alternative for some big investors.

• 35:04Speaker 04

  Well, as I pointed out, any investor, starting from institutional investor, large sovereign wealth funds, private and public pension funds, endowment foundations, let alone retail investors, hold some allocation of their portfolio in long-term treasuries. And that's because it's been traditionally the safe defensive asset, speaking about literally $20 trillion plus of debt. And in the world that I described right now, The losses that occurred in two thousand twenty two or summer of last year, when again there was a spike in bond yields to five percent, there was a correction equity will

• 35:48Speaker 04

  occur. So you're gonna lose money on the equity and on the uh bond side of portfolio. That's why, by the way, even fancy models like risparity that are glorified versions of sixty, forty, seventy, thirty have not done very well. And therefore, I think there is a nervousness around the world. The large pools of money that have this allocation to long duration treasuries, they're concerned about a variety of the risks that I described, and they're thinking about alternative. And as you pointed out, the combination of the assets is one exactly that does reasonably well, actually, in normal times and is a

• 36:28Speaker 04

  convexity. So uh if some of these tail risks were to materialize, of course, the return's gonna be much higher. So for example, you want to stay completely away from long duration treasuries, and instead you want to be in short duration treasury, which usually goes higher and don't have the same price correction if bond yields are gonna be higher. You want to be into tips that of course are gonna do well if there are increases in unexpected inflation. The allocation to gold is a hedge both against inflation and the basement of fiat currency, but there's also a hedge against potential de-dollarization. If you

• 37:09Speaker 04

  think about the only liquid foreign reserve asset that cannot be seized, because the last few years, in Russia, in Iran, uh North Korea, we've had massive sanction financial and seize their foreign assets. The only liquid asset that cannot be seized is not euros, not dollar, it's not yen, all of those have been seized, but it's gonna be gold bullion. If you hold gold bullion, you're gonna go and be safe. And that's why, for example, significant central banks, not only of the strategic rivals of the US, but even of the frenemies of the US have gone into gold. This year, the surge over forty percent in gold prices is significant. Driven by that geopolitical risk of de-dollarization and diversification.

• 37:55Speaker 04

  You want to be in some allocation for commodities, especially ag commodities, because in the world of climate change, the demand is going to be there, but there'll be supply disruption. We have seen spikes in commodity prices driven by climate change. And real estate traditionally is a good hedge against moderate increases in inflation, because rents and other things can go higher and in the short run, real estate is in fixed supply. But because of climate change, of course, lots of parts of North America are going to have significant problems. And asset values are going to be reduced. I mean, many parts of Florida, Louisiana, California are not even any more insurable in terms of home insurance.

• 38:38Speaker 04

  People have to move and as they move, prices are going to fall in the region where you have climate change and they're going to increase where you are having better climate. And therefore, some allocation is in real estate, but we have data at the zip level for every zip level county of the United States and we look at each one of the regions in North America. We see what's our allocation to different regions. We have a whole global climate change map based on big data that allows us to go into the regions that are going to be benefiting from climate change as opposed to those who are going to be hurt by climate change. So it's a combination of assets that provides, you know, solid returns with very low volatility

• 39:21Speaker 04

  and is an alternative to the traditional defensive asset.

• 39:25Joe Weisenthal?

  Yeah, just looking through the holdings of gold and short-term treasuries and TIPS and a short 20-year betting against the 20-year treasury and Equinix and American Tower. Interesting mix. All right, I have one last question.

• 39:38Speaker 04

  Yeah.

• 39:39Joe Weisenthal?

  I'm not going to ask you the obvious question and one thing I noticed in here, there's no Bitcoin ETF, but I don't want to relitigate a Bitcoin conversation because it's the end and I don't want to have that.

• 39:49Speaker 04

  Yeah.

• 39:49Joe Weisenthal?

  But I do want to ask an adjacent question to that, which is that when you talk to overseas investors and talk to people with high amounts of ultra-high net worth people today in 2024, when you talk to them, how seriously do they view, setting aside your own views, how seriously do they view Bitcoin or crypto as some component of the portfolio that they want to have?

• 40:14Speaker 04

  You know, some people are opening up to the idea of holding crypto assets. But those investors that are looking, say, for a safe asset that does well, given this tail risk, are not going to look at crypto assets. When the paradox of crypto assets is that they were doing actually quite poorly when inflation was rising and the Fed was tightening. And they're doing better when inflation is falling and the Fed is easing. They're not negatively correlated with equities, actually. They are kind of like a

• 40:50Joe Weisenthal?

  High beta equity.

• 40:52Speaker 04

  Exactly. So if you want, if you want something, there's a substitute for the faulty component. I would say the combination of assets that we have considered and look at them carefully gives you stable returns and reasonably high returns. If you add any crypto asset, you add a huge amount of volatility. And there is a wide range of investors that don't want that type of volatility.

• 41:17Tracy Alloway?

  When we were first talking about the ETF, there was some early discussion of maybe tokenizing it in some way. Is that still a possibility?

• 41:26Speaker 04

  Yes, it is.

• 41:28Speaker 04

  The idea is that I do believe that actually tokenization of real and financial asset has some validity as opposed to crypto assets are backed by nothing vaporware. And I think that the process of some degree of tokenization is going to occur. And the benefit of tokenization will be that these types of liquid asset ETF is not widely available in a variety of jurisdictions, especially in parts of the world like the global south, where there is significant inflation, the basement of fiat currency. You could have something that would actually have a stable store of value. It's still dollar ringed, but gives you positive return.

• 42:11Speaker 04

  And it's going to be a good hedge against some of those tail risks that are facing. So it'll be a way of eventually making it available to many investors all over the world. So, but that will be stage two tokenization, not for the time it is the ETF, yes.

• 42:27Tracy Alloway?

  So I have just one more question. And every once in a while, I get the urge to start an ETF of some sort, maybe the Odd Lots ETF that is full of thematic related assets to the stuff that we talk about on the podcast. And then I never do it for obvious reasons. But what has been the most challenging or unexpected part of launching this ETF?

• 42:55Speaker 04

  Well, you know, it takes a lot of work, you know, you have to build a team, collaboration with Goldman Sachs.

• 43:02Tracy Alloway?

  Oh, yeah, because this one's actively managed as well.

• 43:04Speaker 04

  Yeah, yeah. So, you know, one thing is to write about money. Another thing is to manage it. You have a daily P and L. But for me, it's a new and interesting challenge. I've been an advisor to many financial institutions over time. There's a big picture view here is that secular stagnation is over, secular stagnation, stagflation is rising. So it's not just a little twist on a new idea, but says there is a big asset class is the defensive one. There's not going to be the safe asset anymore in a world in which there'll be a variety of new tail risk. We have to find a hedge against it. So I think the thesis is going to take time. It's not something that's going to happen overnight. It's a

• 43:47Speaker 04

  medium long term story. But I do believe that investors are getting nervous about the whole spirit of things. And I have to think about an alternative to traditional. But, you know, making the idea, designing it, implementing, convincing people that that's the right thing to do, takes a lot of time and effort. It's hard work.

• 44:06Tracy Alloway?

  All right, Nouriel Roubini, truly the perfect guest to talk about stagflation and some of the other big risks out there. Thank you so much.

• 44:13Speaker 04

  Great having you. Thanks so much.

• 44:29Tracy Alloway?

  Joe, it's always fun to catch up with Nouriel and see how his thinking is kind of evolving and also how he's putting some of the big picture like theories into practice with the new ETF.

• 44:40Joe Weisenthal?

  I loved that chat. I thought that was a fantastic chat with Nouriel and I thought, A, he does a really good job of laying out what has very clearly the sort of, for better or worse, look, all presidents come in and have different factions, right? That's not weird. Coalitions are coalitions and what they are and there's always tensions. But there do seem to be some very interesting, sharp divides within the broader tent of Trumpism. There's the sort of traditional Wall Street quote, pro-business unquote view. And then there is the sort of much more nationalistic, anti-immigration, anti-free trade, stagflationary view. And it's very unclear who, what mix will win out.

• 45:22Tracy Alloway?

  You know, the other thing I like about Nouriel is he kind of like self-catalogs his thoughts while he speaks, like number one, number two, number three, number four. The other thing I was thinking, okay, this, this has been emerging as like a big talking point in a variety of our conversations on the podcast now. And also you've written about it. I've written about it to some extent, but the idea of the market as a limiting factor on what's possible. And part of me is a little bit nervous about that one because it seems like maybe a big ask for the market to police the new administration. But the other thing I was thinking about was the importance of growth in all of this. And like,

• 46:03Tracy Alloway?

  what becomes possible if the economy continues to grow? Maybe that enables like some of the more, I don't want to say radical, but like creative ideas from the administration.

• 46:16Joe Weisenthal?

  Yeah, adventurism and heterodox and sort of, yeah, for sure. You know, I think also, I really enjoyed hearing his theory of the new safe haven because you do see this, like a lot of people's big holdings to bonds got blown up over the last few years. And you think, okay, well, now they're yielding. Like, I don't know, a few percent, maybe they it's a good time to step back in, but the short end is yield.

• 46:37Tracy Alloway?

  1640 has made like a little bit of a comeback recently.

• 46:39Joe Weisenthal?

  A little bit, but like, you know, there's a lot of people who say, why am I buying the 20 year when the short end is yielding more or is yielding about the same with much less duration. And so the and then gold has obviously done phenomenally well the last couple of years. Thinking about what makes real estate a safe haven in the specific properties of like climate, et cetera. Just a very, some very interesting ideas. I there are many ETFs get that get launched all the time. Most of them just sort of disappear. This will be one I at least pay attention to.

• 47:11Tracy Alloway?

  Yeah. And the ticker I just realized is USAF, which is kind of funny.

• 47:15Joe Weisenthal?

  Yeah.

• 47:15Tracy Alloway?

  Anyway, shall we leave it there?

• 47:17Joe Weisenthal?

  Let's leave it there.

• 47:17Tracy Alloway?

  This has been another episode of the All Thoughts Podcast. I'm Tracy Alloway. You can follow me at Tracy Alloway.

• 47:24Joe Weisenthal?

  I'm Joe Weisenthal. You can follow me at the stalwart. Follow Nuriel Rubini at Nuriel. Follow our producers, Carmen Rodriguez at Carmen Armond, Dashell Bennett at Dashbot, and Kale Brooks at Kale Brooks. Thank you to our producer, Moses Andam. For more Odd Lots content, go to Bloomberg.com/oddlots, where we have transcripts, a blog, and a newsletter. You can chat about all of these topics 24/7 in our Discord with fellow listeners, discord.gg/oddlots.

• 47:51Tracy Alloway?

  And if you enjoy Odd Lots, if you like it when we catch up with Nuriel Rubini, then please leave us a positive review on your favorite podcast platform. And remember, if you are a Bloomberg subscriber, in addition to getting our new daily newsletter, you can also listen to all of our episodes absolutely ad free. All you need to do is connect your Bloomberg account with Apple Podcasts. To do that, just find the Bloomberg channel on Apple Podcasts and follow the instructions there. Thanks for listening.

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