US Midterms 2026: What It Means for Rates, the Dollar and the Yen

But chasing powers is always key in U.S. elections. It's more like the consequence of a rush for capital. And it's not over, everybody today needs capital. Everybody borrows. 1% difference in the financing rate doesn't change much. The outcome, the big question is, will you manage to make it profitable or not? Actually, the only country in the world that needs other people's money now is the U.S. More bark than bite, from the North Trump. For a big movement like that, to happen, you need really to align all planets. They're almost aligned. So we are entering a structurally weak dollar world. What matters in this situation is not the level of your debt. It's who owns the debt. Banks in Europe, you mentioned the banking sector, they're not equities. They're just super bonds. Hello, everyone. And welcome to a new episode of Think Macro. I'm delighted to be here today with Vincent Cheyet, Goup CIO of Ace de Management. Hello, Vincent, hello back. Americans are heading back to the polls for the midterm election. And this time, the vote may depend less on party lines than purchasing power. We've seen it on energy, electricity, mortgage rate. And behind that, there is a lot of stake for markets, inflation, rates. And of course, the dollar, which is a strong view of Ace de Management. We won't stop today, talk about the USA. We'll also talk about France, which many now see as Europe's weak link, emerging market on Asia, of course, and the yen and the Swiss banks to other big positions in our funds. And at the end, we're going to talk obviously a little bit about AI and what's the impact? Is it a revolution and evolution? And who's going to benefit from it? We have a lot of ground to cover together. So let's get straight into it. Let's start with the US midterm. Is it becoming an economic referendum on Trump? We have increasing energy prices, increasing mortgage rates, cost of living, which is more and more expensive? Or do you think that this midterm election is going to be as-- it used to be a traditional non-partisan divide between Republicans and Democrats? No, purchasing power is always key in US elections. So it's fair to say that it will come as a critical variable in the decision people make when voting next month. Now with the wave of inflation we had over the last six months, it's reasonable to believe that it mostly favors Democrats and Republicans will really find it hard to win that one. We even saw Republicans start to distance themselves from Donald Trump. Yes, well, it's probably because of the election, the nature of this election itself. It makes sense for them, for local reasons, and the reasons-- on their constituency, they try to communicate in a way that distance themselves from Donald Trump and its policy, take AI, for instance, where data centers are being built locally. It may make sense as a big business plan for the country, but locally, it doesn't win votes when you're to build such a gigantic infrastructure. So there's probably some sort of distance on that side is probably as well some distance coming from the perspectives of the 2028 election. I mean, Trump will leave by that time so you're really trying to create a dynamics with something new for the Republicans, yeah. Are you sure he's going to leave by 2028? No, I'm kidding. Let's talk about this election. We are, let's assume, November 4th. We have the results of the elections. There are three main scenarios. Republicans win both chambers. You have the Democrats, and you have a split. What's the base case scenario for H2O, based on those three outcomes? Well, polls are hinting at Democrats' sweep. It's roughly today 50, something percent probability. That is the starting point. No, we see no reason to depart from that view. Now, besides the dynamics into the election and also favors a Democrats' sweep into the election, you're still in the context of persistent inflation, if local, that's the feeling people have into the election and of a version towards Donald Trump's policy and Donald Trump's character. And these two elements, we think, provide the dynamics that support this idea of Democrats' sweep, winning the two chambers, the two houses in November. And if you work down this scenario of Democrats' sweep, what will be the impact on inflation? Does inflation? At the first order, no big impact. We think that the market deception, as pretty much always with elections, is probably a bit overstated. We see elections as a major risk. But that's essentially due to the uncertainty more than the outcome itself. It is the case with the midterm elections. We really think that the final outcome of these elections will probably come milder than anywhere, nowhere near any extreme situation. Now, having said that at the margin, a Democrats' sweep would be disinflationary just because it will suppress the inflationary policies. Donald Trump had been implementing. We thinking less tariffs, thinking less, probably less trouble, less intervention in Iran, and with less impact on energy prices, probably also less willingness to dig into the deficits and support with some sort of fiscal package support the economy. So more reasonable, all these aspects, and all of these elements being disinflationary at the margin. Yeah, but tariffs and defense budgets are in the hand of the president, not necessarily at least tariffs, not necessarily within the Congress. Yes, but that means that the words that can happen is a continuity of what we already have. You continue with tariffs, you continue with the war, but they are already there. Now, oil prices have stabilized. So its inflationary impact is now behind us, we'll now see the disinflationary impact of the stabilization of prices and same for tariffs. Tires are in place, unless you add something on top, you won't have any further inflationary pressure on top. So the words can happen is just, we keep that. Now, if the Democrats win the two houses, and they would need to win the two houses, with just one, of course, they will have a lot less leeway to act on these aspects. If they win the two houses, odds are they could impact it on the other side and lower down the impact of tariffs, possibly adjusting some of them as for the conflict in Iran, they would probably refrain Donald Trump from acting to boldly in the region. So it can only be positive, say. So if Democrats win two houses, probably disinflation, if we have a split, houses split Congress, we could have not more inflation, not necessarily less, but not more. And if there's a clean win from Republicans, what would be the continuity of the policy of Trump for more inflation? Well, let's be clear first, and that's a very low probability would be very surprising. And if it were to happen, yes, that would probably mean more noise, at least, for markets. Now fundamentally, more bark than bite, really. That would come as a surprise, which is not good for markets. That would maybe make Donald Trump being a bit more active, if not aggressive in his communication and his action. But now, medium-term past the noise, probably with little impact on the economy and on markets fundamentally. You mentioned before that you exclude extreme scenarios. But at this war, we'd like to be bold and speak freely. Don't you think knowing the track record of Donald Trump, and especially his main rules? And we all know his third rule, which is never admit defeat, always claim victory. And we've seen it also with the capital. Don't you think that if the Democrats have a clean sweep, we might have a chaos in the state? No, we don't buy this idea. Of course, Donald Trump will claim victory. He always does. Always finds a way to communicate in a way that makes him a winner. He'll do that. Now, in practice, US institutions are strong. They robust. They will handle this. So there again, more bark than bite from Donald Trump. We don't expect at all something that would really be disruptive on that to that respect. And on the other side, what about this main scenario? In this base case scenario? Do you think the Democrats can start a process of impeachment? Well, they'd probably like to, they'd love to. But will they-- we think not. It's not in their interest. If they are to build the dynamics into 2028, and that's their goal, they want to win that next election. That's the key date for them. It would be at risk in this dynamic. It's a long process, really disruptive with consequences that are not easy to forecast. So will they go along that route? Probably not. So we have those three scenarios. We have the probability clearly in favor of a democratic win of both houses. You mentioned it's going to be less inflationary pressures in this scenario. What's the impact on rates, dollar, US economy, if we have that on November 4th? What that means in this idea that it will not be extreme. It will not be too disruptive. And at the margin, probably possibly a bit disinflationary, that means that fundamentals will be more visible than today. They will be less noise around them. And what are these fundamentals? It's first an economy where consumption comes down gradually decreases over the years. It's a persistent trend. It's the low bar of the K-shaped economy. So we're still in this context of a lower and lower consumption in the US. And remember, it's 75% of the economy. And there you're talking about something that runs at 1 1/2% a year compared to 2 1/2% in the past. So that's a substantial slowdown that is still there and will be again visible once that noise just fades. And inflation itself, as well, will be seed. The peak of inflation is probably happening now. The peak from tariffs, from Iran, energy prices, the peak from AI component prices as well. All that peaks now. Now, technically, that means that as all prices stabilized and all these prices just stabilized, that's enough. You immediately see a contribution to inflation that just fades and comes down gradually over the coming months. So that's what we are going to see past the election. And that's, of course, for rates that is supportive, that is supportive of the idea of possibly maybe one last high from the third in December, but right after a much cleaner sheet for them and the possibility to stop hiking and contemplate possibly some cuts if needed next year. And with the direct link between the hikes, the level of the rates and the dollar, it means that the dollar could stay at the level it is, the DXY. And in the future decline? It's always the same with foreign exchange. It's, you've got the long-term forces and the short-term forces, long-term forces for the dollar. They've been there for a few years already and they really press it down. It's the big reserve allocators that are decreasing their share of dollars in their reserves, in their allocation. It continues to sell their dollars or invest less in dollars and diversify their reserves in other assets. It's big asset allocators as well that are trying to find alternatives to the dollar. For reasons we have described, debated at length in previous podcasts. And it's also the deficits, of course. When you're running such big twin deficits in the US, you just need people to buy a lot of dollars every year, just to keep it stable. You're talking hundreds of billions of dollars you need to buy every year to keep it to float. So that's the long-term depreciation of the dollar. Three big forces that just press it down. Now, locally, the short-term is a bit more supportive because of what's happening, because of the noise. volatility remains a bit supportive of the dollar, less than in the past, but it's still a bit supportive because that's where you can reduce the volatility of your portfolios, simple as that. So really locally, it helps some people are even forced to buy some dollars to pay for margin calls and finance positions that may be losing in volatile moments. That is a bit supportive of the dollar. Rates as well, of course, are locally a bit supportive of the dollar. We think it's a temporary. We think the Fed moved from trying to cut rates to hike rates, so that's a big flip this year, but as temporary, as we said, inflationary pressures are peaking now. Now they will recede. And then you will see more and more. First low down of the lower part of the K-Shap economy. And right after challenges that the gigantic capex into AI are facing, there's big, big challenges of just making them profitable over the minimum terms. All these big questions, less inflation, less consumption on the one side, and questions on the upper bar of the K in the K-Shap economy are all coming into place early next year. That's when you should see central banks more catching rates. We're going to come back on that and the capex on AI, but on what you said on the dollar, how can one distinguish between our view which can be right on the long term, but experience on volatility or being tactically hurt versus our view that could be wrong in a way. And that's what an investor could ask. We mentioned, for example, during a past podcast that the dollar smile was broken, that it was more fragile. And yet we've seen it this year, we've seen it during the month of September, not only an appreciation of dollar when you have these risk of forces, which is exactly what you expect with the dollar smile. - Yes, now we're not saying the dollar smile is broken. We're saying that it's just flattening. - Gradually, it's a long process. Remember, it's been there for 30 years, the dollar smile. It took years, if not a decade for the US, to just build this idea of the dollar being both the safe haven and a superior performer in good moments. That's the whole politics of the 80s, early 90s. So now flattening it is also a long process. And it's happening now. You can see that on the left of the smile, really the attractiveness of the dollar is fading. Risks are building. It's no longer the safe haven, it used to be. Now, just an adortedly of what's happening now, you can see that the dollar is not that strong. If you just think about what happened this year, a Fed that moved some three cuts to three hikes, that's like one and a half percent of rate difference. If you think of energy prices have gone up like 50, 60 percent, and dollar is a bit strong, but actually not against everybody, on average it's mildly strong. So that's, in our view, that participates to this idea that of less steep smile. It's a lot less strong than in the past. in the same context, really. Now, that means that for us, the other way to look at things in our portfolios, the other way to manage that, you have this uncertainty over the short term because of this. We got it wrong on Fed action this year. But it's always the case when we invest in portfolio. It's always about the short term V, the long term, the dollar should depreciate, will depreciate. And it's actually started to depreciate. Now, short term, you face some noise and some positive support for the currency. Now, short term, the dollar helps reduce your volatility. Fine. But long term, it helps selling the dollar reduces your risk, which is not the same thing. Volatility over the short term is not necessarily medium term risk. So this support for the dollar works locally because it helps mitigate the volatility of your portfolio. But right after investors sell it because they think, okay, fine, that's one thing, my volatility, but my real risk, my medium term risk, shall I keep it? No. And what you observe in markets as well, that's also linked to this idea of a flattening smile. Yes, they buy the dollar, they still buy the dollar in trouble when markets turn volatile, but they don't keep it in the past. They used to keep it for quarters. Now, just after past the noise, they sell it again. That's what happened in May June and that's what's probably going to happen after the election into your end or early next year. So we're still in this context of flattening dollar smile. And now in our portfolios, maybe as one last point on how to deal with this position between the short and the medium term, it's all about the way you build your portfolios. And we have today in our portfolios markets offer ways to wait with advanced positive terms, positive yields. We've got today running on high octane portfolios yields of indexes of 20%. So they're being paid while we wait. We will pay so well paid that we can afford being wrong on the timing, which we have been this year. Is it a big issue when you pay that much? It's okay. One thing that happened all this year, and recently in August and September actually, was the seller of the US tenure. When we've seen yield rising to 5.30, two levels that we haven't seen before 2002. Remember 2002 was the year where the ketchup song was number one of the chat. Remember the ketchup song? I'm not going to sing it to you, but that's that's how old, how many years passed since the rate we're at 5.30. It's a clear signal from the bond holders. To whom is this signal designed? What's the message? On the other side, we can see that the S&P is breaking records every month. I'm not sure it's a message. I argue it's more like the consequence of a rush for capital, and it's not over everybody today needs capital. Everybody borrows. It's not just the states anymore. Of course, we've had the states borrowing like crazy for decades now, but now it's also hassles that because there's no more savings left, no big buffer of savings, they need to borrow to keep consumption to these levels. It's also corporates, of course, corporates. And with the new player in town, the hyperscalers that are borrowing like big, big amounts. When you think about it, you're talking just this year alone in excess of $400 billion if you take the hyperscalers, plus a few others, AI related companies in the US. Next year, almost twice that, they are preparing. They're borrowing long-term, which means that their pressure on the curve comes actually a lot higher than the amount suggests. Duration adjusted, it's even bigger than this big amounts we see in the market. So they have a big impact on the market in terms of duration impact, you're talking next year, probably in excess of half what the Treasury Department does. And that's just a noob they're coming. So there's intense pressure on rates because everybody needs to borrow over these long maturities. That is not over. Now, we also think that the US can cope with higher rates more and probably with higher rates than a lot of participants think. If you remember back in 2022, the market was getting just panicking when rates reached 4%. We were arguing that economically they could live with 5% or 6%. Considering the boom they had underneath, and there was no trouble whatsoever. Even when it peaked above 5% at the time, the economy was running really, really hot. So higher rates in the bottom. It can't eat can face fairly high rates. When you are thinking of the AI theme, for instance, financing rates is a minor contributor to the whole system. If you do, then 1% or more less doesn't really matter. This is where we ran in the US today. So it's very hard to say five and a half is bad. Six is a. There's no. It's a very big gray zone, but what we may say is that rates are rising. Long rates are rising. They will continue to rise and they're doing that. They're doing so really, really fast. So that tipping point, that moment when the economy, the US economy falters and really faces it hard to cope with higher rates, will come soon enough. Couldn't say at what level, but it will happen probably next year. So it's not the level of rate, which is the problem, what you mentioned, is somehow more the leverage and the speed, the speed at which we get in there. I mean, when you think about it, we were on 450 just at the beginning of August. Two months down, even Midwest. Six weeks later, we are on 530, so we're halfway to 6%. Let's put back our macro hat and move to emerging markets. What will be the impact on the scenarios we described before with Democrats winning both houses or split chamber? What will be the impact on emerging market? We have strong positions in, for example, in Mexico with Mexican peso, other emerging markets. We're also in Asia. So can you run through to this vessel? Yes, I mean, in this divided world, Europe is a bond. The US and emerging markets are equities, except that we think the US equity proposition is getting riskier when the EM equity proposition is getting safer. That is where they are gaining an advantage relative to the US. In this world, first thing, they have already built resilience in emerging markets. Really, their balances, their equilibrium have improved a lot over the last 10 years, making them a lot less sensitive to what's happening in the US. Remember, those years where when it was all about the fed rate to decide the fate of emerging markets, these days are over. They care a lot less now about where the fed fund rate sends. They care a lot less about our money. They don't need our money anymore. They don't need a hatch fund or asset managers money anymore. They've got balanced accounts. Actually, the only country in the world that needs other people's money now is the US. Yeah, but if we remember elections of Trump, we saw the huge price movement on the Mexican peso. So numbers show that you're wrong, that they care. The market at least is carrying and we see big volatility depending on the outcome of an election. Yes, but that's the past. That's when they were fragile. They needed money and they needed our capital and they needed a friendly US. They need that a lot less. Not that they don't need it, but their dependence on this aspect has decreased a lot. Now on The particular situation of Mexico, which may well be representative of what's going on in Latin America. Yes, there are question marks, but there again locally, the situation is just not the same as it was in 2024. Or before that in 2016 when Donald Trump was first elected in Mexico, in all that massive movement you had at the time was linked to what Donald Trump announced when elected. We had already came as a surprise and then he came with a wall, he came with immigration restrictions, then he came with tariffs. I mean, all that is in place now. So what more can happen to that extent? Not much. There's one pending question, which is the USMCA negotiation, where, as you might have expected, Donald Trump has threatened Mexico of a diesel ban like many countries. But also to renegotiate the USMCA terms. Now, last time he threatened them, came with a high number and then took it down back time because why? Because it's in the US interest not to come hard on Mexico. Mexico is the substitute to China for the US. The US is trying to re-sure the production and the only option they have, of course, you need a neighbor for that and Latin America and Mexico in particular. Does the job, they replaced China on many sectors, they are actually on some intermediate sectors and competing with each other. So Mexico is a natural substitute to China. If you are to say I want to reduce my dependence on China, then Mexico, of course, you need Mexico. So that's what the situation of the US today. So this, we see very little room for them to come hard on Mexico just for that reason and buy extension to the whole Latin American continent. So we can have a little volatility on the short term but the fundamentals are here on the long term and somehow what you said is that the emerging markets of yesterday are more like the developed markets of tomorrow in terms of finance or in terms of accounting, let's say. And the developed are more the emerging markets now if we, yeah, I wouldn't say tomorrow, I would say today, today is already the case. What about Asia? You mentioned Mexico is the China of the US but what about China and Asia in general, what's our view on the Asian countries? We continue as in the case now for a bit more than a year to be very constructive on the region, it's a strategic theme in our portfolios. We see Asia as a very strong investment proposition on equities, on foreign exchange and in some cases on bonds as well. So the region is just not stronger than it was, I mean, it's been structured since the Asian crisis for many countries for 15 years with Abenomics in Japan. So it's a much more robust region, China has done the job as well there. It's also now a good return proposition and that is new on all these assets, it's a much better return proposition on equities. Because there as we discussed, when we saying Europe is frozen capital is no longer the case in Asia, it used to be the case, it is a lot less the case now. Maybe still with the exception of China, where there's some some work there. But in Japan, in Korea, Taiwan and many all the Southeast Asian region, capital now is being put at work and you get some returned against it. So the economic engine now turns faster and faster. So you've got very strong propositions in there. Now the next asset we could think of and that is naturally comes to us, is foreign exchange, where very as well you have a very strong strategic proposition for the whole region. We invested in Korean one, for example, that's one of our recent things. We've been in the city in the end for a long time, as you're going to come back to the end, because we have of course many questions on that. On foreign exchange as well, the tide is turning and now supports a much stronger foreign exchange. When you had those years of low discounted effects in the region, this is changing. So the market is starting to see that emerging markets are becoming more developed in a way and so we see more interest and then flows. That's what you say. It's linked somehow to the flows. But so far that's the missing part, which is why they are not outperforming that much. We yet to see strong inflows into the asset class and we've been to be honest, we've been a bit surprised by the time it takes for investors to make the move. They are making the move a bit, but not aggressively. Now it takes time but it's happening and investors are gradually considering that their US assets, they've got the loaded off, is getting riskier. Of course, it doesn't matter if not everyone believes in this thesis, but just because some investors that aren't hugely exposed to US assets, now think they are riskier, some investors are making the move and gradually investing in alternatives. Today, they are first making a move towards defensive assets like gold and a few others because they did yet to make that conclusion that emerging markets really is the answer. But some are already making the move and we think that movement will amplify in the coming months and years. You think next year it could be what would be the catalyst because to summarize is the investment in emerging markets is linked to the investment that investors have into the US, mainly hyperscalers or big companies. Artis is that those companies will have more difficulties which is not shared with many clients that actually believe that the US can overcome that and leave with the AI companies performing. But what will be the catalyst that makes this perpetuation on one hand and investors going out of the US to invest more in emerging markets? For big movements like that to happen, you need really to align all planets. They are almost aligned but there is one planet missing which is rights. Until you have that, you wait for this big reallocation movement. Now, rates are coming into place. If you think of Korea, for instance, the ones that had been weak for years, decades, and turned when the market realized that the bulk was about to high-grade small and actually catch up on the US potentially next year. Because the economy is booming, because now it makes sense for them to high-grades. That's when as an investor, if you're a local investor, you think, "Okay, now, shall I keep my dollar risk?" No, because my cost of hedging now is flat, because me nothing to hedge. Why would I keep my dollar risk? Again, for some of these local investors, not all of them, I take your point. A lot of people believe in the success of what the US is undertaking today, but if just some investors say, they're all in dollars today, if 10-20% of these investors say, "You know what? That is risky. Not that I don't believe in it, but I see risks. Should I keep my dollar risk? Should I keep my full exposure to these assets?" No. I'm going to hedge my dollars and probably reduce a bit my allocation, and by some proposition I've got now at home that have become attractive. That is what is started to happen in Korea, and that may happen tomorrow in Taiwan, in Japan, where then you can make that repatriation move a lot more global, and that tide of flows from east to west, turn the other way. And move back east. That's something we say and you bring that voice for yours, for example, on Japan, but it has not yet happened. So, why, what's the trigger? Why the yen, yen, yen? is not strengthening, despite the fact that the Buji has raised its rate again. Yeah, we got it wrong this year on the dollar leg, on the Fed leg, we thought that the Fed would cut rates and Japan would hike, which happened, but now the Fed hiked even more or hiked as much and maybe hiking again in December. So basically that rate difference between Japan and the US, you need to take down to make the cost of hedging lower for Japanese, just didn't happen, as we expected. Now, is it a complete change of picture? No, it's just a delay. As we said, when talking about the US, Fed hikes are temporary. Next year comes the big challenge of the profitability of AI in a context of much higher rates, as we said, fast and strong pressure on long rates in the context of total absence of fiscal leeway and of savings buffer for households. So you are approaching 2027, basically in a situation to be fair, something we had in mind for 2026. We're now seeing it in 2027, but it's not because it didn't happen in 2026, that it's gone. No, it is still there. And in 2027, the challenge would come even bigger. So that's when, probably you have a moment when the Fed maybe falls to cut, to save the day in the US, when in Japan and in Asia in general, you continue to have upside pressure on on rates and that's what's make the difference shrink and that's what makes investors take them on the other way. Some people believe that maybe we're missing something in this analysis because we understand that the rate differentials remain the same this year because B.O.G. raised, but Fed raised also. But some people would say yes, but the Japanese economy has a democratic tree that looks like a V with not a lot of young workers, not immigration, so no growth in a way. So what's our bet? Is it that the robots, robots is going to take control and develop the Japanese growth? And that's what would make the yen appreciate. Well, it's not the case if you look at the demographic statistics. Yes, well, again, there you are in the divide between short-term and long-term. Our view is a very strategic one. It's not about noise. Even one year is just noise around this view. FX is not growth or not worth alone. FX is about attractiveness and competitiveness. Is the trade-off between the two. For 30 years, the US and the dollar was all about being attractive. They needed the money. They needed the people. They wanted to make the country attractive. So that's a world where you need a strong currency to attract people and money. And it gets stronger as money flows. Over that same period, Asia and Japan in particular was actually trying to be competitive, not attractive. Being competitive means I want to send my products. I want to send my products. If I've got a lower foreign exchange, then I'm more competitive. And I can sell more and just gain market shares. And that was the whole Asian proposition for 30 years, not just Japan. Now, this logic is now completely reversing today. In the US, assets and the economy are getting less attractive. They're getting riskier as we see more volatility. Bonds are challenged. Equities, we think, are taking more risk. We're not saying it's not going to work, but we're saying they're getting-- facing more challenges, more uncertainty. And the dollar, of course, is linked to all this. So in terms of attractiveness in the US, you're just losing ground. And remember, that's the whole program of Donald Trump. That's the whole MAGA theme. It's all about being competitive again. So the US has completely flipped from being targeting attractiveness to competitiveness. That's what you want and that's what you're losing. And we're talking next 5, 10, 20 years here. Now, in Asia, it's exactly the opposite. Now, on the attractiveness side, they are getting more attractive now. They've reformed their economies, material robust. It's all these reforms in China for 15 years, in Japan, are beenomics for 15 years. Returns on equities are improving very fast margins. They're improving very fast capitalism, being put at work. All these reasons make the region more attractive. And they want it to be more attractive, importantly, politically. Think intervention on the yen in July. It's not just to stabilize the effects. It's also because now for Japan, it's important to stabilize the currency, maybe for one day to appreciate. Because now they need the money home. They need to be attractive. They didn't care in the past. They just wanted to sell more of their goods. Now, they've got a booming economy locally. So they need the money to flow back to local. So attractiveness now is the new target for this economy. Now, on the competitiveness side, they don't need it anymore. So there again, it's completely reversed. They need the weak exchange. Now, it's weak. Japan is the cheapest currency in the world. Korea is not far. So they are already really competitive. Now, on top of that, do they need to be that competitive in the world now that they have the leadership on many, many goods? Think AI. There are leaders on memory. Who cares if the one is or the yen is 5%, 10% stronger anyway? You pricemaker. So they don't need that competitiveness as much as before. So they want to be more attractive. They need to be more attractive. And they need a lot less competitiveness. The whole system, FX system between the West and the East is completely flipping. And that's for a good 5/10 years to come. It's not only West and East, because we can think of an economy of the country, which would love to become more competitive and has been held too much attractive on its currency is the Swiss francs. What's the view of the Swiss francs with the Swiss National Bank increase? It's a good parallel to make with the yen, because the Swiss francs look like the yen on many, many dimensions, except that Switzerland wants and needs competitiveness opposite to Japan, as we just said. First, the Swiss franc is expensive when the yen is very cheap. So you need to alleviate the pressure, the upside pressure you have on the Swiss franc. If you want to keep that competitive advantage, the Swiss economy has today. And second, the Swiss economy wants to be competitive to keep that advantage and wants to avoid flows to flow back to Switzerland. It's the opposite of Japan. They don't need money home in Switzerland. They need actually money to be diversified away out of the country. And for that, you need to do as much as you can to prevent the effects for an exchange to appreciate. Think of the behavior of the SNB. The SNB on every single occasion since 2016, on Donald Trump's first election day, they've been intervening every time the Swiss franc was used as a safe haven. Remember those years when there was trouble you'd buy Swiss franc, you know, an yen actually, but that was the rule as a manager. They've killed that idea over the course of the last 10 years. Every time there was volatility, you had some PMs, some hedge funds buying Swiss francs. They would intervene against them, just to make sure the Swiss franc would not be strong in these moments, that dissipates to this idea that we just don't want the Swiss franc to be a safe haven or people to believe it is. Even if that is fundamentally the case, we don't want people to play that because we want to keep, we need to keep our competitiveness. So that's not the Swiss francs. It's not been very effective. It's been the level of the Swiss francs. Well, maybe on Mauritius, I don't know. I mean, think of inflation. I mean, an effect is not the level, it's the level adjusted for inflation. In Switzerland, you had over the last five years, seven percent accumulated inflation. Europe 25, the UK 30%, the Swiss bank is trading marginally higher than five years ago, but adjusted for inflation is actually weaker. So it has depreciated already. So that depreciation move we are discussing now is happening. 2026 alone is probably out of record the weakest year for the Swiss bank out of the last 20, if not more. Again, adjusted for inflation. That's what matters to Switzerland. Is it only this impact of more competitivity and less attractiveness worked by the Swiss National Bank? Or is it also linked to carry traders that maybe look for a new foreign exchange for financing? Yes, for sure, they do participate in the move, carry traders. But you know, carry traders are more the noise against the trend. They can make across depart from fundamentals or from equilibrium a bit, but not that much. They will not create a trend. So yes, we do many investors sell the Swiss bank to finance other positions they believe are more attractive. And that makes complete sense in the context we just described. Now, is it a risk for the Swiss bank? We don't think it's a major risk. Of course, you could have, and that's often the case, into your end, a bit of appreciation of the Swiss bank because people's square position, carry traders, square positions, but right back in January, they'll put them back. So do you really want to play around that? Not really. Fundamentally, it makes sense to use the Swiss bank as a funder because it makes sense for the Swiss economy to try its best to keep its competitiveness. Now, when it yields 0%, then you've got, you take the two boxes required to make it a good funder. There are other elections which may be important next year. We have an election of the next French president. We've seen that this election, the discussion around this election, has triggered a huge move on the OIT and wooden spread. Can we say that Europe is not in good shape and some of France is maybe the catalyst that could put Europe more down on its knees and maybe create or recreate that crisis in Europe. No, we don't think so. Yes, there's a problem with France and it's not a new one. It's been in the making for years, if not decades, with this drifting in French deficits running at 2%, 3% below any other country, including Italy, Spain, even at the worst moment for these countries. It's drifting. It's been drifting for 30 years on the debt side of France. It was just a matter of time before you have this issue with the country. Now, does that mean there's a systemic risk in Europe? No. The risk is a lot lower than in 2011. It's very different in nature what's happening to France. When Italy, Spain had a heart attack, France is facing suffering from cancer. That's quite different in the way it works. Heart attack, there's no choice. You just take it to the hospital and take everything you can to just fix the issue because otherwise it's death. That's what Europe did and it didn't have the means. It didn't have any tools, any of these medical systems that you need in such situation at the time. Today, it's a much more gradual process for France and Europe has now put in place the tools to address the situation. It has tools to intervene when the country asks for it. It's the OMT. It has tools to intervene when the central bank thinks or feels that the monetary policy is not transmitted properly, the TPI. It has debt measures, it mutualization as well, which means that today there's a lot of mitigation of the risk across countries. All this means that it's very difficult to see a serious contagion, such as the one we had in 2011. Now, second important point on this aspect, what matters in this situation is not the level of your debt. Japan has been running very high level of debt for decades without any issue. Why? Because it's held by Japanese. And today, all countries butt France. France is not called its own debt. Italy is not a twist. Italy, there's only 10% of foreign investors outside of the eurozone in Italy, same for Spain, most European countries. France is the exception. It's a French problem, local problem that can be addressed as it is as a French issue with all the means necessary to avoid any serious contagion to the rest of the region. But the means involve political willingness from EU countries, mainly Germany. If we apply this, I guess we can summarize in this IMF-style solution, I think everybody remembers that in 2011, when in Italy, we had debt to GDP ratio close to what we have today in France, above 120%, but they had also deficit, which was 4% and today it's more in France. We had politically Merkel and Sarkozy that pushed Berlusconi out to put in place the government of Monti. So what makes you think that this cannot happen tomorrow? We understand that there are tools, but politically in Europe that we don't have German governments, especially when we have more extremes getting into power, promoting big change in France. That would be good news, because that's probably actually the only solution, something jointly between France and the rest of Europe, particularly the Germans. If you think of the French situation, it cannot be fixed by the French politics and the French country itself. Politically, it's impossible. Again, it's cancer, it's slow motion, so who is going to take the responsibility to try and cure a disease that goes only gradually and hard to explain, and you don't feel that much difference from one year to the other. It's impossible. Politically, it's unsellable. Now, when pressure intensifies, then you have no choice. It's the logic of moving from cancer to heart attack. That's only when you act. So forget about any idea of France acting on its own, even with the programmes announced from the Assemblyman National or other parties today. It's just minor adjustments here and there that will take the deficit from minus 5.4 to say 4.82 years. I mean, there's just nowhere near what you need. So there will be no solution at the French level. So you will need involvement of other countries in particularly Germany, and that's probably where the solution lies. At some point, a deal, a la Italy at the time, where basically you ask you help the country in exchange of some serious reforms, a lot more serious than anything announced ahead of the election, and probably implemented after. Something real, as Italy did, as Eastern Europe did, as Portugal greased it in the past. That's what you need to really fix the problem. I'm sure we're going to have other occasions to discuss about France and Europe in general, but now if we remove the macro heart and we jump into the markets, listening to what you just explained, Europe is not a field where we want to invest because we don't see any growth, many problems with the geopolitics and those elections. So how come that, in our portfolios, we have investment in Europe and in particular in France to name it French banks? Well, first, the low growth doesn't need no good investments to make. You have plenty of situations where a great piece. is not high and you have very good investments to make. I mean, Europe has got qualities. Of course, it suffers from the lack of profit perspectives. So it's not an equity market. You don't have good equity propositions because capital is not well allocated. It's somewhat frozen on the side. So it's not really working. So there's no entrepreneurship, there's no innovation, it cannot compete with the US or with China on any theme, not just AI. So that's the drawback of Europe. But the French banks we invested are not bonds or equities. Yeah, in practice, actually, there are more bonds and equities are super bonds. Reality, the strength of Europe is its robustness. So basically, it's the flip side of the absence of profits because Europe has secured everything back in 2011 around the European crisis. It had to secure everything. In securing its market, its institutions, its regulation, its strengthens the system a lot, making it really, really robust, but at the expense of profit, innovation, entrepreneurship. But that remains a very, very robust, including the French problem, as we said, which is a very local situation that you can fix. There's nothing, no money, any contingent or any systemic crisis you could think of. In this context, by Europe for what it is. And what does Europe offer today? Two things. First, some equity sectors are cheap and now have become super bonds. That's where Europe thrives. They're just super bonds yielding 10, 12% per annum. If you look at their profits, it's a straight line. Of course, it's not the slope you can find in some tech sectors, but as a bond proposition, it's a very nice one, much better than any OAT, of course, but even German bonds or American bonds, it yields a lot more with stable profits and increasing, actually, stable. Increasing profits, stable slope of profits. So you have a very nice proposition there. On top of that, banks do benefit from higher rates. And in this world, it's a quality that is quite, quite hard to find, so that alone makes the sector attractive in Europe. But again, not as an equity, as a super high yielding bond with very decent security because the sector has restructured itself over the years. As Einstein put it, "Compon interest" is the eighth wonder of the world. So that's how it comes. Exactly, you think, even for French banks, I mean, rising OAT spray is good news. Locally, it means volatility. Locally, it means stress because the market tends to sell these banks or other French assets to protect itself. But reality is that when it yields a higher, including on the OATs, it's good for banks. They can make a lot more money on the curve. So ultimately, it's positive. It's just short of noise against medium-term positive. The blueprint will be the Italian and Spanish bonds. Yes, exactly. Exactly, exactly. Well, actually, back in 2018, and again, three, four years ago, you had that in Italy, where right to end up, the market just thrashed the Italian banks back in 2018, again, three years later. But reality is that it took them a few months, months, not years, months to make the money back. And more after that, in just making the most of the slope of the Italian curve, I mean, for big Italian banks, what are you taking when you buy two, three, four-year bonds, yielding two, three, four percent more than your financing rate? It's a massive carry trade at the bank level, leveraged. It's just a matter of time, before you make really, really big money out of it, and look at the Italian banks now. I mean, among the best performers in the world, over the last five and 10 years, and they are really thriving, even in a position to buy German competitors today. So that's really, again, medium long term-- it's not a problem. It's just a short-term issue against long-term benefits for the sector. Now, the other proposition we like in Europe is what relates to what the Germans are doing. I mean, Europe is not the throngs. It's also the Germans that are-- it's also the Italy-Spanic countries that are doing really, really well-growth-wise, thanks to EU proceeds, in part, but also their own strength. It's also more recently the German package. It's a lot more than fiscal. It's a lot more than just injecting money in the system. It's done in a very comprehensive way. It's long-term. It's targeting the right sectors with a high macro-multiplier. It also covers aspects like red tape for companies which was a major issue in Germany. They've made a good, really good progress on that side just this year. And companies now are-- it's a lot easier for them to create, to develop, to invest. They also covering aspects such as incentivizing people, investors, to take more risks. So move a bit away from there, two, three-year bonds, and go for longer duration equities. They're developing pension funds. They're creating that whole dynamics that make capital work more, which was the number one is, today, the number one issue of Europe. And particularly in Germany, where capital is ample. They've got massive amounts of money, but it's just frozen. So they're now putting it at work. And that's-- the numbers, they are really, really big. So Germany is doing a great job on that side. Mertz actually has been accelerating in the wake of bad election reserves recently. And that is positive for Germany. That is positive for Europe. We like German equities. We like small and medium companies that are deemed to benefit from this better, more efficient access, cheaper access to capital. So that's also half of our positions in Europe are made of these, of these small and medium. Let's run a scenario. Now, if we zoom, where we are completely wrong on our US, on our view, on US AI companies, hyperscalers, because we understand from all the discussion we're just having that that's probably one of the key of our view. If we are wrong on this, we might be wrong also on the end. We might be wrong on other views. So if we are completely wrong, if the US can go down this growth story and cope with inflation that comes with it, what's going to happen in our portfolios? That's the very reason why we work a lot and build on portfolio construction, because we know we can be wrong. And we can get caught wrong like this here on some of the scenario. We believe the US economy is going to slow down, and we believe that the later it happens, the harder, but we don't exactly know the timing. We thought it could well be this year. Now, we think it could be next year, but possibly with the vengeance. But timing isn't certain. Same for AI. We think macro wise, it would be very hard to put all these nice micro stories in the big macro box. It doesn't fit. So it's going to be very difficult, the probability of that, to be profitable as much as these companies' analysis is quite low. But now we may be wrong, maybe more productivity gains than we expect. It could come faster than we expect. So there's always room for just because these are so uncertain variables and you're talking productivity is extremely hard to assess. Spot, how fast is AI implemented is also very hard to assess. You want basically to build portfolios that are less exposed to these uncertain elements. The timing also down the US economy, the final outcome, and when of AI. So we believe in these scenarios, but we have as well positions that can absorb the timing and certainty and would do well, even if wrong, on these two big elements of scenario we have. Do well in the meantime, it's the yield we have in our portfolios. High octane portfolios today are running a yield of in excess of 20%. So that's a very comfortable waiting position. And actually these 20% are not leverage on credit. the assets. It's a lot on short dated bonds. These bonds are very defensive in nature and they provide a big chunk of the yield in our portfolio. So we've got a nice and fairly defensive weight in C position in the portfolio while we wait for that U.S. slowdown, while we wait for the answer to the big AI profitability question. And we also have a position that should do well if the answer to these two questions is positive. There again the answer, the best answer is Asia. So Asia is not just we like assets out there. It's also because in both worlds it does very much okay. If the AI story is stronger then I mean they're providing all the big troubles to the AI story. So that means that these Korean companies, Japanese or Taiwanese companies will make money a lot longer when you've seen the numbers. That means longer very very high profits for these companies with all the distribution into the local economies. That is very strong for them if the U.S. in the context of the U.S. economy resisting the pressure and that continues to out perform. There again what's the best match they can find is the Asian region, China on innovation, South Korea as a provider supplier in Japan. So that's when the being global as we are in our portfolio is the best answer to these two big uncertainties. Of course we have an idea on but on which we may well be wrong or at least wrong on the timing. I think that was a clear overview, a full overview of our views and our convictions. Thank you very much Vasal. Thank you all for listening back to us and if you have any comments positive or negative to share with us on think macro or podcast feel free to send us an email and we will gladly read it and improve our podcast. Thank you all and thank you for your trust.