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The global financial landscape is currently navigating a period of profound technological shifts and fiscal uncertainty. Raphaël Gallardo, Chief Economist at Carmignac, offers a perspective that diverges from the standard central bank playbook. By applying the principles of Austrian economics to modern markets, Gallardo identifies a series of "wobbling" bubbles in AI, fiscal policy, and private credit. His analysis suggests that the era of central bank dominance is facing a reckoning, requiring investors to rethink traditional asset allocation in favor of a Trump Risk Parity strategy.
Key Takeaways
- Intertemporal Imbalance: Modern central banking focuses too heavily on contemporaneous supply and demand, ignoring the long-term intertemporal coordination required for a stable capitalist economy.
- The "Sad" AI Bubble: Unlike the euphoria of the 1990s, the current AI boom is a "labor-replacing" technology revolution occurring alongside depressed consumer confidence.
- Triple Bubble Risk: The global economy is currently supported by three precarious pillars: an AI capex bubble, a massive US fiscal deficit, and a hidden credit bubble in private markets.
- Investment Strategy: The "Trump Risk Parity" portfolio suggests shorting US duration, underweighting US equities, and increasing exposure to gold and commodity currencies like the Australian dollar.
The Austrian Critique of Modern Central Banking
Gallardo’s investment framework is deeply rooted in the Austrian School of economics, specifically the works of Schumpeter and Hayek. He argues that modern central bankers, following "Woodfordian" or Neo-Keynesian models, mistakenly view the economy as a series of exogenous shocks. In this view, the central bank’s only job is to "clean up the mess" after a bubble bursts. However, Gallardo contends that the central bank's primary duty is to manage intertemporal signals through interest rates.
A functioning capitalist economy requires the coordination of three rates: the market interest rate, the household rate of time preference (savings), and the anticipated rate of return on investment. When central banks manipulate rates to prop up demand artificially, they distort these signals, leading to excess consumption or malinvestment.
"The first duty of the central bank is to make sure that it is sending the appropriate intertemporal signal through the interest rates."
This failure to align expectations has led to a cycle where the base of installed capital is too high to be profitable under sustainable demand levels. To prevent a liquidation crisis, policy has shifted from monetary stimulus to aggressive fiscal spending, creating the "welfare addiction" seen in the post-COVID era.
Navigating the Three Wobbling Bubbles
Gallardo identifies a confluence of three distinct bubbles that are beginning to lose momentum. The interconnected nature of these risks makes the current market environment particularly fragile for institutional investors.
The AI Capex Shift
The AI revolution has entered a more dangerous second phase. Initially, markets rewarded companies for increasing capital expenditure (capex). Recently, however, stock prices have begun to dip when "hyperscalers" announce massive spending plans. There are growing doubts regarding the ability of model providers to monetize this technology effectively. Gallardo notes that while the internet was a consumer service people were happy to pay for, AI is often viewed as a labor-replacement threat.
The Fiscal and Credit Fragility
The US fiscal bubble is increasingly tethered to the AI boom through national security interests. This creates a moral hazard where the government cannot allow a collapse in capex because it is viewed as an arms race with China. Simultaneously, cracks are appearing in the private credit sphere. Gallardo points to the rise of "Payment-in-Kind" (PIK) toggles, where companies issue more debt instead of paying interest, as a sign that credit defaults are being artificially suppressed.
"Credit defaults remain very low in the private credit market but it's because of a increased recourse to pay in kind."
The Trump Risk Parity Portfolio
Given the expectation of continued fiscal stimulus and potential inflationary bottlenecks, Gallardo advocates for a Trump Risk Parity approach. This strategy acknowledges the "toxic" political environment and the loss of credibility in the current policy mix. In this framework, the traditional 60/40 portfolio is insufficient because the "risk-free asset" no longer exists in a meaningful way.
- Short Duration: US 10-year yields do not properly integrate the short-term economic prospects or the required term premium for fiscal risk.
- Inflation Hedges: Beyond gold, investors should look at "proxies" for commodities, such as the Australian dollar (AUD) and Canadian dollar (CAD).
- Currency Shifts: A preference for the Japanese Yen (fair value estimated near 130) and the Swiss Franc as safe havens against financial repression.
- Active Management: The complexity of these shifting correlations makes passive indexing dangerous, as gold and Bitcoin have become volatile assets themselves.
Global Outlook: Europe, Japan, and China
While the US faces fiscal "paralysis," other regions offer varying degrees of opportunity and risk. Gallardo highlights Spain as a standout performer in Europe due to cheap energy, skilled immigration, and a boom in sophisticated service exports. In contrast, France represents a significant tail risk. The political inability to address a 5% GDP deficit suggests that the market may eventually need to "put a gun to the head" of French politicians to force fiscal adjustment.
Japan's Normalization Struggle
Japan remains hooked on "Abenomics" and a weak currency. While the Japanese equity market remains attractive, Gallardo warns that the Bank of Japan is dangerously behind the curve. A sudden loss of credibility in Japanese policy could force the repatriation of reserves, potentially triggering a bond market crash in the United States.
China's Dual Economy
China is currently a "textbook debt deflation" story. While the export and tech sectors remain innovative and competitive, the domestic housing market is in a state of depletion. The Chinese consumer remains terrified by the lack of an end to property price declines. Gallardo suggests that while Chinese tech may offer value, the broader macro trade remains difficult due to the threat of global tariffs and internal surveillance-driven repression.
Conclusion
The transition from a period of globalization and stable growth to one defined by technological disruption and fiscal bubbles requires a high degree of intellectual agility. As Raphaël Gallardo notes, the most valuable asset for a modern investor or professional is the willingness to challenge established "doctrines" and look at the economy through a different lens. By focusing on the intertemporal balance of capital and the hidden risks in private credit, investors can better position themselves for the volatility of the coming years. Success in this environment will depend less on following the central bank's lead and more on identifying the structural shifts that are de-anchoring global inflation and asset values.
