Speaker 1: Hello, Odd Lots listeners, It's Joe Wisenthal. Before we get
Speaker 1: to today's show, I wanted to let you know that
Speaker 1: odd Lots is hosting its first ever live event on
Speaker 1: September here in New York City. Join me and Tracy
Speaker 1: Ellaway as we host an all star lineup of guests
Speaker 1: to talk about cryptocurrency, white color fraud, modern monetary theory,
Speaker 1: and more. We'll even have some finance themed live music,
Speaker 1: including some songs by yours truly. So keep listening to
Speaker 1: odd Lots all this month to find out more details
Speaker 1: about the live show, but for now, mark your calendars
Speaker 1: for Thursday September for the first ever Odd Lots variety show. Hello,
Speaker 1: and welcome to another episode of the Odd Lots Podcast.
Speaker 1: I'm Tracy Alloway. My co host Joe Eisenthal is away.
Speaker 1: But I was thinking the other day and I realized
Speaker 1: that Joe and I have never really done an episode
Speaker 1: on negative interest rates. And while we've had instances of
Speaker 1: negative yielding bonds before, over the course of the summer
Speaker 1: this has actually become a really big topic. By some estimates,
Speaker 1: the world has I think seventeen trillion dollars worth of
Speaker 1: negative yielding debt now, and that includes things that you
Speaker 1: wouldn't really expect, like corporates, some emerging market governments. And
Speaker 1: I think the reason this gets so much attention is
Speaker 1: that there's something fundamentally kind of unsettling about negative rates.
Speaker 1: It just doesn't really sit well with our idea of
Speaker 1: how capitalism is supposed to function. I mean, if you
Speaker 1: have money and you put it to work by investing
Speaker 1: in a company or a government, then you are supposed
Speaker 1: to be rewarded for that. And that's one reason I
Speaker 1: think that we're really starting to see p question the
Speaker 1: foundations of the global economy. And we're also starting to
Speaker 1: see people look at new ideas for fixing it, such
Speaker 1: as modern monetary theory or MMT, which is something that
Speaker 1: we have discussed on odd lots before. Now, in any case,
Speaker 1: it doesn't seem like negative rates are going to go
Speaker 1: away anytime soon, given that central bankers around the world
Speaker 1: are pushing benchmark rates even lower by embarking on another
Speaker 1: easing cycle. So on today's all thoughts will be asking
Speaker 1: why exactly is this happening. Why is it that more
Speaker 1: than ten years after the financial crisis, yields are trending
Speaker 1: even lower and what is this say about the economy
Speaker 1: and how we think about it and how can we
Speaker 1: actually fix it? And I'm really happy to say that
Speaker 1: our guest for this episode is one of my favorite analysts.
Speaker 1: I've been reading his research notes for many years now,
Speaker 1: and I think he's really one of the few on
Speaker 1: the cell side that thinks about these kind of issues
Speaker 1: on a big picture basis. He's certainly the only analyst
Speaker 1: I've read who seems to be taking M M T
Speaker 1: very seriously. And you'll see what I mean in just
Speaker 1: a minute. So, without further ado, I'd like to bring
Speaker 1: on Victor Schutz. He is a Global markets head of
Speaker 1: Asia strategy over at McQuary. Victor, so nice to have
Speaker 1: you on the show. Thank you, thank you for having
Speaker 1: me a Jersey. Let's start with that number that I
Speaker 1: threw out earlier, seventeen trillion of corporate and sovereign debt
Speaker 1: with negative yields. How exactly did we get here? Well,
Speaker 1: that's uh, that's a great question. You're absolutely correct. The
Speaker 1: question is why we cannot tolerate things like obility. Said
Speaker 1: more when I was a younger man. Quite often spreads
Speaker 1: will move fifty sixty bits very easily today when we
Speaker 1: have thirty five spreads suddenly moving and you almost need
Speaker 1: ambulances at the exits. Why can't we have prime discoveries.
Speaker 1: Why can't we have time value of money? The answer
Speaker 1: to me is leveraging. In other words, our solution to
Speaker 1: low productivitory over the last twenties that years was the
Speaker 1: brand future consumption. To the present, our solution was a
Speaker 1: surprises and leveraging will don't but to you what wages
Speaker 1: no longer capable of giving you. And therefore, yes, your
Speaker 1: real incomes might not grow, but we will allow you
Speaker 1: to grow well in different ways. And initially it's incredibly stimulating,
Speaker 1: it improves wealth, It does also some wonderful things. It
Speaker 1: also works together with globalization. You can't really have that
Speaker 1: sort of leveraging unless you also globalize the product and
Speaker 1: labor market. So it's really the next of triple package
Speaker 1: of globalization, product market, labor market, and financial market, where
Speaker 1: our well being, our pensions and everything else depends on enterprices.
Speaker 1: But the challenge with that is that the more you financialize,
Speaker 1: the less effective it becomes. You got twenty years ago,
Speaker 1: you needed maybe a dollar dollar fifty of debt to
Speaker 1: generate one dollar of GDP. In most countries today, you
Speaker 1: need three to five dollars of debt for every dollar
Speaker 1: of GDP. So the more you do it, the more
Speaker 1: incremental impact diminish it. And that implies that you have
Speaker 1: to spur or you have to motivate it to multiply
Speaker 1: even higher. To do that, you need to issue more
Speaker 1: and more of that debt. And the more capital you
Speaker 1: create compared to what you need, the more cost of
Speaker 1: apple has to go down. And that's why interest rates
Speaker 1: have to continuously go down to a lower and lower level.
Speaker 1: And the more you rely on assets and debt, the
Speaker 1: less comfortable you are with volatility, the less you can
Speaker 1: tolerate volatilities, particularly in asset classes. So where is the
Speaker 1: stage that it's like a squirrel in the wheel. You
Speaker 1: can't stop running because if you do, the whole house
Speaker 1: of gods collapses theory very quickly. And so if you
Speaker 1: if you sort of take that, you do that. Any
Speaker 1: inoculation that central banks might want to do in terms
Speaker 1: of lowering rates not to spur a little bit more
Speaker 1: growth makes it worse, and interest rates have to go
Speaker 1: even lower over the longer term. Of course, what it
Speaker 1: means if you continue to use monetary levels, interest rates
Speaker 1: will have to go with negative everywhere, not just in Europe,
Speaker 1: not just in Japan, but also names of such countries
Speaker 1: and eventually all across the world. A lot of people
Speaker 1: will say what is wrong with that? But but traceday
Speaker 1: as you correctly said, that's not the way capitalism is
Speaker 1: supposed to function. That's not the way corporate finds theory
Speaker 1: is supposed to function. So Victor, on that note, you
Speaker 1: talked about central banks driving down the cost of capital
Speaker 1: in order to boost growth, and this is where we
Speaker 1: start to to see the impact on both our theory
Speaker 1: of capitalism and also the value of money. You mentioned
Speaker 1: this already, the time value of money, So this is
Speaker 1: the idea that you know, money available right now is
Speaker 1: worth more than that same money in the future due
Speaker 1: to its earning capacity. So basically, you know, it's a
Speaker 1: core principle of investing that your money can earn interest
Speaker 1: or a return, and so it's it's worth something. And
Speaker 1: that seems to be what makes people so uncomfortable about
Speaker 1: the negative interest rate environment. So my question is what
Speaker 1: is that going to do to the overall economy and
Speaker 1: to investment. Central banks that what they're doing because they're
Speaker 1: scared of deflation. Now why they're scared of deflation, Well,
Speaker 1: because we've accumulated so much dead that nobody will ever
Speaker 1: be able to repay it. I mean, globally, we have
Speaker 1: two hundred trillion dollars of death. If you look at
Speaker 1: all of the real instruments that we haven't told that
Speaker 1: really the cloud of finances at least four or five
Speaker 1: hundred trillion dollars. That's around five times nominal GDP. So
Speaker 1: instead of repaying the death, society is built around the
Speaker 1: concept of a very gradual and slow default. So we're
Speaker 1: slowly defaulting on our death, and the way we're default
Speaker 1: it is to inflation. That's why central banks are so
Speaker 1: scared of deflation. The more you relign monitor delivers, the
Speaker 1: more you drive the cost of capital down, the more
Speaker 1: you create deflation. So you're trying to eliminate it, but
Speaker 1: you're actually making it worse. Now why is it's a
Speaker 1: well a couple of reasons. The reason number one is
Speaker 1: that the low cost of capital means zombie companies survived,
Speaker 1: so you don't actually have clearances which are normal capitalist
Speaker 1: system or have. Now that's a highly deflationary element. The
Speaker 1: other thing that is happening. The lower cost of capital
Speaker 1: implies that any unicorn, any brand new idea can be funded,
Speaker 1: and so technology is actually progressing much quicker than otherwise
Speaker 1: it would be the case. We've actually pour in Harrison
Speaker 1: on the fire, and as technology explodes, companies get decent
Speaker 1: mediated from their products, their brands, labor gets disintermediated from
Speaker 1: their wages, and that's also highly disinflationary. So the first
Speaker 1: side effects of using sort of monetary levels that aggressively
Speaker 1: is that you're trying to avoid deflation, but in fact
Speaker 1: you're creating a stronger and stronger dec inflation. So, actually, Victor,
Speaker 1: you just mentioned tech investment in particular, and I wanted
Speaker 1: to press you on this topic because it does feel
Speaker 1: like nowadays, with the cost of capital so low and
Speaker 1: people chasing future asset price growth rather than value, right now,
Speaker 1: it does feel like we've seen a lot of money
Speaker 1: go into the sector, whether it's through the private market
Speaker 1: and unicorns, or through the public markets through thingstocks like
Speaker 1: Amazon and Apple. What is the tech investment in particular
Speaker 1: do for global economies and for society? Tech investment actually
Speaker 1: has clearly multifact de fact some of it is very
Speaker 1: very good, but a lot of it is highly deflationary.
Speaker 1: So in other words, tech has a tendency of eroding
Speaker 1: cost of everything we consume and we produce. So when
Speaker 1: marginal costs decline of a time, the prices also dropped.
Speaker 1: That's part of the reason it's so hard to prosecute
Speaker 1: technology company for antitrust violations because they're not actually gouging consumers.
Speaker 1: On the contrary, they're reducing prices. It's not the depriving
Speaker 1: consumers of a good product. Product is actually good. The
Speaker 1: problem with tech is not so much gouging or depriving
Speaker 1: people of value, but rather the fact that tax is
Speaker 1: money tizing people than powers uh and the creating scale
Speaker 1: of business that includes other businesses going into into this
Speaker 1: particular area. But from a macro perspective, if you keep
Speaker 1: the cost of capital too low, technology propagates much faster.
Speaker 1: Technology is really human spirit, it's human ingenuity, but the
Speaker 1: speed with which it progresses depends on the cost of capital.
Speaker 1: The lower your cost of capital, the faster it goes.
Speaker 1: As a set of setting that it's like pouring rising
Speaker 1: on the fire. And when tech progresses, it basically disintermediates
Speaker 1: companies from their products and their brand. It disintermediates employees
Speaker 1: from their wages. So it contributes more disinflation to the system.
Speaker 1: I mean, I'm curious you've alluded to this already, but
Speaker 1: rampant disinflation. Uh, disintermediateation through technology, the financialization of assets,
Speaker 1: and a bunch of investors basically pursuing speculative wealth. What
Speaker 1: does that due to political society. One of the things
Speaker 1: it does is that it increases income and wealth inequalities. Again,
Speaker 1: income in weals inequalities, right, variety of reasons. But financialization,
Speaker 1: relying on assets, relying on leverage, magnifies those income and
Speaker 1: wealth inequalities significantly. Even the central banks increasingly starting to
Speaker 1: realize that aggressive prolonged usage of money to relevers is
Speaker 1: not good for inequalities. Now that by itself is starting
Speaker 1: to create political friction. So but from a societal perspective,
Speaker 1: couple of impacts. Number one, the marginal pricing power of
Speaker 1: labor declines. In other words, technology and financial sization reduces
Speaker 1: your marginal pricing power, reduces your wages effectively that you
Speaker 1: otherwise would be able to command. And the second thing
Speaker 1: it does if you're a person with a lot of assets,
Speaker 1: particularly financial assets, your your wealth, your networks is growing
Speaker 1: very fast. If you're relying on wages and household chapels
Speaker 1: like houses or refrigerators, your relative wells actually goes down.
Speaker 1: Um and financialization and dead increase the speed with which
Speaker 1: those two parties go apart. That's your top one versus
Speaker 1: the rest of the population. So if we continue to
Speaker 1: rely on monetary levels, implications are At first of all,
Speaker 1: disinflation is likely to get stronger. Number two, the pockets
Speaker 1: of growth in economy will get smaller and narrower. Number three,
Speaker 1: that will be less productive investment, a lot more speculation occurring.
Speaker 1: Number four, income in wealth inequalities are going to increase.
Speaker 1: But another thing it does because every time you use debt,
Speaker 1: marginal utility of that debt goes down, and other words,
Speaker 1: every time you need more and more of it. What
Speaker 1: it does make countries want to do is to steal
Speaker 1: from their neighbors. So, in other words, countries and start
Speaker 1: competing very aggressively to start running current accounts surfluces, to
Speaker 1: try to steal business from another country, and that's what
Speaker 1: leads you into potential currency evaluations. That's what leads you
Speaker 1: into trade wars. So if we continue using monitory levels
Speaker 1: as we have done over the last thirty forty years,
Speaker 1: if we continue over the next fiveteen years, societies could
Speaker 1: just blow up. Okay, So here's my question. In two
Speaker 1: thousand nineteen, we are about to embark on another round
Speaker 1: of easing by tra banks around the world, and even
Speaker 1: though we've had ten years of evidence to the contrary,
Speaker 1: they think that doing the same thing over and over
Speaker 1: and over again, which is lowering rates, is somehow going
Speaker 1: to lead to a different outcome, which would be inflation.
Speaker 1: So what exactly is going to be the point at
Speaker 1: which policymakers realize that this monetary strategy is not working. Essentially,
Speaker 1: the problem is you can throw away the system until
Speaker 1: you build a new system. I do believe that, whether
Speaker 1: it's central banks, whether it's treasury departments where most of
Speaker 1: the banks they do understand that you can't just keep going.
Speaker 1: But the problem is you kind of abandon the system
Speaker 1: that you already have before you've decided what else you're
Speaker 1: going to do. Now, there are alternative ideas, and the
Speaker 1: interesting thing that I find how quickly they're becoming popular.
Speaker 1: If you think of what monetary theory. It's not a
Speaker 1: new idea. It's been around for a long long time,
Speaker 1: and there were books published, articles published for decades. It's
Speaker 1: amazing how popular there is suddenly becoming. I mean, Financial
Speaker 1: Times only a couple of weeks ago devoted the entire
Speaker 1: page discussing MMT. Only twelve months ago, I can't believe
Speaker 1: that ever would have happened. The same applies to Neil Kinsians.
Speaker 1: If you think of a growing popularity of people like
Speaker 1: Paul Krugman, uh, what you're seeing that in massive intellectual
Speaker 1: shift is already underway. Recognizing that fiscal neo Kinsian and
Speaker 1: m m T solutions might have lower side effects. It's
Speaker 1: still a drug, but it's a drug which will have
Speaker 1: lower side effects than continue to use minetary levers. But
Speaker 1: I'm not suggesting for a second we're going to abundant
Speaker 1: monetary policies where no we're not. It's just what you
Speaker 1: prioritize as you go forward. I personally think probably is
Speaker 1: going to be the last year when monetary policy is
Speaker 1: used as a primary instrument, and the breakpoint to me
Speaker 1: will be when we have to do something every two
Speaker 1: or three months. Every two or three months, think about it.
Speaker 1: We had a small heart attack in December two thousand eighteen.
Speaker 1: I don't know what January two thousand nineteen would have
Speaker 1: looked like if Jerrem Powell did not surrender on a
Speaker 1: third of January two thousand nineteen. Then we had another
Speaker 1: mini heart attack in May two thousand nineteen. This time
Speaker 1: around it was better reserve and ECB. So the windows
Speaker 1: getting shorter and shorter, the period of stimulation or the
Speaker 1: beneficial impact are getting shorter and shorter, and so so
Speaker 1: to me, it's those mini heart attacks that will continue
Speaker 1: rolling over the next twelve eighteen months that will have
Speaker 1: to come to a stage that people will start shifting priorities.
Speaker 1: I do not believe anybody will call it neo Kanzian
Speaker 1: immediately or anybody will call it m MP immediately. Rather,
Speaker 1: we're going to stumble around and gradually it will be
Speaker 1: fiscal policy. It's going to be neo Keynsian policies that
Speaker 1: that are going to drive them. So what about political
Speaker 1: opposition to fiscal solutions, because it does seem that basically
Speaker 1: what you're talking about is rethinking the way the financial
Speaker 1: system has been working, and governments in the developed world
Speaker 1: really have seemed reluctant to do that so far, and
Speaker 1: certainly it feels like there are interest groups or politicians
Speaker 1: out there who basically I can't see them and diving
Speaker 1: head first into m m T for instance. So what
Speaker 1: would allow it to happen? Now? You you argue that
Speaker 1: in some of your research that Japan is actually the
Speaker 1: closest example we have to a sort of m MT
Speaker 1: or fiscally driven society. But you know, as someone who
Speaker 1: grew up in Japan, I can argue that that society
Speaker 1: is very, very different to the one in the US.
Speaker 1: For instance, when we talk about using monetary levels, we're
Speaker 1: predominantly talking about the rest of the world outside of Japan,
Speaker 1: and outside of China. China is actually using all three instruments.
Speaker 1: They're using monetary policy, they're using fiscal policy, they're using
Speaker 1: neo kains in Ism, and they're using straight MMT Japan practices.
Speaker 1: Elements of all of this, all of this societies are
Speaker 1: are different. But one thing, Tracy, absolutely you're right to
Speaker 1: say that a dogmark developed since I guess late ninety seventies,
Speaker 1: which basically argued that private sector is always better at
Speaker 1: allocating capital than a public sector. If you go back
Speaker 1: to nineteen fifties. In nineteen sixties, that document didn't exist.
Speaker 1: People didn't think at the time that public sector is
Speaker 1: necessarily inferior to private sector investment. And the reason why
Speaker 1: they didn't think public sector was inferior because in their
Speaker 1: memory they remembered in nineteen twenties and nineteen thirties how
Speaker 1: badly private sector a misallocated resources. It was, really, I said,
Speaker 1: late in nineteen seventies. So the problem we have the
Speaker 1: entire system is structured around the idea that private sector
Speaker 1: is dominant, private sector is in a driving seat, and
Speaker 1: around the idea that public sector is wasteful and private
Speaker 1: sector is much better dellocating capital. Now, I think what
Speaker 1: new King's in and M. M. T would argue that
Speaker 1: is not strictly true always, and in fact, there has
Speaker 1: been spectacular misallocation of capital occurring in the private sector itself. Now,
Speaker 1: to surrender the dogma requires a very long time, So
Speaker 1: from an academic point of view, you're looking at decades
Speaker 1: before a new system will actually emerge. But from a
Speaker 1: practical perspective, from a political perspective, I do not believe
Speaker 1: for a second we're going straight into m MPT. What
Speaker 1: we're going to do, We're going to de emphasize monetary
Speaker 1: and emphasize more fiscal and Kinsian solutions. Eventually, we probably
Speaker 1: will end up with a version of MT, but that
Speaker 1: could be a decade away or longer. So it's not
Speaker 1: going to be a one soft switch that we go
Speaker 1: from one policy, one set of tools to another set
Speaker 1: of tool. Instead, what we're going to do is just
Speaker 1: gradually shift towards it. A classic example of that all
Speaker 1: the antitrust and investigation that is starting right now in
Speaker 1: various countries on techno oology. In many ways, that's a
Speaker 1: Neil Kinziean answer. When we have management team has been
Speaker 1: criticized for very high pension payments or salaries, that's a
Speaker 1: Neil Kinziean answer. And so what you're seeing is that
Speaker 1: neo kinson is, if actively, already intruding into the today's world.
Speaker 1: It's already starting to impact, but its impact is still small.
Speaker 1: We're predominantly in a monetary system. All I'm saying over
Speaker 1: the next couple of years that impact will grow and
Speaker 1: the state role, the role of the state is going
Speaker 1: to increase, and that role will be welcomed, particularly by
Speaker 1: millennium and Generation Z. And you have to remember one
Speaker 1: third of the US electorate is already millenniums and Generation Z. Uh.
Speaker 1: Within five years or six years, there will be the
Speaker 1: majority electoral majority. The same way as Biby boomers brought
Speaker 1: on their shoulders Ronald Reagan and Maggief. Millenniums Z generations
Speaker 1: will change how the role of the status perceived. I said,
Speaker 1: what we're going to see is increasing influence of those
Speaker 1: ideas and those policies. Now that's a major problem for investment. Victor.
Speaker 1: I take the point that this is going to be
Speaker 1: a sort of long running transition. But whenever we talk
Speaker 1: about m m T on the show, I always have
Speaker 1: the question of whether or not MMT can work everywhere
Speaker 1: because to me, it feels like it's basically the purview
Speaker 1: of a few developed economies who you know, probably have
Speaker 1: an advantage in the form of currencies that are either
Speaker 1: you know, global reserve currencies or considered safe haven. So
Speaker 1: can everyone around the world embark on significant fiscal stimulus
Speaker 1: or MMT uh? No, absolutely not. It's going to be
Speaker 1: a reserve of only some countries. I think both New
Speaker 1: kangents and m m T. People who propagate these ideas
Speaker 1: will agree on a couple of aspects. Number One, they
Speaker 1: will all agree that if private sector doesn't multiply aggregate
Speaker 1: demand and liquidity at a pace that society requires, a
Speaker 1: society believes is appropriate, then it's responsibility of public sector
Speaker 1: to do that. Secondly, they agree that it's not necessarily
Speaker 1: proven that public sector necessarily worse at allocating capital than
Speaker 1: private sector. But the other thing, they would argue that
Speaker 1: under certain circumstances, government can do almost anything they want to,
Speaker 1: and prerequisites are quite tight. Number one, you have to
Speaker 1: have monetary sovereignty. So in other words, you have to
Speaker 1: be issuing your own currency and you have to be
Speaker 1: borrowing in your own currency. Now, that applies to United States,
Speaker 1: that applies to Canada, to Australia, that applies the UK,
Speaker 1: That applies to Japan, that applies to parts of euro
Speaker 1: But it doesn't apply to a lot of emerging markets
Speaker 1: in emerging market space. For example, it does apply to China,
Speaker 1: it does apply to Korea, but a lot of weaker
Speaker 1: emerging markets, um, they do not have monetary sovereignty. The
Speaker 1: second argument, I think correctly they will They will say
Speaker 1: that you need to have proper institutions of state, so
Speaker 1: that the country borrowing and or using central bank cannot
Speaker 1: be as Imbubwe or Democratic Republic of Congo Venezuela, that
Speaker 1: that they have solid institutions of space. Again, that applies
Speaker 1: to a lot of the world, but some of the
Speaker 1: emerging markets it does not apply. And a third argument,
Speaker 1: they will say that you need to live in a
Speaker 1: relatively disinflation re climate. Again that applies to a lot
Speaker 1: of developed countries. That applies to some emerging markets, but
Speaker 1: it doesn't apply to others. So you're absolutely right, there
Speaker 1: are some strict criteria. It's good to be of some
Speaker 1: size as well, that there are greateria and not rebody
Speaker 1: will be able to do this. But if you think
Speaker 1: of the world, the countries we mentioned represent about of
Speaker 1: global GDP, what happens to the countries or economies that
Speaker 1: can't make the transition to fiscal spending? And on that note,
Speaker 1: are are we basically going to be trading inequality within
Speaker 1: countries or within societies for inequality between countries. That's exactly
Speaker 1: what's going to happen. We're going to become much more localized. Effectively,
Speaker 1: we're going to sort of nineteen fifties nineteen sixties. It's
Speaker 1: not going to be, of course, as field countries as
Speaker 1: they were back then, but nevertheless the shades of fifties
Speaker 1: and sixties will be there. You know, there's much more localized,
Speaker 1: much more protective. The freedom of movement of people will
Speaker 1: be much more restricted, the freedom of moment of capital
Speaker 1: will be much more restricted. You'll find the government will
Speaker 1: be the major driver of a want to miss an investment.
Speaker 1: Many people will welcome that also because in this system
Speaker 1: you don't have a lot of access capital just looking
Speaker 1: for something to do. You might end up with a
Speaker 1: little bit less speculation. You will will end up with
Speaker 1: a little bit more productivity growth rates, at least for
Speaker 1: a period of time, and that in turn would lower
Speaker 1: inequalities in your country. But what about iglobalization that it implies,
Speaker 1: what about the vocanization that it implies, Well, you absolutely right,
Speaker 1: a lot of emerging markets probably will go back to
Speaker 1: being just under developed countries the way they were quality
Speaker 1: classified not that long ago, when I just needs to
Speaker 1: be young men that were called underdeveloped countries. So in
Speaker 1: other way, some of the trade and capital flows that
Speaker 1: really enable the emerging markets to prosper and develop will
Speaker 1: become much scarcer, and some of those countries might not
Speaker 1: be able to make it, so disparities between the country
Speaker 1: is I think will will increase. Okay, and you touched
Speaker 1: on this earlier, But if you're an investor in the
Speaker 1: current climate, you are still living um, you know, in
Speaker 1: the current construct of capitalism, and it's basically one where
Speaker 1: markets are sort of driven by flows of money rather
Speaker 1: than um sort of outright value or productivity. So what
Speaker 1: are investors supposed to do as they still continue to
Speaker 1: grapple with the current environment, which is one of you know,
Speaker 1: lower rates and negative yields. It's interesting if we just
Speaker 1: continue doing what we're doing. Let's assume no change in policies,
Speaker 1: as you correctly said, it might take a long time
Speaker 1: for politics to change. If we continue to rely on
Speaker 1: monitory levels, then investment styles become quite clear. First, bombs
Speaker 1: are always good investment. This idea that it's the end
Speaker 1: of the tar bullmarket run and bonds is just absolute
Speaker 1: nonsense because interest rates eventually will have to go negative everywhere.
Speaker 1: The number one, bonds are always good. Number two financial
Speaker 1: speculation always good. As you correctly set private equity unicorns
Speaker 1: flatly thing any financial speculation is good. Number three because
Speaker 1: this inflation is likely to get stronger and it grows
Speaker 1: will become narrower. In the narrow pockets, Investing in companies
Speaker 1: that are capable of growing despite the headwinds are going
Speaker 1: to become even more popular as you go forward. That's
Speaker 1: sort of the essence of your quality and grows portfolios
Speaker 1: that a lot of people are really like. One investment
Speaker 1: style that will never work in the system is a
Speaker 1: traditional value investing occasionally valuable pick up, but essentially it
Speaker 1: doesn't work in that system at all. If we switch
Speaker 1: across the Neo Kansian world, the circumstances are somewhat different.
Speaker 1: I don't believe interest streates can really go up that much,
Speaker 1: but it will be an environment which will have a
Speaker 1: bit more inflation and grows in it. So first, the
Speaker 1: bonds are not going to be a one way street anymore.
Speaker 1: I don't think people are going to lose necessarily a
Speaker 1: lot of money because the interest rates cannot really go
Speaker 1: up a lot. But nevertheless, it's not a one way street.
Speaker 1: Number two, because there ought to be a little bit
Speaker 1: more productivity, a little bit more inflation, at least for
Speaker 1: a while. You're going to have more gross opportunities available
Speaker 1: to you, So the excessive price you will place on
Speaker 1: the companies that are capable of growing despite all the
Speaker 1: headwinds will become less pronounced, and in fact some of
Speaker 1: those companies might get somewhat derated. As you go a forward,
Speaker 1: there will be times when the value will really run
Speaker 1: up because the governments will be spending more money on infrastructure,
Speaker 1: that will be spending more money on various facilities and
Speaker 1: things to do capital investment, so some of the value
Speaker 1: will really run up and could actually be a prime
Speaker 1: in them for years rather than just for you know,
Speaker 1: two or three months. But the thing that really will
Speaker 1: work in that sort of environment is whatever the government
Speaker 1: wants to do, which is not similar if you think
Speaker 1: of China today, That's exactly what Chinese analysts are doing.
Speaker 1: They're basically asking what would the government do and how
Speaker 1: does it work through my system? And what do they buy?
Speaker 1: That's pretty much the way in in sort of neo
Speaker 1: king and fil world is going to work that you
Speaker 1: would need to ask yourself a question, what does the
Speaker 1: government wants to do? If it's infrastructure fine, and if
Speaker 1: it's support of consumption through about a minimum in can
Speaker 1: get in his find That's that's what you're going to do.
Speaker 1: Investment styles are quite different. But because we're living between
Speaker 1: the two worlds, a monetary world is still with us.
Speaker 1: It's still the most powerful force that we have right now.
Speaker 1: But now the world is gradually intruding, and as it intrudes,
Speaker 1: it creates cross currents, and so investors right now have
Speaker 1: difficulties seeing how they should be investing. That's why Aliot
Speaker 1: just continue to get crushed by growths. That's why at
Speaker 1: the times of uncertainties, declining interest rates, even sometimes they've
Speaker 1: been in yielding stocks don't do well, and and and
Speaker 1: so the reason for that is there a cross currents.
Speaker 1: If we stay was one system, it's pretty clear what
Speaker 1: to do. If we move to another system, it's pretty
Speaker 1: clear what to do. If we staying in between, investors
Speaker 1: are confused. What they're all hoping for, and central banks
Speaker 1: also hoping for, is a private sector will returned back
Speaker 1: to growth, and therefore central banks and fiscal authorities will
Speaker 1: simply pull back and every single returns back to normal
Speaker 1: to meet the probability of that occurring is close to zero.
Speaker 1: So I have one more question for you, and it's
Speaker 1: sort of a step back question on on everything we've
Speaker 1: been discussing. But you know, if you read your research,
Speaker 1: it feels like a lot of the problems that you
Speaker 1: identify with the current system are that we are overindebted
Speaker 1: and we're not going to be able to reflate our
Speaker 1: way out of that debt using existing monetary methods. And
Speaker 1: yet you're also advocating for fiscal stimulus in the form
Speaker 1: of m M T or neo kanesiasm, and I think
Speaker 1: you know that's the policy that basically says, don't worry
Speaker 1: about the deficit um, So how do you square those
Speaker 1: two ideas? Can Can indebtedness be both the problem and
Speaker 1: the solution? That's exactly what it is. But but the
Speaker 1: most I guess basic principle is returning back to normality
Speaker 1: is not on the cause. So we need to choose
Speaker 1: our poison for the lasts. The West was taking one poison.
Speaker 1: It's called monetoring. It indirectly tries to influence the behavior
Speaker 1: of private sector, and the facts of that policy for
Speaker 1: the lost tent tift is is becoming so toxic that
Speaker 1: neither people, nor political classes, nor anybody else has prepared
Speaker 1: to just carry on with the other poison we have
Speaker 1: is what we have discussed. It doesn't necessarily solve the problem.
Speaker 1: We're not returning back to equilibrium, whatever that equilibrium is.
Speaker 1: We're not returning back to our reality. But instead we're
Speaker 1: thinking another poison that has less side effects right now.
Speaker 1: Because remember, only China practice Ball three. They know the
Speaker 1: side effects of the other two. We in the West
Speaker 1: have not really used the other two poisons since nineteen
Speaker 1: fifty six, so nobody really remembers. So from my point
Speaker 1: of view, what new Kinson and m MT does. They
Speaker 1: give us another way of keeping society is intact, keeping
Speaker 1: economies intact with a lower degree of side effects, oring
Speaker 1: the pressure, not the similar to what Iron Chancellor Bismarck
Speaker 1: did in Germany in eighteen eighties when in producing welfare
Speaker 1: benefits that reduced some of the pressure that arose out
Speaker 1: of industrial revolutions. We need to do something similar to
Speaker 1: reduce the pressure on societies. It doesn't solve the problem.
Speaker 1: I mean not suggesting it solves a problem. All it
Speaker 1: does it provides another draft to keep going with the
Speaker 1: lower side effects and reducing some of the geopolitical and
Speaker 1: social pressures that we are experiencing in the next several decades,
Speaker 1: a different world will emerge. It's going to be something
Speaker 1: completely different. I don't not believe it's going to be
Speaker 1: a conventional capitalism, but we need to go through decades
Speaker 1: to get there, and so I think we need to
Speaker 1: switch the draft. That's Victor Schwetz, the only sell side
Speaker 1: analyst I know who can reference Bismarck on a podcast
Speaker 1: and quote marks in his research. Thank you so much
Speaker 1: for being on our thoughts. Thank you, thank you. Drakey. Yeah,
Speaker 1: so this has been another episode of the Odd Lots podcast.
Speaker 1: You can follow me on Twitter at Tracy Alloway. You
Speaker 1: can follow my Missing an Action co host Joe Wisenthal
Speaker 1: at The Stalwart, and you should definitely follow our producer
Speaker 1: Laura Carlson at Laura M. Carlson. You should follow the
Speaker 1: Bloomberg podcast team at podcast. Thanks for listening.