1 00:00:10,039 --> 00:00:13,440 Speaker 1: Hello, and welcome to another episode of the All Thoughts Podcast. 2 00:00:13,520 --> 00:00:18,120 Speaker 1: I'm Tracy Alloway and I'm Joe. Wisn't Joe? Uh? Soft 3 00:00:18,200 --> 00:00:21,760 Speaker 1: landing seems to have sort of it's in the air. 4 00:00:22,239 --> 00:00:26,080 Speaker 1: It's almost consensus at this point. I mean, markets are rallying, 5 00:00:26,800 --> 00:00:29,320 Speaker 1: shrugging off a lot of the survey data which looks 6 00:00:29,320 --> 00:00:32,320 Speaker 1: a little bit more pessimistic, which is all kind of 7 00:00:32,360 --> 00:00:35,400 Speaker 1: strange because you still have big segments of the market, 8 00:00:35,479 --> 00:00:40,320 Speaker 1: like bond yields, for instance, pointing towards recession. Yes, that's 9 00:00:40,360 --> 00:00:44,280 Speaker 1: the really weird part to me, So risk asset stock market, 10 00:00:44,400 --> 00:00:47,000 Speaker 1: really nice start to the year, much different tenor than 11 00:00:47,040 --> 00:00:51,040 Speaker 1: in head in two. We are recording this January. As 12 00:00:51,040 --> 00:00:53,680 Speaker 1: of right now, the NAS deck is up seven pc. 13 00:00:53,920 --> 00:00:56,480 Speaker 1: Of course you got clever last year, but you know, 14 00:00:56,560 --> 00:00:58,560 Speaker 1: you look at something like the short end of the 15 00:00:58,560 --> 00:01:01,360 Speaker 1: curve three month two year markets are pricing in rate 16 00:01:01,400 --> 00:01:04,600 Speaker 1: cuts really soon. Into my mind, I'm like, they're only 17 00:01:04,600 --> 00:01:06,760 Speaker 1: going to happen if there's like a recession or some 18 00:01:06,880 --> 00:01:09,640 Speaker 1: hard landing. Like it's hard for me to reconcile what 19 00:01:09,800 --> 00:01:12,840 Speaker 1: we're seeing in different parts of the market right now. Absolutely, 20 00:01:12,920 --> 00:01:15,720 Speaker 1: and it is. It does seem to have happened very quickly. 21 00:01:15,920 --> 00:01:19,800 Speaker 1: The shift to you know, everyone's focused on China reopening, 22 00:01:19,840 --> 00:01:23,520 Speaker 1: that unfolded pretty fast. Lots of the soft landing talk 23 00:01:23,560 --> 00:01:25,800 Speaker 1: seems to have sort of come out of nowhere. You know, 24 00:01:25,840 --> 00:01:28,880 Speaker 1: two or three months ago, everyone was talking about entrenched inflation, 25 00:01:29,240 --> 00:01:32,800 Speaker 1: the possibility of a wage price spiral. But given the 26 00:01:32,840 --> 00:01:35,920 Speaker 1: shift in sentiment, I think we need to speak with 27 00:01:36,000 --> 00:01:39,840 Speaker 1: someone who has been consistent in their view that the 28 00:01:39,920 --> 00:01:45,000 Speaker 1: world could avoid a high inflationary regime absolutely, because you 29 00:01:45,040 --> 00:01:46,960 Speaker 1: have a lot of people going back and forth. I 30 00:01:47,040 --> 00:01:49,200 Speaker 1: even saw something in the Wall Street Journal that's like 31 00:01:49,360 --> 00:01:53,640 Speaker 1: maybe it was transitory all along, and we hadn't heard 32 00:01:53,640 --> 00:01:55,480 Speaker 1: that word, and no one dared uttered it for like 33 00:01:55,560 --> 00:01:58,360 Speaker 1: six months, and everyone was ashamed at ever even having 34 00:01:58,560 --> 00:02:01,760 Speaker 1: used that term transit worry, and that was suddenly it's 35 00:02:01,800 --> 00:02:04,720 Speaker 1: creeping back that maybe that a lot of the inflation 36 00:02:04,800 --> 00:02:07,720 Speaker 1: really was due to these like massive shocks we experienced, 37 00:02:07,800 --> 00:02:10,480 Speaker 1: the pandemic in the war, and that as these things 38 00:02:10,520 --> 00:02:14,560 Speaker 1: at least normalized to some extent, that the residual inflation, 39 00:02:14,600 --> 00:02:17,040 Speaker 1: the entrenched noess would not be as high as some 40 00:02:17,080 --> 00:02:19,639 Speaker 1: people were concerned about. Right, So today we're going to 41 00:02:19,720 --> 00:02:23,399 Speaker 1: be speaking with someone who was always on Team Transitory, 42 00:02:23,520 --> 00:02:26,840 Speaker 1: who never left and defected like a lot of other people. 43 00:02:26,880 --> 00:02:29,280 Speaker 1: I'm not going to name any names, but someone who 44 00:02:29,280 --> 00:02:32,200 Speaker 1: has been I use that word consistent, someone who has 45 00:02:32,240 --> 00:02:34,760 Speaker 1: been sort of banging the drum of this idea that 46 00:02:34,880 --> 00:02:38,560 Speaker 1: actually a lot of the pandemic related disruptions might go 47 00:02:38,639 --> 00:02:41,520 Speaker 1: away and we might return to more of what we 48 00:02:41,639 --> 00:02:44,560 Speaker 1: saw over the past few years or so, you know, 49 00:02:44,760 --> 00:02:48,320 Speaker 1: low interest rates, lower growth, that sort of environment. So, 50 00:02:48,919 --> 00:02:51,280 Speaker 1: without further ado, today we're going to be speaking with 51 00:02:51,480 --> 00:02:54,560 Speaker 1: Victor Schwetz. He is, of course global strategist over at 52 00:02:54,639 --> 00:02:58,960 Speaker 1: McQuary Capital repeat a lots guest, one of our favorites. Victor, 53 00:02:59,080 --> 00:03:01,440 Speaker 1: thank you so much for coming on our parts. Thank you, 54 00:03:01,560 --> 00:03:04,080 Speaker 1: thank you for having me. So what was it like 55 00:03:04,200 --> 00:03:07,120 Speaker 1: being on Team Transitory for the past year or so. 56 00:03:07,360 --> 00:03:10,560 Speaker 1: I loved it um But for very simple reason. Whenever 57 00:03:10,600 --> 00:03:14,600 Speaker 1: everybody agrees you know something is wrong, you know you 58 00:03:14,639 --> 00:03:17,880 Speaker 1: need to get away from that. With inflation, I never 59 00:03:17,960 --> 00:03:21,560 Speaker 1: felt I needed to get away. And the primary reason 60 00:03:21,639 --> 00:03:25,120 Speaker 1: for me was that inflation that we have witnessed really 61 00:03:25,160 --> 00:03:27,920 Speaker 1: have nothing to do with demand. If you think of 62 00:03:27,960 --> 00:03:33,040 Speaker 1: the global economy, we are still below the trajectory pre COVID. 63 00:03:33,080 --> 00:03:36,240 Speaker 1: In other words, global demand is less than what it 64 00:03:36,280 --> 00:03:39,480 Speaker 1: would have been if there was no COVID. The only 65 00:03:39,560 --> 00:03:42,960 Speaker 1: country that it's slightly different is the US. But even 66 00:03:43,000 --> 00:03:46,040 Speaker 1: in the US, the aggregate demand is only about ninety 67 00:03:46,120 --> 00:03:48,760 Speaker 1: bits higher than it would have been if there was 68 00:03:48,800 --> 00:03:52,280 Speaker 1: no COVID. So it's not so much aggregate demand. Rather 69 00:03:52,520 --> 00:03:56,200 Speaker 1: it is a disruption, unprecedented disruption of the goods market, 70 00:03:56,440 --> 00:04:00,480 Speaker 1: services market, labor market that was responsible for that. So 71 00:04:00,520 --> 00:04:02,960 Speaker 1: if you think of the goods market, for example, if 72 00:04:02,960 --> 00:04:06,360 Speaker 1: we go back eighteen months ago, goods demand in the 73 00:04:06,480 --> 00:04:09,960 Speaker 1: US and in Europe we're about ten to fifteen percent 74 00:04:10,120 --> 00:04:13,440 Speaker 1: higher then it would have been pre COVID. So even 75 00:04:13,520 --> 00:04:16,240 Speaker 1: if there was no disruption in ports, there was no 76 00:04:16,320 --> 00:04:19,680 Speaker 1: disruption in supply, there was no way supplies could have 77 00:04:19,760 --> 00:04:23,600 Speaker 1: expected demand to be fifteen percent higher than what it 78 00:04:23,720 --> 00:04:27,120 Speaker 1: was today. If you think of Europe, goods demand is 79 00:04:27,160 --> 00:04:30,359 Speaker 1: already below the pre COVID trajectory. If you think of 80 00:04:30,360 --> 00:04:33,479 Speaker 1: the United States, it's right back to where it should 81 00:04:33,480 --> 00:04:36,680 Speaker 1: have been if there was no COVID. But then before 82 00:04:36,720 --> 00:04:41,880 Speaker 1: we normalized goods, we started destabilized services. So you find 83 00:04:41,880 --> 00:04:44,719 Speaker 1: if you go back eighteen months ago, services would have 84 00:04:44,720 --> 00:04:48,839 Speaker 1: been in the US about fift lower then it would 85 00:04:48,839 --> 00:04:52,320 Speaker 1: have been pre COVID. Today they are within two percent 86 00:04:52,520 --> 00:04:55,520 Speaker 1: of COVID. So in other words, services pretty much recovered. 87 00:04:55,800 --> 00:04:59,920 Speaker 1: So even before we normalize goods, we started to destabilize serve. 88 00:05:00,680 --> 00:05:06,440 Speaker 1: But theoretically, just like the goods market eventually normalizes, services 89 00:05:06,520 --> 00:05:09,960 Speaker 1: market will eventually normalize. And the only problem, and that's 90 00:05:10,000 --> 00:05:14,599 Speaker 1: your transitory part. The only problem if inflation become embedded 91 00:05:14,839 --> 00:05:17,120 Speaker 1: in a goods market, in the labor market, in the 92 00:05:17,120 --> 00:05:20,720 Speaker 1: wages market, as well as in the financial markets. And 93 00:05:20,760 --> 00:05:22,919 Speaker 1: my argument for the last twelve months was that I 94 00:05:22,920 --> 00:05:26,640 Speaker 1: don't see any evidence at all of embedding. Now, if 95 00:05:26,680 --> 00:05:30,279 Speaker 1: you don't have the evidence of embedding, then inflation should 96 00:05:30,360 --> 00:05:33,560 Speaker 1: come off pretty quickly, very similar what happened in nineteen 97 00:05:33,680 --> 00:05:38,560 Speaker 1: forty six nine, and central banks then will adjust their 98 00:05:38,560 --> 00:05:42,280 Speaker 1: policies accordingly. So the reason I was not in favor 99 00:05:42,279 --> 00:05:45,280 Speaker 1: of a global recession is that I never felt that 100 00:05:45,360 --> 00:05:48,840 Speaker 1: we need to destroy demand in order to lower the inflation. 101 00:05:49,200 --> 00:05:52,320 Speaker 1: It's interesting, so it's almost like the issue is not 102 00:05:52,520 --> 00:05:56,440 Speaker 1: aggregate demand. It's almost like the issue is disaggregated demand. 103 00:05:56,480 --> 00:05:59,480 Speaker 1: It was this shift, and we have an infrastructure there 104 00:05:59,560 --> 00:06:02,039 Speaker 1: was sort of designed for one sort of pattern of 105 00:06:02,120 --> 00:06:04,800 Speaker 1: consumption and a certain amount of good, certain amount of services, 106 00:06:04,839 --> 00:06:07,680 Speaker 1: and it was this shift. You know, there still is 107 00:06:07,760 --> 00:06:12,479 Speaker 1: this fear of embeddedness and that you know, and people 108 00:06:12,520 --> 00:06:14,680 Speaker 1: who are against team traditors like, yes, we know all 109 00:06:14,680 --> 00:06:17,039 Speaker 1: the shocks or nother thing, but it doesn't matter because 110 00:06:17,040 --> 00:06:19,600 Speaker 1: if inflation is elevated for too long, it can risk 111 00:06:19,839 --> 00:06:23,360 Speaker 1: becoming embedded. What is that process? What does that mean 112 00:06:24,040 --> 00:06:29,360 Speaker 1: in your view for how could inflation become embedded? Well, 113 00:06:29,440 --> 00:06:32,120 Speaker 1: you're absolutely right, the longest lost, the more likely it 114 00:06:32,200 --> 00:06:34,719 Speaker 1: is to become embedded. But we live in a very 115 00:06:34,800 --> 00:06:39,200 Speaker 1: different and unusual world in a sense that unlike nineteen 116 00:06:39,400 --> 00:06:43,719 Speaker 1: sixties and nineteen seventies, where we had pretty much, certainly 117 00:06:43,720 --> 00:06:47,320 Speaker 1: from late sixties into early eighties pretty much inflationary prescious, 118 00:06:47,360 --> 00:06:51,760 Speaker 1: was not any disinflationary off sets or ES two thousand, 119 00:06:51,880 --> 00:06:55,680 Speaker 1: when we had pretty much dec inflationary prescious with no 120 00:06:55,880 --> 00:06:59,920 Speaker 1: inflationary off sets. Today we have boats we have very 121 00:07:00,040 --> 00:07:05,240 Speaker 1: strong disinflationary pressures. That's your circular stagnation. In other words, demographics, 122 00:07:05,320 --> 00:07:10,240 Speaker 1: inability to add labor inputs, things like wealth, extreme wealth inequalities, 123 00:07:10,240 --> 00:07:15,480 Speaker 1: things like technology, things like financialization and indebtedness. They're incredibly 124 00:07:15,560 --> 00:07:20,760 Speaker 1: strong and they create a disinflationary backdrop. Now, against that, 125 00:07:21,760 --> 00:07:25,280 Speaker 1: you need to look at frequent black swans and fat tales. 126 00:07:25,600 --> 00:07:28,840 Speaker 1: That's what we keep discussing is that normal distribution of 127 00:07:28,920 --> 00:07:32,680 Speaker 1: events no longer exist. We're getting a lot of disruptions 128 00:07:32,760 --> 00:07:36,000 Speaker 1: coming in now whenever black swants arrived, and they could 129 00:07:36,080 --> 00:07:39,640 Speaker 1: be health scare driven, they could be geopolitically driven. What 130 00:07:39,800 --> 00:07:43,440 Speaker 1: we have we have inflationary spikes that occur. But as 131 00:07:43,480 --> 00:07:46,400 Speaker 1: soon as those pressures received either from a health scare 132 00:07:46,520 --> 00:07:50,840 Speaker 1: or your political perspective, disinflation comes in very quickly. And 133 00:07:50,880 --> 00:07:55,000 Speaker 1: so because of this disinflationary backdrop, it's incredibly hard to 134 00:07:55,080 --> 00:07:58,960 Speaker 1: embed expectation because you're not on a one way street, 135 00:07:59,320 --> 00:08:01,960 Speaker 1: either as if I ancial markets or the labor market 136 00:08:02,120 --> 00:08:05,240 Speaker 1: or the corporates sink of corporates. Corporates these days they 137 00:08:05,280 --> 00:08:07,840 Speaker 1: regain pricing powerful la a quarta too, and then they 138 00:08:07,880 --> 00:08:09,920 Speaker 1: lose it, and then they gain it again or somebody 139 00:08:09,920 --> 00:08:13,920 Speaker 1: else gains it. There is no consistency of corporate pricing power. 140 00:08:14,040 --> 00:08:17,480 Speaker 1: There is no consistency of the labor pricing power, in 141 00:08:17,520 --> 00:08:20,720 Speaker 1: which case it's very, very hard to embed those sorts 142 00:08:20,720 --> 00:08:40,280 Speaker 1: of expectation. I was about to ask you, what do 143 00:08:40,320 --> 00:08:43,120 Speaker 1: you say to critics who who maybe argue that it's 144 00:08:43,160 --> 00:08:46,800 Speaker 1: too early to declare a win for team Transitory, given 145 00:08:46,840 --> 00:08:49,320 Speaker 1: that CPI is still at six point five percent. But 146 00:08:49,480 --> 00:08:51,240 Speaker 1: it sounds like you're making the argument that we can 147 00:08:51,280 --> 00:08:55,800 Speaker 1: get these recurring spikes of disruption related inflation, but then 148 00:08:55,840 --> 00:08:59,920 Speaker 1: the deflation narrative will like rapidly reassert itself. So may 149 00:09:00,040 --> 00:09:03,400 Speaker 1: be a different way of asking that question. What would 150 00:09:03,520 --> 00:09:07,840 Speaker 1: change your mind when it comes to endemic inflation? Is 151 00:09:07,840 --> 00:09:09,920 Speaker 1: there something that you're looking out for for a sign 152 00:09:10,000 --> 00:09:13,160 Speaker 1: that the regime really has changed. Yes, a couple of areas. 153 00:09:13,679 --> 00:09:17,439 Speaker 1: One of them is deglobalization. One of the things that 154 00:09:17,559 --> 00:09:22,240 Speaker 1: I've been debating whether diglobalization, as it progresses over the 155 00:09:22,280 --> 00:09:26,920 Speaker 1: next ten ten years, whether it's inflationary, because the underlying 156 00:09:27,000 --> 00:09:30,840 Speaker 1: idea is that the essence of globalization is arbitrage of cost, 157 00:09:31,000 --> 00:09:36,160 Speaker 1: arbitrage of efficiencies opportunities. As you diglobalize, that arbitrage goes away, 158 00:09:36,520 --> 00:09:39,520 Speaker 1: and therefore its inflationary. One of the things I've been 159 00:09:39,640 --> 00:09:44,760 Speaker 1: arguing is that this time around, deglobalization will not be inflationary, 160 00:09:44,960 --> 00:09:47,120 Speaker 1: and there are a couple of reasons for that reason. 161 00:09:47,200 --> 00:09:51,920 Speaker 1: Number one is that labor is increasingly smaller percentage of 162 00:09:52,000 --> 00:09:55,000 Speaker 1: the arbitrage. So if you go back twenty thirty years ago, 163 00:09:55,520 --> 00:09:59,080 Speaker 1: labor in the let's say lab intensive industries like closing 164 00:09:59,080 --> 00:10:03,080 Speaker 1: and footwear, would have been sixty arbitrage. Today it's only 165 00:10:04,480 --> 00:10:06,880 Speaker 1: in some of the new industries labor is as little 166 00:10:06,920 --> 00:10:09,800 Speaker 1: as five percent, So, in other words, labor is no 167 00:10:09,920 --> 00:10:14,319 Speaker 1: longer as critical as it was twenty or thirty years ago. Secondly, 168 00:10:14,960 --> 00:10:17,560 Speaker 1: unit labor costs in emerging markets have gone up. In 169 00:10:17,600 --> 00:10:21,080 Speaker 1: other words, wages have increased faster than productivity, So in 170 00:10:21,120 --> 00:10:24,439 Speaker 1: other word, the opportunities for barbitrage is getting less. The 171 00:10:24,520 --> 00:10:28,840 Speaker 1: third area is services. This day's services is one third 172 00:10:28,920 --> 00:10:32,920 Speaker 1: of merchandise trade. You basically cannot do merchandise trade with art. 173 00:10:33,000 --> 00:10:38,000 Speaker 1: Services and services have very different dynamics to merchandise trade. 174 00:10:38,120 --> 00:10:42,360 Speaker 1: It can be located in various jurisdictions. It's much less inflationary. 175 00:10:42,400 --> 00:10:45,440 Speaker 1: The other thing to remember, of course, is technology. Think 176 00:10:45,480 --> 00:10:49,360 Speaker 1: of the United States. United States between nine two thousand 177 00:10:49,440 --> 00:10:53,840 Speaker 1: seven d industrialized. Basically, you had manufacturing output in the 178 00:10:53,920 --> 00:10:56,800 Speaker 1: US growing only one one and a half percent paranum. 179 00:10:57,200 --> 00:10:59,880 Speaker 1: Global growth was more like three and a half four percent. 180 00:11:00,160 --> 00:11:03,360 Speaker 1: In other words, US market share has rapidly declined. If 181 00:11:03,360 --> 00:11:05,960 Speaker 1: you look over the last decade, US has been matching 182 00:11:06,440 --> 00:11:10,160 Speaker 1: global numbers. Manufacturing output's been growing at three three and 183 00:11:10,160 --> 00:11:13,000 Speaker 1: a half percent every year. Now the reason for that 184 00:11:13,320 --> 00:11:17,640 Speaker 1: US is re industrializing, But US is re industrializing in 185 00:11:17,640 --> 00:11:21,760 Speaker 1: a very different form. This is not nineteen sixties nineteen seventies, 186 00:11:22,120 --> 00:11:27,199 Speaker 1: much less fixed assets, much less labor, more robotics, more automation, 187 00:11:27,640 --> 00:11:30,240 Speaker 1: and so you don't see it really in a labor force. 188 00:11:30,360 --> 00:11:33,200 Speaker 1: So as a percentage of labor force, manufacturing is down 189 00:11:33,720 --> 00:11:36,679 Speaker 1: relative to what it was ten years ago, down from 190 00:11:36,720 --> 00:11:41,200 Speaker 1: nine to eight point four percent. But US is reindustrializing. 191 00:11:41,280 --> 00:11:44,280 Speaker 1: Was a much more flexible core structure, and so the 192 00:11:44,320 --> 00:11:48,439 Speaker 1: result is on shoring that people expect probably won't be 193 00:11:48,520 --> 00:11:52,319 Speaker 1: as inflationary as what people anticipate. So to me, there 194 00:11:52,360 --> 00:11:54,880 Speaker 1: is a debate whether you look at the impact of technology, 195 00:11:55,200 --> 00:11:57,440 Speaker 1: whether you look at the impact of services, whether you 196 00:11:57,480 --> 00:12:00,400 Speaker 1: look at the impact of labor. I just and see 197 00:12:00,400 --> 00:12:04,880 Speaker 1: it's going to be inflationary at all. As we gradually diglobalize, 198 00:12:05,000 --> 00:12:07,680 Speaker 1: or to put it the other way, globalization is dying 199 00:12:07,760 --> 00:12:11,480 Speaker 1: and natural deaths, and it will die over the next 200 00:12:11,480 --> 00:12:15,240 Speaker 1: ten fifteen years. A new form of globalization will emerge 201 00:12:15,320 --> 00:12:20,000 Speaker 1: which will not be dependent on relative costs or relative efficiencies. 202 00:12:20,440 --> 00:12:22,679 Speaker 1: And so that's one area. If I'm wrong on that, 203 00:12:23,600 --> 00:12:26,160 Speaker 1: then you find inflation become much more embedded. The other 204 00:12:26,200 --> 00:12:30,000 Speaker 1: area is easy, particularly the e pot of e G. 205 00:12:30,880 --> 00:12:33,240 Speaker 1: And so if you look at s G again, my 206 00:12:33,360 --> 00:12:34,959 Speaker 1: view is that I'm I worry about the s G 207 00:12:35,120 --> 00:12:39,280 Speaker 1: more then I worry about a gglobalization. But if you 208 00:12:39,360 --> 00:12:42,199 Speaker 1: sing of the number one, we're going to take decades 209 00:12:42,280 --> 00:12:44,360 Speaker 1: to do what we want to do. Nobody is going 210 00:12:44,400 --> 00:12:48,800 Speaker 1: to touch the sacred goals of reduction of whatever it 211 00:12:48,920 --> 00:12:52,160 Speaker 1: is we want to reduce, but we will be meandering 212 00:12:52,280 --> 00:12:55,719 Speaker 1: towards that goal, will be trying to reconcile those subjectives 213 00:12:55,760 --> 00:12:59,160 Speaker 1: with the realities on the ground that we're facing. And 214 00:12:59,200 --> 00:13:01,000 Speaker 1: so number one is going to take a long time. 215 00:13:01,080 --> 00:13:03,600 Speaker 1: It's going to be a lot of meandering. Number two, 216 00:13:03,880 --> 00:13:06,120 Speaker 1: we're going to cut costs, not just put on new 217 00:13:06,160 --> 00:13:08,960 Speaker 1: costs the way a lot of people are expecting. And 218 00:13:09,040 --> 00:13:12,400 Speaker 1: the third area is that technology is reducing the cost 219 00:13:12,520 --> 00:13:15,520 Speaker 1: of new technology as you apply it. So even if 220 00:13:15,559 --> 00:13:18,960 Speaker 1: I look at E my argument basically it might not 221 00:13:19,160 --> 00:13:22,240 Speaker 1: be as inflationary as what people expect. Now, there will 222 00:13:22,280 --> 00:13:26,600 Speaker 1: be pockets of commodities that will be inflationary. So for example, oil, 223 00:13:26,679 --> 00:13:29,160 Speaker 1: we've got plenty of world, we just don't deliver it appropriately. 224 00:13:29,360 --> 00:13:31,160 Speaker 1: But we've got plenty of world we call we've got 225 00:13:31,240 --> 00:13:34,040 Speaker 1: plenty of coal, which is again not using it the 226 00:13:34,080 --> 00:13:36,320 Speaker 1: way we could have used it. But there are some 227 00:13:36,360 --> 00:13:41,680 Speaker 1: commodities in the real shortage copper, nickel, cobbalt, lithium, rare earth, 228 00:13:42,040 --> 00:13:45,760 Speaker 1: so there will be some increases and substantial increases in 229 00:13:45,800 --> 00:13:48,640 Speaker 1: the value of that. But overall, as I said, I'm 230 00:13:48,679 --> 00:13:52,720 Speaker 1: not totally convinced that E. S G actually will be inflationary. 231 00:13:52,920 --> 00:13:56,520 Speaker 1: And the third area is geopolitics. As you know my view, 232 00:13:56,840 --> 00:13:59,079 Speaker 1: and that's why part of my portfolio is what I 233 00:13:59,160 --> 00:14:01,800 Speaker 1: called bullets and prey. Sasons for the last ten years 234 00:14:02,000 --> 00:14:05,120 Speaker 1: is that I believed in the geopolitical and social dislocation 235 00:14:05,200 --> 00:14:07,920 Speaker 1: for a decade now, and I can believe that the 236 00:14:07,960 --> 00:14:10,280 Speaker 1: next ten years could be even worse than a ten 237 00:14:10,360 --> 00:14:14,600 Speaker 1: years we've experienced so far. But geopolitics is a process, 238 00:14:14,760 --> 00:14:18,120 Speaker 1: it's not an event. In other words, I usually say 239 00:14:18,120 --> 00:14:20,320 Speaker 1: it took Hitler fifteen years to come to power, so 240 00:14:20,640 --> 00:14:24,640 Speaker 1: it doesn't happen overnight. And so the critical area to 241 00:14:24,720 --> 00:14:28,440 Speaker 1: me is judging the periods where geo political pressures might 242 00:14:28,480 --> 00:14:33,240 Speaker 1: be less acute and identifying periods where your political pressures 243 00:14:33,240 --> 00:14:36,480 Speaker 1: will be more acute, recognizing that over ten fifteen years 244 00:14:36,520 --> 00:14:39,480 Speaker 1: period it's going to be worse, but there will be 245 00:14:39,560 --> 00:14:43,320 Speaker 1: windows of two or three years when those pressures actually 246 00:14:43,320 --> 00:14:47,120 Speaker 1: will be less prevalent. And I think twenty twenty three 247 00:14:47,280 --> 00:14:51,240 Speaker 1: and twenty twenty four will be a period of lower pressures, 248 00:14:51,280 --> 00:14:53,840 Speaker 1: not higher pressures. There are so many different threads there. 249 00:14:53,880 --> 00:14:56,640 Speaker 1: That was such a fascinating answer. I want to talk 250 00:14:56,640 --> 00:14:59,480 Speaker 1: more about geopolitics, but before I want to actually go 251 00:14:59,520 --> 00:15:02,120 Speaker 1: back to what you're are saying about the reindustrialization of 252 00:15:02,200 --> 00:15:05,880 Speaker 1: the U. S economy, because I think that's really fascinating, particularly, 253 00:15:06,280 --> 00:15:08,560 Speaker 1: you know, thinking about the impact of some of the 254 00:15:08,560 --> 00:15:11,640 Speaker 1: big legislation that was recently passed in the United States, 255 00:15:12,000 --> 00:15:15,720 Speaker 1: the Chips Act, which attempts to onshore recreate a domestic 256 00:15:15,960 --> 00:15:19,240 Speaker 1: semiconductor capacity, and of course the Inflation and Reduction Act, 257 00:15:19,520 --> 00:15:23,880 Speaker 1: which has incentives for domestic battery manufacturing other things like that. 258 00:15:24,120 --> 00:15:26,040 Speaker 1: Can you talk a little bit more about what this 259 00:15:26,160 --> 00:15:29,560 Speaker 1: new vision of a sort of re industrialized United States 260 00:15:29,560 --> 00:15:33,440 Speaker 1: economy looks like and how you see the pretty big, 261 00:15:33,480 --> 00:15:37,680 Speaker 1: substantial sort of industrial policy spending plans sort of moving 262 00:15:37,680 --> 00:15:40,520 Speaker 1: the dial. I usually like to compare us to China, 263 00:15:41,120 --> 00:15:44,040 Speaker 1: and I basically say sink of China as the equivalent 264 00:15:44,080 --> 00:15:49,040 Speaker 1: of the United States of nineteen seventies. China today responsible 265 00:15:49,080 --> 00:15:54,240 Speaker 1: for about global manufacturing. China today is very heavy in 266 00:15:54,360 --> 00:15:59,360 Speaker 1: fixed assets, very heavy in manufacturing, very low on cash flow, 267 00:16:00,000 --> 00:16:03,800 Speaker 1: relatively low and intellectual inputs. This is exactly what United 268 00:16:03,840 --> 00:16:07,480 Speaker 1: States look like in nineteen seventies. So China is in 269 00:16:07,560 --> 00:16:13,480 Speaker 1: the very earlier stages of conventional d industrialization, whereas US 270 00:16:13,640 --> 00:16:15,720 Speaker 1: on the opposite side. And that is why people in 271 00:16:15,760 --> 00:16:18,640 Speaker 1: Michigan and are higher voting the way they do. It's 272 00:16:18,640 --> 00:16:22,560 Speaker 1: already had the body blow of the industrialization and all 273 00:16:22,600 --> 00:16:26,160 Speaker 1: the social consequences, and now they're approaching it from a 274 00:16:26,160 --> 00:16:30,200 Speaker 1: different direction. How do we re industrialize in a different form. 275 00:16:30,480 --> 00:16:33,720 Speaker 1: And by the way US re and re industrialization started 276 00:16:33,760 --> 00:16:37,360 Speaker 1: a decade ago, this is pre dates Biden, It predates 277 00:16:37,400 --> 00:16:40,080 Speaker 1: any of the plans, because there are obvious ways of 278 00:16:40,200 --> 00:16:43,960 Speaker 1: on shoring now at a very different cost structure and 279 00:16:44,000 --> 00:16:47,240 Speaker 1: a very different positioning. That's why for a decade now, 280 00:16:47,280 --> 00:16:50,760 Speaker 1: manufacturing output in the US was broadly matching the global 281 00:16:50,800 --> 00:16:54,760 Speaker 1: manufacturing output, and US market share can no longer decline. 282 00:16:55,000 --> 00:16:57,440 Speaker 1: So the interesting thing to me is that if I 283 00:16:57,480 --> 00:17:00,120 Speaker 1: think of the US, twelve thirteen million people are so 284 00:17:00,320 --> 00:17:06,200 Speaker 1: in manufacturing, they are generating manufacturing out but half of China's. Now, 285 00:17:06,240 --> 00:17:09,000 Speaker 1: if you think of China, nobody really knows the numbers 286 00:17:09,040 --> 00:17:13,399 Speaker 1: in the sense that we only measure urban employment, but 287 00:17:13,440 --> 00:17:16,440 Speaker 1: there's also a lot of rural employment which actually directly 288 00:17:16,520 --> 00:17:20,560 Speaker 1: or indirectly feeds into manufacturing. So there's all sorts of estimates, 289 00:17:20,640 --> 00:17:23,520 Speaker 1: but the numbers are anywhere from eighty two hundred and 290 00:17:23,600 --> 00:17:27,960 Speaker 1: fifty million people involved directly or indirectly in manufacturing. So 291 00:17:28,040 --> 00:17:30,080 Speaker 1: think of it this way, twelve million in the US 292 00:17:30,160 --> 00:17:36,000 Speaker 1: generating half the output of what million China labors and 293 00:17:36,000 --> 00:17:39,760 Speaker 1: and workers are manufacturing. That tells you how much more 294 00:17:39,760 --> 00:17:43,120 Speaker 1: productive it is and what sort of malowa unit labor 295 00:17:43,160 --> 00:17:46,240 Speaker 1: costs you're gradually getting in the US. So the way 296 00:17:46,240 --> 00:17:48,800 Speaker 1: I look at chip ACT and everything else is it. 297 00:17:49,000 --> 00:17:55,520 Speaker 1: US finally recognized that instead of just staying ahead of China, 298 00:17:55,720 --> 00:17:59,119 Speaker 1: they do need to slow down China. In a sense, 299 00:17:59,160 --> 00:18:01,879 Speaker 1: they do need you put China at least couple of 300 00:18:01,920 --> 00:18:05,600 Speaker 1: generations behind. And the problem is, in my view, there 301 00:18:05,680 --> 00:18:08,880 Speaker 1: is not much China can do about it, because at 302 00:18:08,880 --> 00:18:11,000 Speaker 1: the end of the day, it's not about billions of 303 00:18:11,040 --> 00:18:15,639 Speaker 1: dollars you want to spend. It's about science. And the 304 00:18:15,760 --> 00:18:20,200 Speaker 1: reason Trump administration first stuff and then Biden administration were 305 00:18:20,280 --> 00:18:24,760 Speaker 1: so successful at kneecapping the high tech industries in China 306 00:18:25,200 --> 00:18:30,400 Speaker 1: is because China completely depends on the Western intellectual contribution. 307 00:18:30,760 --> 00:18:33,879 Speaker 1: If you cut it off, then the ability of China 308 00:18:34,040 --> 00:18:37,920 Speaker 1: to maintain its position and improve its position is very 309 00:18:37,960 --> 00:18:40,800 Speaker 1: significantly retarded. So the way I look whether you look 310 00:18:40,880 --> 00:18:44,720 Speaker 1: at batteries where they look at rare ars, and materials 311 00:18:44,720 --> 00:18:47,159 Speaker 1: where they look at by attack, where they look at chips, 312 00:18:47,520 --> 00:18:50,080 Speaker 1: the idea is to try to put you as even 313 00:18:50,119 --> 00:18:55,719 Speaker 1: further ahead and strategically, to me, that is the right approach. Ultimately, 314 00:18:55,920 --> 00:18:59,800 Speaker 1: ultimately nobody can hold anybody back or any length of time. 315 00:19:00,200 --> 00:19:05,280 Speaker 1: But given the predominance of the US in intellectual sphere, 316 00:19:05,320 --> 00:19:09,159 Speaker 1: given that almost everybody realies in some form on the 317 00:19:09,200 --> 00:19:14,400 Speaker 1: intellectual contribution of the United States, they can actually widen 318 00:19:14,640 --> 00:19:17,000 Speaker 1: the gap against China. So that's the way I look 319 00:19:17,040 --> 00:19:18,960 Speaker 1: at that. Not so much there is a plan for 320 00:19:19,040 --> 00:19:22,399 Speaker 1: re industrialization as such, that's been happening for a while, 321 00:19:22,760 --> 00:19:26,760 Speaker 1: but shift the United States even more towards the frontier. China, 322 00:19:26,800 --> 00:19:30,840 Speaker 1: on the other hand, is facing a period of conventional 323 00:19:30,960 --> 00:19:34,560 Speaker 1: de industrialization over the next decade or two, which they 324 00:19:34,600 --> 00:19:37,760 Speaker 1: need to they need to challenge how to do that. 325 00:19:37,800 --> 00:19:42,280 Speaker 1: They also face agricultural revolution. China had many revolutions, but 326 00:19:42,320 --> 00:19:45,439 Speaker 1: agriculture was not one of them. So China has a 327 00:19:45,600 --> 00:19:50,000 Speaker 1: much lower output in agriculture, even though they deploy two 328 00:19:50,840 --> 00:19:54,000 Speaker 1: million people in this area you asked as a fraction 329 00:19:54,040 --> 00:19:57,720 Speaker 1: of that, and a much larger agricultural output. So China 330 00:19:57,800 --> 00:20:02,320 Speaker 1: is facing conventional the industrial sization, it's facing agricultural revolution 331 00:20:02,480 --> 00:20:05,840 Speaker 1: or improvements and yields in agriculture that they need to do, 332 00:20:06,320 --> 00:20:10,000 Speaker 1: and many other aspects compared to US. Was just focusing 333 00:20:10,720 --> 00:20:14,760 Speaker 1: on reindustrializing in a different form. Just on the topic 334 00:20:14,800 --> 00:20:16,879 Speaker 1: of China. You know, we mentioned in the intro that 335 00:20:16,920 --> 00:20:20,479 Speaker 1: the reopening has become a big theme in markets. The 336 00:20:20,560 --> 00:20:24,800 Speaker 1: prospect of China really trying to restimulate economic growth, and 337 00:20:24,840 --> 00:20:27,040 Speaker 1: it does seem like to some extent they are opening 338 00:20:27,080 --> 00:20:30,439 Speaker 1: these bigots of credit once again. They're rolling back some 339 00:20:30,520 --> 00:20:34,080 Speaker 1: of the previous policy crackdowns on sectors like real estate, 340 00:20:34,359 --> 00:20:38,320 Speaker 1: some aspects of consumer tech. Two questions here. One is 341 00:20:38,359 --> 00:20:42,160 Speaker 1: the China reopening going to export inflation to the rest 342 00:20:42,240 --> 00:20:45,280 Speaker 1: of the world because it stimulates higher demand or is 343 00:20:45,320 --> 00:20:49,240 Speaker 1: it going to export deflation because industrial capacity is getting 344 00:20:49,280 --> 00:20:52,479 Speaker 1: boosted at the same time. And then secondly, is it 345 00:20:52,520 --> 00:20:56,960 Speaker 1: possible for China to return to the period of high growth, 346 00:20:57,040 --> 00:21:00,320 Speaker 1: you know, above five percent? And you know Joe mentioned 347 00:21:00,359 --> 00:21:02,680 Speaker 1: that we're recording this on January eighteenth. I think we 348 00:21:02,760 --> 00:21:05,400 Speaker 1: had China's GDP figures just a day or two ago 349 00:21:05,520 --> 00:21:09,680 Speaker 1: coming in at sub three something like that. Yeah, Well, 350 00:21:09,920 --> 00:21:13,399 Speaker 1: answering sort of the second question. First, if you think 351 00:21:13,640 --> 00:21:16,440 Speaker 1: of beyond the recovery from COVID so, in other words, 352 00:21:16,440 --> 00:21:19,680 Speaker 1: beyond second half of twenty three and the first half 353 00:21:19,680 --> 00:21:24,160 Speaker 1: of twenty four, if we start looking into twenty and beyond, 354 00:21:24,680 --> 00:21:28,199 Speaker 1: I don't believe China can return back to anything like 355 00:21:28,320 --> 00:21:31,280 Speaker 1: five six percent GDP growth rates. And the reason, but 356 00:21:31,359 --> 00:21:35,320 Speaker 1: it is simple contribution of labor is now zero. In fact, 357 00:21:35,400 --> 00:21:39,240 Speaker 1: even if you include quality adjustments. In other words, labor 358 00:21:39,280 --> 00:21:42,800 Speaker 1: force becomes more educated over time. Even if you include that, 359 00:21:43,080 --> 00:21:47,280 Speaker 1: there is virtually no labor contribution. Secondly, capital contribution has 360 00:21:47,320 --> 00:21:49,280 Speaker 1: been very high. Look at the last year, it was 361 00:21:49,320 --> 00:21:53,840 Speaker 1: all investment that draw the China's China's performance. So the 362 00:21:53,880 --> 00:21:58,720 Speaker 1: result is efficiency of capital utilization is declining, Incremental capital 363 00:21:58,720 --> 00:22:01,400 Speaker 1: output ratious and eight ten times. So in other ways, 364 00:22:01,400 --> 00:22:04,240 Speaker 1: you need eight ten dollars of investment for every dollar 365 00:22:04,320 --> 00:22:08,600 Speaker 1: of GDP that you generate. That explains why China it 366 00:22:08,840 --> 00:22:15,040 Speaker 1: is reluctant to stimulate conventionally, it's reluctant to unleash infrastructure 367 00:22:15,040 --> 00:22:17,359 Speaker 1: and real estate the same way as they did on 368 00:22:17,400 --> 00:22:20,440 Speaker 1: the previous three occasions over the last ten years, because 369 00:22:20,440 --> 00:22:24,159 Speaker 1: they don't want efficiency of capital utilization continue to declining 370 00:22:24,400 --> 00:22:27,080 Speaker 1: or the opposite side of a debt increasing. That's why 371 00:22:27,200 --> 00:22:30,160 Speaker 1: China is caring sixty trillion dollars of debt right now. 372 00:22:30,720 --> 00:22:33,080 Speaker 1: And that leaves you only was one area of growth, 373 00:22:33,720 --> 00:22:36,680 Speaker 1: and that's multi factor productivity. So if you don't contribute labor, 374 00:22:36,720 --> 00:22:40,800 Speaker 1: if you constrain capital, you only have multi factor productivity. Now, 375 00:22:40,800 --> 00:22:43,600 Speaker 1: the problem is multi factor. Productivity in China has been 376 00:22:43,640 --> 00:22:47,760 Speaker 1: declining consistently for the last ten years, even on official numbers. 377 00:22:47,760 --> 00:22:51,679 Speaker 1: On unofficial numbers, it actually even bordering negative numbers. In 378 00:22:51,680 --> 00:22:55,200 Speaker 1: other words, productivity detracts from GDP growth rates. So how 379 00:22:55,200 --> 00:22:58,040 Speaker 1: do you restart productivity? Well, to me, there is only 380 00:22:58,040 --> 00:23:00,399 Speaker 1: two ways. Whither you go back to the polls is 381 00:23:00,560 --> 00:23:05,320 Speaker 1: from nine eighties until GFC, and that is shrinking of 382 00:23:05,400 --> 00:23:08,320 Speaker 1: the state, shrinking of the role of state on enterprises, 383 00:23:08,720 --> 00:23:12,560 Speaker 1: opening up private sector. You either do that chances of 384 00:23:12,640 --> 00:23:16,560 Speaker 1: reversal of policy that they had since two thousand eight 385 00:23:16,760 --> 00:23:19,240 Speaker 1: for the last fifteen years, and that is the opposite 386 00:23:19,240 --> 00:23:22,080 Speaker 1: of it, growing state on enterprises, growing the role of 387 00:23:22,080 --> 00:23:26,080 Speaker 1: the state. Chances of that reversal occurring is near zero. 388 00:23:26,480 --> 00:23:28,600 Speaker 1: So what else do you have, Well, the only other 389 00:23:28,640 --> 00:23:33,760 Speaker 1: way to grow productivity is through technology. This is your robotics, automation, 390 00:23:33,920 --> 00:23:37,240 Speaker 1: fusion of infotech, bi attack, this is the alternative energy 391 00:23:37,359 --> 00:23:40,760 Speaker 1: transport platforms. But this takes a very long time to 392 00:23:40,880 --> 00:23:43,920 Speaker 1: come to pass. It's a right approach, it's totally right approach, 393 00:23:43,960 --> 00:23:46,600 Speaker 1: but it takes a very very long time. So the 394 00:23:46,640 --> 00:23:49,280 Speaker 1: only other way to try to grow productivity is to 395 00:23:49,440 --> 00:23:51,720 Speaker 1: mix and match all of that as much as you can, 396 00:23:52,160 --> 00:23:55,880 Speaker 1: and embark on domestic services agriculture. We just talked about 397 00:23:55,880 --> 00:24:00,560 Speaker 1: agricultural revolution improving domestic productivity now, so to me, when 398 00:24:00,560 --> 00:24:03,840 Speaker 1: I combine those numbers, I can't really see how they're 399 00:24:03,880 --> 00:24:07,080 Speaker 1: going to come back to five six groce rates. And 400 00:24:07,119 --> 00:24:10,480 Speaker 1: if they do, they're either committing even more capital, which 401 00:24:10,480 --> 00:24:14,639 Speaker 1: means efficiency capital utilization declines, or somehow they find a 402 00:24:14,680 --> 00:24:17,880 Speaker 1: way of growing productivity at a faster than I expect 403 00:24:17,880 --> 00:24:20,359 Speaker 1: to at our pace. So that's that second question. The 404 00:24:20,400 --> 00:24:23,879 Speaker 1: first question is harder because if you say, of the 405 00:24:23,920 --> 00:24:27,240 Speaker 1: first question, the opening up was so chaotic and so 406 00:24:27,520 --> 00:24:31,360 Speaker 1: rapid that it creates most positives and negatives. First of all, 407 00:24:31,480 --> 00:24:34,399 Speaker 1: you have a spread of COVID, you have meltdown of 408 00:24:34,480 --> 00:24:37,640 Speaker 1: some of the production and capacity. But on the other hand, 409 00:24:37,680 --> 00:24:40,840 Speaker 1: you have a promise of much more rapid recovery. Because 410 00:24:40,840 --> 00:24:43,480 Speaker 1: there has been massive accumulation of cash, just like in 411 00:24:43,520 --> 00:24:46,480 Speaker 1: the United States, just like in the UK, that cash 412 00:24:46,520 --> 00:24:49,119 Speaker 1: will be drawn down as we go into the second 413 00:24:49,160 --> 00:24:52,119 Speaker 1: half of twenty three and the first half of twenty four, 414 00:24:52,280 --> 00:24:56,800 Speaker 1: so there will potentially massive increase in consumption occurring at 415 00:24:56,800 --> 00:24:59,359 Speaker 1: the same time China is trying to control capital. In 416 00:24:59,359 --> 00:25:01,720 Speaker 1: other words, you want to grow infrastructure but not too much. 417 00:25:01,760 --> 00:25:05,600 Speaker 1: You try to allow real estate to stabilize, but you 418 00:25:05,640 --> 00:25:08,719 Speaker 1: don't really want to have a major real estate cycle. 419 00:25:09,040 --> 00:25:14,400 Speaker 1: So depending how China balances investment versus consumption, and depending 420 00:25:14,440 --> 00:25:17,960 Speaker 1: how much it recovers, it could be the case that 421 00:25:18,119 --> 00:25:21,160 Speaker 1: suddenly China might demand another one million or two million 422 00:25:21,200 --> 00:25:24,639 Speaker 1: barrels of oil. For example, our in house forecast right 423 00:25:24,680 --> 00:25:27,960 Speaker 1: now is six hundred thousand barrels, which means it's more 424 00:25:28,040 --> 00:25:32,679 Speaker 1: or less offsets weakness elsewhere. At the same time, more capacity, 425 00:25:32,720 --> 00:25:35,720 Speaker 1: as you correctly says, comes in and therefore more deflation 426 00:25:36,320 --> 00:25:39,400 Speaker 1: is coming into the system. So my view right now 427 00:25:39,680 --> 00:25:42,240 Speaker 1: is that the positives and negatives in the short term 428 00:25:42,280 --> 00:25:45,280 Speaker 1: balance and therefore China is not going to be an 429 00:25:45,280 --> 00:25:49,280 Speaker 1: inflationary agent. But longer term, as I said earlier, I 430 00:25:49,560 --> 00:25:52,720 Speaker 1: really can't see how they consistently can return to five six. 431 00:25:53,720 --> 00:25:55,800 Speaker 1: It is interesting if you look at the price action 432 00:25:55,840 --> 00:25:58,240 Speaker 1: in the market. We've seen a big surge in copper, 433 00:25:58,440 --> 00:26:02,440 Speaker 1: which you would associate with infrastructure investment, and not that 434 00:26:02,560 --> 00:26:05,159 Speaker 1: big an increase in oil prices, which is what you 435 00:26:05,160 --> 00:26:09,280 Speaker 1: would associate with greater demand. Maybe maybe in the second 436 00:26:09,280 --> 00:26:12,720 Speaker 1: half speaking of China, and I wanted to go back 437 00:26:12,760 --> 00:26:16,600 Speaker 1: to your point about geopolitics and these are a long 438 00:26:16,720 --> 00:26:19,000 Speaker 1: term process, but you think maybe the next two years 439 00:26:19,080 --> 00:26:21,720 Speaker 1: might be a little more mild on the headlines. I 440 00:26:21,760 --> 00:26:25,399 Speaker 1: feel like that's always a risky car. But what what 441 00:26:25,440 --> 00:26:27,040 Speaker 1: makes you think that, How do you even begin to 442 00:26:27,080 --> 00:26:29,080 Speaker 1: analyze a question, Oh, is this going to be like 443 00:26:29,119 --> 00:26:32,200 Speaker 1: a sort of hot year, volatile year versus a less 444 00:26:32,240 --> 00:26:35,439 Speaker 1: violatile I wanted a couple of ways to look at it. 445 00:26:35,480 --> 00:26:38,320 Speaker 1: In my view. First of all, nobody pushes the envelope 446 00:26:38,359 --> 00:26:41,560 Speaker 1: all the time, because if you push people for too long, 447 00:26:41,640 --> 00:26:47,240 Speaker 1: people become tired, they become irritated, whether it is domestic policies, 448 00:26:47,280 --> 00:26:51,280 Speaker 1: whether it's international policies. And that's why even during wars, 449 00:26:51,400 --> 00:26:54,879 Speaker 1: you don't have consistent wars. You have flare ups, and 450 00:26:54,920 --> 00:26:57,840 Speaker 1: then you have relative quiet. In other words, to put 451 00:26:57,840 --> 00:26:59,720 Speaker 1: it the other way, we don't kill each other every day. 452 00:27:00,200 --> 00:27:02,200 Speaker 1: And so the key from an investment point of view, 453 00:27:02,359 --> 00:27:06,480 Speaker 1: in my from my perspective is to say, first of all, Russia, Ukraine, 454 00:27:06,560 --> 00:27:11,199 Speaker 1: have you seen already the peak of economic commodity and 455 00:27:11,240 --> 00:27:15,600 Speaker 1: political disruption out of Russia Ukraine. The answer to me categorical, Yes, 456 00:27:16,480 --> 00:27:21,040 Speaker 1: we can debate in three. Inevitably, Ukraine's will attack, Russians 457 00:27:21,040 --> 00:27:24,159 Speaker 1: will counter attack. Russians will attack, Ukrainians will counter attack. 458 00:27:24,480 --> 00:27:27,520 Speaker 1: But it appears to me more likely that neither side 459 00:27:27,680 --> 00:27:30,840 Speaker 1: will be able to overwhelm the other, which implies that 460 00:27:31,000 --> 00:27:34,520 Speaker 1: sometimes to twenty three or into early twenty four, there 461 00:27:34,560 --> 00:27:37,760 Speaker 1: has to be a process whereby they will draw the 462 00:27:37,800 --> 00:27:41,080 Speaker 1: dotted line on the map. Nobody will agree on the conclusion, 463 00:27:41,520 --> 00:27:44,919 Speaker 1: because what Russia offering Ukraine will never Ukraine will never accept. 464 00:27:45,000 --> 00:27:47,960 Speaker 1: What Ukraine is offering to Russia, Russia will never accept. 465 00:27:48,320 --> 00:27:51,240 Speaker 1: But drawing a dotted line like North sas Vietnam and 466 00:27:51,320 --> 00:27:57,680 Speaker 1: North sas Korea, himalayas Kashmir, that is a very likely proposition. 467 00:27:58,000 --> 00:28:01,719 Speaker 1: Then you go onto other areas in a okay, China 468 00:28:01,760 --> 00:28:04,560 Speaker 1: was over the last four or five years or almost 469 00:28:04,600 --> 00:28:08,160 Speaker 1: ten years, on a civilizational mission. In other words, how 470 00:28:08,160 --> 00:28:12,240 Speaker 1: do you reshape society? How do you reshape politics? Higher 471 00:28:12,320 --> 00:28:16,520 Speaker 1: reshaped gear politics, whether it's a trading rules, internet rules, 472 00:28:16,760 --> 00:28:20,240 Speaker 1: information rules. I think over the next year or two 473 00:28:20,640 --> 00:28:23,679 Speaker 1: there is no doubt that China shifted much more to 474 00:28:23,760 --> 00:28:28,800 Speaker 1: prioritizing economic stability and growth rather than anything else, and 475 00:28:28,880 --> 00:28:32,400 Speaker 1: overcoming COVID. So I think it will be I think 476 00:28:32,480 --> 00:28:35,560 Speaker 1: China will be focusing on different things. Now. It doesn't 477 00:28:35,640 --> 00:28:38,480 Speaker 1: mean the China will not react to whatever happens in 478 00:28:38,520 --> 00:28:42,960 Speaker 1: Taiwan Straits. It would, but the degree to which China 479 00:28:43,000 --> 00:28:45,520 Speaker 1: will go out of the way in order to aggravate 480 00:28:45,680 --> 00:28:49,160 Speaker 1: the tension will be much more limited. And if you 481 00:28:49,200 --> 00:28:52,640 Speaker 1: look at the Middle East, for example, you could argue 482 00:28:52,720 --> 00:28:56,520 Speaker 1: that one of the underrated things clearly of Trump administration 483 00:28:56,600 --> 00:28:59,840 Speaker 1: was Abrahama courts, because they're basically what they've done, that 484 00:29:00,000 --> 00:29:01,680 Speaker 1: through the line who is the enemy and who is 485 00:29:01,720 --> 00:29:03,840 Speaker 1: a friend, And as soon as you draw the line, 486 00:29:04,040 --> 00:29:07,480 Speaker 1: it actually usually leads to a stell mate. In other words, 487 00:29:07,480 --> 00:29:11,200 Speaker 1: nobody reconciled with anybody, nobody trust anybody. But on the 488 00:29:11,240 --> 00:29:14,840 Speaker 1: other hand, you don't have a chaos that usually prevails 489 00:29:14,920 --> 00:29:16,840 Speaker 1: in the Middle East. So when I look at it, 490 00:29:17,000 --> 00:29:22,360 Speaker 1: the key areas where tektonic plates collide and where earthquakes 491 00:29:22,360 --> 00:29:25,680 Speaker 1: are likely to happen, which is Ukraine, Belarus, which is 492 00:29:25,800 --> 00:29:30,480 Speaker 1: Balkan's Middle East, the Himalayas, and Nata wants trades. I 493 00:29:30,520 --> 00:29:33,120 Speaker 1: actually think the next couple of years is not going 494 00:29:33,160 --> 00:29:36,240 Speaker 1: to be Now. Am I confident? Of course not nobody 495 00:29:36,280 --> 00:29:38,680 Speaker 1: can be. But I think it's a bit unlikely that 496 00:29:38,760 --> 00:29:41,840 Speaker 1: we're going to have a spike anything equivalent to what 497 00:29:41,920 --> 00:29:46,080 Speaker 1: we have experienced with Russia Ukraine. Speaking of tectonic plates 498 00:29:46,120 --> 00:29:49,200 Speaker 1: and the possibility of antagonistic battles, maybe we should talk 499 00:29:49,200 --> 00:29:52,640 Speaker 1: about central banks and markets because there does seem to 500 00:29:52,840 --> 00:29:56,040 Speaker 1: be an element of tension here where the FED is 501 00:29:56,080 --> 00:29:59,160 Speaker 1: talking about it wants to go hard on inflation. It 502 00:29:59,240 --> 00:30:02,880 Speaker 1: cares about financial conditions tightening, and yet we've seen risk 503 00:30:02,920 --> 00:30:08,800 Speaker 1: assets rallying recently, financial conditions loosening. Um. Meanwhile, we're again 504 00:30:08,840 --> 00:30:11,000 Speaker 1: we're recording this on January eighteenth. We just had the 505 00:30:11,000 --> 00:30:15,040 Speaker 1: Bank of Japan decision. A bond market in Japan certainly 506 00:30:15,080 --> 00:30:18,480 Speaker 1: seems to be pushing up against the central bank there. 507 00:30:19,160 --> 00:30:22,600 Speaker 1: How long can this tension go on for? Is there 508 00:30:22,640 --> 00:30:26,880 Speaker 1: going to be a time or an event that maybe 509 00:30:27,240 --> 00:30:31,720 Speaker 1: pushes markets and central banks into direct opposition. It all 510 00:30:31,760 --> 00:30:35,800 Speaker 1: comes down to inflation, coming back to the starting point, 511 00:30:36,120 --> 00:30:40,320 Speaker 1: what is inflation, how embedded it is, how much disinflation 512 00:30:40,440 --> 00:30:44,160 Speaker 1: is going to come through? Because central banks have to 513 00:30:44,200 --> 00:30:46,560 Speaker 1: be hawkish and the reason they have to be hawkish. 514 00:30:46,960 --> 00:30:49,960 Speaker 1: As you correctly said, the market is a forward looking machine, 515 00:30:50,520 --> 00:30:55,000 Speaker 1: and the market anticipating either or recession or greater disinflation 516 00:30:55,120 --> 00:30:59,800 Speaker 1: coming through. So if you are easing off on your policy, 517 00:31:00,400 --> 00:31:04,080 Speaker 1: what you find is that financial condition index will ease 518 00:31:04,520 --> 00:31:07,760 Speaker 1: very rapidly and before the time when you, as a 519 00:31:07,840 --> 00:31:11,000 Speaker 1: central bank are comfortable that you know in a position 520 00:31:11,040 --> 00:31:13,440 Speaker 1: where you want to be. Not to me, the markets 521 00:31:13,440 --> 00:31:16,600 Speaker 1: are absolutely correct. What you're going to get, You're going 522 00:31:16,600 --> 00:31:20,720 Speaker 1: to get longer term less gross, longer term less inflation, 523 00:31:21,120 --> 00:31:25,880 Speaker 1: circular stagnation, the old Larry Summer's words are well here. 524 00:31:26,120 --> 00:31:29,320 Speaker 1: He basically re enacted the old theory back from But 525 00:31:30,280 --> 00:31:33,600 Speaker 1: circular stagnation is back at the heart of the system 526 00:31:33,640 --> 00:31:36,120 Speaker 1: that we run, and so central banks need to get 527 00:31:36,120 --> 00:31:39,440 Speaker 1: around to that point. Now. My view, certainly for the 528 00:31:39,480 --> 00:31:43,479 Speaker 1: last twelve months, was that sometime in twenty three, also 529 00:31:43,560 --> 00:31:46,160 Speaker 1: I should say late twenty two, central banks will start 530 00:31:46,240 --> 00:31:49,360 Speaker 1: changing the rhetoric. Well, if you think of November December 531 00:31:49,400 --> 00:31:51,960 Speaker 1: twenty two, they already started doing it. They're already talking 532 00:31:51,960 --> 00:31:54,760 Speaker 1: of dual mandates. We don't just have inflation, we need 533 00:31:54,800 --> 00:31:58,000 Speaker 1: to balance inflation and grows if you're seeing AVCB, they're 534 00:31:58,040 --> 00:32:01,400 Speaker 1: still talking now more they're talking more about dual duality 535 00:32:01,800 --> 00:32:04,200 Speaker 1: or what they deal with. I think all of that 536 00:32:04,280 --> 00:32:06,960 Speaker 1: will become more pronounced as we go through the said 537 00:32:07,040 --> 00:32:10,920 Speaker 1: first and the second quarter of three, sometimes in twenty three. 538 00:32:11,000 --> 00:32:14,000 Speaker 1: I think we'll get on the same page. Now, I 539 00:32:14,480 --> 00:32:17,880 Speaker 1: to some extent depends on China, as we discussed earlier, 540 00:32:18,000 --> 00:32:21,000 Speaker 1: and how much it boosts the global economy and inflation. 541 00:32:21,480 --> 00:32:24,200 Speaker 1: But in my books, as Federal Reserve, who will start 542 00:32:24,200 --> 00:32:28,000 Speaker 1: cutting rates? QT will end sometimes to twenty three. I 543 00:32:28,080 --> 00:32:30,920 Speaker 1: always point up the middle of twenty three, but it 544 00:32:30,960 --> 00:32:33,920 Speaker 1: could be later, but QT will end as we go 545 00:32:34,000 --> 00:32:37,120 Speaker 1: into twenty twenty four. I think not only the rates 546 00:32:37,120 --> 00:32:39,440 Speaker 1: will be cut, but some version of keys also will 547 00:32:39,440 --> 00:32:42,760 Speaker 1: come back, and that will push you up in terms 548 00:32:42,840 --> 00:32:45,880 Speaker 1: of growth, up in terms of interest rates down. Now, 549 00:32:45,960 --> 00:32:48,400 Speaker 1: if you think of equities, what is equities? Equities is 550 00:32:48,440 --> 00:32:51,720 Speaker 1: earnings per share risk free rate and equity risk premiums 551 00:32:51,880 --> 00:32:55,080 Speaker 1: now earnings, but share will be more constrained because as 552 00:32:55,080 --> 00:32:57,800 Speaker 1: I said, we are in twenties three, we're probably going 553 00:32:57,840 --> 00:33:00,600 Speaker 1: to have two percent global GDP growth rates. Remember, even 554 00:33:00,600 --> 00:33:04,200 Speaker 1: the US equities as days have close EPs relationship to 555 00:33:04,200 --> 00:33:07,160 Speaker 1: global GDP than they do to US GDP, So you're 556 00:33:07,160 --> 00:33:10,360 Speaker 1: going to get more restricted EPs even in twenty four. 557 00:33:10,440 --> 00:33:12,680 Speaker 1: You're not going to return back to ten twelve percent 558 00:33:12,720 --> 00:33:16,400 Speaker 1: EPs growth rates, but there is no need for massive 559 00:33:16,480 --> 00:33:21,000 Speaker 1: cuts to negative ten NEGATIVEPS. So from an investor point 560 00:33:21,040 --> 00:33:24,120 Speaker 1: of view, you basically know, yes, you'ly scanning close to zero, 561 00:33:24,200 --> 00:33:26,400 Speaker 1: but you're not going to collapse in EPs. Not the 562 00:33:26,440 --> 00:33:28,560 Speaker 1: second part of each, which is risk free rate and 563 00:33:28,680 --> 00:33:31,880 Speaker 1: equity risk prem um. What we've just discussed this environment 564 00:33:31,880 --> 00:33:34,400 Speaker 1: where risk free rates will be lower, and at the 565 00:33:34,440 --> 00:33:37,320 Speaker 1: same time equity ris prem ums also could be lower 566 00:33:37,360 --> 00:33:41,280 Speaker 1: because we've avoided the worst outcomes. We've avoided bankruptcies, were 567 00:33:41,320 --> 00:33:45,320 Speaker 1: avoided the worst possible outcomes. So to me, it's almost 568 00:33:45,320 --> 00:33:48,440 Speaker 1: like a goldilock that is likely to occur. And that's 569 00:33:48,480 --> 00:33:51,720 Speaker 1: why in Avember last when when I previewed twenty three, 570 00:33:52,120 --> 00:33:54,760 Speaker 1: I basically argued that twenty three is likely to have 571 00:33:54,800 --> 00:33:59,680 Speaker 1: a much better risk reward balance than two, perhaps lower 572 00:33:59,800 --> 00:34:02,600 Speaker 1: or two. Then twenty two doesn't mean equities as an 573 00:34:02,600 --> 00:34:06,520 Speaker 1: asset class will appreciate significantly, but it doesn't mean that 574 00:34:06,600 --> 00:34:10,640 Speaker 1: you need to cut another out of the current equity value. 575 00:34:10,680 --> 00:34:31,920 Speaker 1: It's almost like mini gold Dellow emerging. Just on the 576 00:34:31,960 --> 00:34:35,520 Speaker 1: topic of financial conditions. I have a slightly weird question, 577 00:34:35,520 --> 00:34:37,240 Speaker 1: but I feel like you're a good person to ask 578 00:34:37,320 --> 00:34:42,600 Speaker 1: weird questions. If most of the inflation is about, you know, 579 00:34:43,080 --> 00:34:47,680 Speaker 1: we can call them transitory or transient or narrow disruptions, 580 00:34:48,440 --> 00:34:51,960 Speaker 1: then do financial conditions actually matter when it comes to 581 00:34:52,120 --> 00:34:56,560 Speaker 1: bringing down inflation. It's a good question because if you 582 00:34:56,640 --> 00:34:59,239 Speaker 1: think about the same applies to the yield curves and 583 00:34:59,360 --> 00:35:02,919 Speaker 1: extend to which the yield curves convey the right information 584 00:35:03,040 --> 00:35:05,879 Speaker 1: to you. When a lot of people and a lot 585 00:35:05,880 --> 00:35:09,000 Speaker 1: of businesses no longer depend on the banks and the 586 00:35:09,000 --> 00:35:11,560 Speaker 1: bank's lending, you have the bond markets, you have a 587 00:35:11,600 --> 00:35:13,719 Speaker 1: wholesale you have a shadow banking. Yet that there's so 588 00:35:13,719 --> 00:35:17,440 Speaker 1: many other things in there. For financial condition index is 589 00:35:17,480 --> 00:35:22,360 Speaker 1: basically amalgamation of various spreads. Which is a high yield market, 590 00:35:22,400 --> 00:35:24,840 Speaker 1: which is triple see debt, which is volatility of the 591 00:35:24,840 --> 00:35:27,600 Speaker 1: bond market, volatility of equity markets. So it's got a 592 00:35:27,640 --> 00:35:31,120 Speaker 1: variety of those elements in one number. As any given number, 593 00:35:31,160 --> 00:35:34,080 Speaker 1: it's not perfect because there's just too many elements together, 594 00:35:34,600 --> 00:35:37,560 Speaker 1: but directionally they are correct, so you find when you 595 00:35:37,640 --> 00:35:41,120 Speaker 1: do have an easy or financial condition index. On balance, 596 00:35:41,800 --> 00:35:45,480 Speaker 1: you would argue that it is easier to transact, It 597 00:35:45,640 --> 00:35:48,960 Speaker 1: is easier to do stuff than it was before, which 598 00:35:49,000 --> 00:35:53,440 Speaker 1: means it does support more economic activity. But this idea 599 00:35:53,719 --> 00:35:57,400 Speaker 1: that you as soon as you go into you know, 600 00:35:57,440 --> 00:36:00,080 Speaker 1: inverse yield curves for a period of nine months, you 601 00:36:00,120 --> 00:36:03,000 Speaker 1: always have recession. I think this is very much industrial 602 00:36:03,120 --> 00:36:06,800 Speaker 1: age idea, going back the fifties and sixties and seventies, 603 00:36:06,840 --> 00:36:10,319 Speaker 1: eighties and nineties. So I don't necessarily buy that that 604 00:36:10,640 --> 00:36:13,719 Speaker 1: is the and by the way, it can be reversed overnight, 605 00:36:14,320 --> 00:36:18,320 Speaker 1: because you remember, not only we have ample capital, because 606 00:36:18,320 --> 00:36:21,040 Speaker 1: we have more capital than we need, which is very 607 00:36:21,120 --> 00:36:24,200 Speaker 1: unusual in the human history. We always had shortage of capital, 608 00:36:24,520 --> 00:36:26,920 Speaker 1: but we have more capital than we need. But at 609 00:36:26,920 --> 00:36:30,879 Speaker 1: the same time, we did fully digitized, which means investors 610 00:36:30,920 --> 00:36:33,880 Speaker 1: can react in a split second. It means central banks 611 00:36:33,920 --> 00:36:37,600 Speaker 1: can react in a split second. That also means communication 612 00:36:37,680 --> 00:36:41,440 Speaker 1: policy is a single most important tool that central banks have. 613 00:36:42,040 --> 00:36:44,880 Speaker 1: And so and so to me, the inversion of the 614 00:36:44,920 --> 00:36:48,200 Speaker 1: ILK curve could disappear in the afternoon. It really could 615 00:36:48,239 --> 00:36:50,560 Speaker 1: take just a couple of hours, and there is no 616 00:36:50,680 --> 00:36:53,560 Speaker 1: inversion occurring. I want to talk about that further. I mean, 617 00:36:53,560 --> 00:36:55,960 Speaker 1: you anticipate in my next question, and I mentioned in 618 00:36:56,040 --> 00:36:59,040 Speaker 1: the very introduction, you know, the short end of the 619 00:36:59,080 --> 00:37:02,560 Speaker 1: curve is interesting because it implies, right that cuts are 620 00:37:02,560 --> 00:37:05,919 Speaker 1: coming soon. If you take it literally, the three month 621 00:37:06,000 --> 00:37:08,719 Speaker 1: two year portion of the U S y old curve 622 00:37:09,040 --> 00:37:11,799 Speaker 1: negative fifty eight, it's like basically the lowest since the 623 00:37:12,000 --> 00:37:14,839 Speaker 1: Great Financial Crisis? Is the Fed going to be cutting soon? 624 00:37:15,000 --> 00:37:17,719 Speaker 1: What would it take? Would it take recession, would it 625 00:37:17,760 --> 00:37:20,600 Speaker 1: merely take disinflation? Like what would it take in your 626 00:37:20,719 --> 00:37:23,760 Speaker 1: view for the Fed to go into rate cut mode? Well, 627 00:37:24,400 --> 00:37:27,279 Speaker 1: and the other question is doesn't really matter that the 628 00:37:27,360 --> 00:37:30,440 Speaker 1: l you've just mentioned and if that number persist for 629 00:37:30,440 --> 00:37:32,960 Speaker 1: a period of time, does it really matter to what 630 00:37:33,080 --> 00:37:36,200 Speaker 1: you do and what the economy does? Now? My view, 631 00:37:36,320 --> 00:37:39,680 Speaker 1: my view is that what we're going to see, it's 632 00:37:39,680 --> 00:37:42,120 Speaker 1: sort of describe it as a pendulum. If you remember 633 00:37:42,200 --> 00:37:45,600 Speaker 1: last time we talked that what we have is a 634 00:37:45,719 --> 00:37:50,359 Speaker 1: rapid pendulum shifts from one direction to another. And that's 635 00:37:50,360 --> 00:37:52,759 Speaker 1: why my view was that inflation is going to fall 636 00:37:52,920 --> 00:37:56,640 Speaker 1: much faster then what Federal Reserve or central banks believe, 637 00:37:57,120 --> 00:38:00,359 Speaker 1: and in fact, the spectrum disinflation could become much more 638 00:38:00,400 --> 00:38:02,680 Speaker 1: pronounced as we go towards the end of twenties three 639 00:38:02,680 --> 00:38:05,080 Speaker 1: into twenty four. As I said earlier on, China could 640 00:38:05,080 --> 00:38:08,120 Speaker 1: make a very significant difference to what will happen, But 641 00:38:08,239 --> 00:38:11,320 Speaker 1: that still remains my my base case. So it comes 642 00:38:11,360 --> 00:38:15,920 Speaker 1: back to inflation, disinflation and growth, extent to which Federal 643 00:38:15,920 --> 00:38:20,200 Speaker 1: Reserve and other central banks feel comfortable that inflation is 644 00:38:20,280 --> 00:38:23,920 Speaker 1: not a persistent problem, that it's not embedding itself, that 645 00:38:24,000 --> 00:38:27,880 Speaker 1: a lot of elements were truly transient rather than necessarily 646 00:38:27,920 --> 00:38:31,799 Speaker 1: embedding themselves into wages market, labor market, or protocol or 647 00:38:31,800 --> 00:38:34,920 Speaker 1: goods markets, in extent to which the second part of 648 00:38:34,960 --> 00:38:38,759 Speaker 1: the mandate, which is to do with maintaining certain level 649 00:38:38,800 --> 00:38:43,000 Speaker 1: of economic growth rates, becomes much more important. So if inflation, 650 00:38:43,800 --> 00:38:47,160 Speaker 1: if we if the pendulum theory or the pendulum framework 651 00:38:47,239 --> 00:38:50,400 Speaker 1: is correct, and if inflation comes down much more rapidly 652 00:38:50,600 --> 00:38:54,080 Speaker 1: than they expect, it's plausible that we could get cuts 653 00:38:54,120 --> 00:38:57,399 Speaker 1: even in the absence of recession, just because they want 654 00:38:57,440 --> 00:39:01,480 Speaker 1: to maintain their unemployment exactly okay, exactly right, And that's 655 00:39:01,480 --> 00:39:03,600 Speaker 1: where the balancing. So what you find you have more 656 00:39:03,600 --> 00:39:06,719 Speaker 1: and more governors because the way fair federal reserve communicates. 657 00:39:06,880 --> 00:39:09,920 Speaker 1: It basically gets those governors to talk publicly, and so 658 00:39:10,000 --> 00:39:12,600 Speaker 1: more and more those governors will be coming out and saying, well, 659 00:39:12,640 --> 00:39:15,560 Speaker 1: I think we've done a heavy lifting. They'll be saying 660 00:39:15,600 --> 00:39:19,080 Speaker 1: things like, you know, monetary policies work with a variable 661 00:39:19,160 --> 00:39:23,239 Speaker 1: and long lacks. They will start talking about, we need 662 00:39:23,320 --> 00:39:27,319 Speaker 1: to think about maintaining our employment and growth at an 663 00:39:27,320 --> 00:39:30,000 Speaker 1: acceptable level. So you get a lot more of that 664 00:39:30,160 --> 00:39:33,680 Speaker 1: communication coming out out of all of the center, and 665 00:39:33,719 --> 00:39:36,480 Speaker 1: as soon as federal reserve changes, other central banks will 666 00:39:36,480 --> 00:39:39,760 Speaker 1: follow suit. Now there are a couple of unusual players. 667 00:39:39,880 --> 00:39:44,239 Speaker 1: One of them is clearly China, which because of the 668 00:39:44,320 --> 00:39:48,120 Speaker 1: close nature of the economy and because it's state capitalism economy, 669 00:39:48,200 --> 00:39:51,839 Speaker 1: it doesn't really conform to those cycles that we've just discussed. 670 00:39:52,239 --> 00:39:55,480 Speaker 1: And the other one is is Japan and the extent 671 00:39:55,600 --> 00:39:58,880 Speaker 1: to which Japan is on a different tension compared to 672 00:39:58,960 --> 00:40:01,680 Speaker 1: everybody else. But if you think of a federal reserve, 673 00:40:01,719 --> 00:40:03,440 Speaker 1: if you think of ECP, if you sink a bank 674 00:40:03,520 --> 00:40:05,719 Speaker 1: up Canada, if you think of b o E, all 675 00:40:05,760 --> 00:40:08,600 Speaker 1: of them I think will be pretty much on the 676 00:40:08,680 --> 00:40:11,520 Speaker 1: same on the same page. And the only question is 677 00:40:11,560 --> 00:40:16,799 Speaker 1: and that's legitimate debate where the central banks will overtighten 678 00:40:17,560 --> 00:40:21,040 Speaker 1: h and whether in fact central banks will perpetuate policy 679 00:40:21,200 --> 00:40:25,920 Speaker 1: errors without reversing them. My view is no, even if 680 00:40:25,920 --> 00:40:28,840 Speaker 1: they overtighten, they can reverse it in split second. That 681 00:40:28,960 --> 00:40:32,120 Speaker 1: comes back to my argument that we have surplus of capital, 682 00:40:32,160 --> 00:40:37,920 Speaker 1: not shortage of capital. Remember u S liquidity system. If 683 00:40:37,920 --> 00:40:41,400 Speaker 1: you think of US liquidity system, UH banks currently maintain 684 00:40:41,440 --> 00:40:45,160 Speaker 1: two point two trillion dollars in reverse reapers. Remember reverse 685 00:40:45,200 --> 00:40:48,040 Speaker 1: repers is just net balance of the system. So there 686 00:40:48,080 --> 00:40:51,320 Speaker 1: is a surplus of two point two trillion that banks 687 00:40:51,360 --> 00:40:53,759 Speaker 1: cannot deploy, or at least they don't see way of 688 00:40:53,840 --> 00:40:57,600 Speaker 1: deploying that capital other than depositing it with with Federal 689 00:40:57,640 --> 00:41:01,359 Speaker 1: Reserve on an overnight basis. So so, so the way 690 00:41:01,440 --> 00:41:03,520 Speaker 1: the way I look at it is that we have 691 00:41:03,600 --> 00:41:07,920 Speaker 1: plenty of capital, we are fully digitized, we're dependent entirely 692 00:41:08,000 --> 00:41:11,680 Speaker 1: on the communications strategy. We can reverse a bear market 693 00:41:11,680 --> 00:41:15,400 Speaker 1: in the ball market in two hours, maybe minutes, maybe minutes. 694 00:41:15,640 --> 00:41:18,640 Speaker 1: And and Joe's you correctly said, just remember two thousand 695 00:41:18,680 --> 00:41:22,759 Speaker 1: and eighteen. Remember two thousand nineteen, Remember Federal Reserve restarted 696 00:41:22,840 --> 00:41:26,440 Speaker 1: que and was scudding raids about five months Before COVID, 697 00:41:26,600 --> 00:41:29,200 Speaker 1: COVID wasn't even there. Nobody knew that there was such 698 00:41:29,280 --> 00:41:32,160 Speaker 1: thing as COVID, So you can see how that will 699 00:41:32,200 --> 00:41:35,960 Speaker 1: happen now. A lot of clients saying that COVID it 700 00:41:36,040 --> 00:41:40,560 Speaker 1: is such a dramatic event that we are permanently repricing capital, 701 00:41:40,640 --> 00:41:45,520 Speaker 1: permanently repricing risk. We are now in a completely different environment. 702 00:41:46,280 --> 00:41:50,160 Speaker 1: I disagree with that. COVID, in my view, accelerated some 703 00:41:50,280 --> 00:41:54,279 Speaker 1: of the pre existing trends. For example, these days we're 704 00:41:54,280 --> 00:41:56,920 Speaker 1: relying more on fiscal levers than what we did in 705 00:41:56,960 --> 00:42:00,840 Speaker 1: the previous twenty or thirty years. It accelerated pre existing 706 00:42:00,880 --> 00:42:04,719 Speaker 1: trends like geopolitics, for example in the Black Swans. But 707 00:42:05,080 --> 00:42:07,960 Speaker 1: otherwise I don't think it changed the nature of what 708 00:42:08,080 --> 00:42:11,760 Speaker 1: we do think of sectoral balances. Now in the US, 709 00:42:11,880 --> 00:42:16,000 Speaker 1: we're already drawn down private sector savings, so so you 710 00:42:16,080 --> 00:42:20,440 Speaker 1: find net savings by the private sector as of December, 711 00:42:20,800 --> 00:42:23,759 Speaker 1: as of September for two thousand and twenty two was 712 00:42:23,800 --> 00:42:27,879 Speaker 1: almost zero. Now government is not cutting savings as much, 713 00:42:27,920 --> 00:42:30,840 Speaker 1: you know, the government actually deceaving. And so the result 714 00:42:30,960 --> 00:42:33,480 Speaker 1: is what's happening is that the rest of the world 715 00:42:33,520 --> 00:42:36,640 Speaker 1: balance for US is growing, it's back to four. So 716 00:42:36,960 --> 00:42:39,440 Speaker 1: if you think of the U s UK, your traditional 717 00:42:39,600 --> 00:42:42,919 Speaker 1: supplies of real demand in the economy, they're already back 718 00:42:42,960 --> 00:42:45,759 Speaker 1: to pre COVID. They are already they are already generating 719 00:42:45,800 --> 00:42:49,640 Speaker 1: deficits that they require other countries to finance. That means 720 00:42:49,640 --> 00:42:53,319 Speaker 1: the opposite is also true, because it's it's an accounting, 721 00:42:53,480 --> 00:42:56,120 Speaker 1: accounting identity, it has to be true that the rest 722 00:42:56,160 --> 00:42:59,040 Speaker 1: of the world is going back to supplying capital. So 723 00:42:59,160 --> 00:43:02,240 Speaker 1: and so, whether I look at impact of technology, impact 724 00:43:02,280 --> 00:43:05,759 Speaker 1: of demographics, whether you look at the impact of financialization, 725 00:43:06,120 --> 00:43:09,200 Speaker 1: where they look at sexual balances, everything tells me that 726 00:43:09,239 --> 00:43:12,480 Speaker 1: we are reverting to pre COVID times and therefore this 727 00:43:12,640 --> 00:43:17,080 Speaker 1: idea that we're permanently repricing culpital cheap money is gone forever. 728 00:43:17,480 --> 00:43:20,520 Speaker 1: To me, that's just nonsense, Victor. I think that's a 729 00:43:20,560 --> 00:43:23,160 Speaker 1: great place to leave it. We could easily talk for 730 00:43:23,480 --> 00:43:27,160 Speaker 1: absolutely others here, But yeah, thank you so much for 731 00:43:27,160 --> 00:43:29,759 Speaker 1: for coming back on our thoughts. Really appreciate it. Thank you, 732 00:43:30,040 --> 00:43:46,080 Speaker 1: thanks so much. That was great. That really, Joe, It's 733 00:43:46,080 --> 00:43:49,399 Speaker 1: always wonderful to talk to Victor. But there's so much 734 00:43:49,440 --> 00:43:51,920 Speaker 1: to pull out of that conversation. I'm actually having trouble 735 00:43:52,280 --> 00:43:54,719 Speaker 1: picking just one or two highlights. I did think the 736 00:43:54,800 --> 00:43:58,440 Speaker 1: comments about globalization were incredibly interesting. And we tend to 737 00:43:58,480 --> 00:44:02,680 Speaker 1: think of globalization as this like monolithic process that can 738 00:44:02,719 --> 00:44:06,000 Speaker 1: only go in one direction. But this notion that actually 739 00:44:06,640 --> 00:44:09,799 Speaker 1: you can have different types of globalization with different results, right, 740 00:44:09,840 --> 00:44:12,000 Speaker 1: And so this idea is like, Okay, the world like 741 00:44:12,360 --> 00:44:14,400 Speaker 1: Davos is happening right now, and I'm sure there are 742 00:44:14,400 --> 00:44:20,920 Speaker 1: a lot of people globalization. Yeah, I wonder if we'll 743 00:44:20,920 --> 00:44:24,319 Speaker 1: ever do like a Davo anyway, Like, you know, people 744 00:44:24,320 --> 00:44:27,120 Speaker 1: are anxious about that. But this idea that it's like, well, 745 00:44:27,200 --> 00:44:30,440 Speaker 1: maybe it's something different, and that actually the sort of 746 00:44:30,680 --> 00:44:36,880 Speaker 1: disinflationary impulses that we associated with globalization for forty years 747 00:44:37,000 --> 00:44:39,120 Speaker 1: or thirty years, or twenty years, however long you want 748 00:44:39,160 --> 00:44:41,480 Speaker 1: to identify, maybe that hasn't been the story in a 749 00:44:41,480 --> 00:44:46,560 Speaker 1: long time anyway. And as such, the idea that COVID 750 00:44:46,640 --> 00:44:49,279 Speaker 1: was going to mark some huge trend break from that 751 00:44:49,760 --> 00:44:51,319 Speaker 1: is just the wrong way to think about it from 752 00:44:51,320 --> 00:44:54,640 Speaker 1: the first place. Absolutely, also, the idea that maybe the 753 00:44:54,719 --> 00:45:00,040 Speaker 1: yield curve isn't that well suited to providing information in 754 00:45:00,120 --> 00:45:02,840 Speaker 1: the sort of post industrial age. I thought that was 755 00:45:02,880 --> 00:45:05,440 Speaker 1: interesting as well, and something that I think we've written 756 00:45:05,480 --> 00:45:07,719 Speaker 1: about at various points of time, the idea that there 757 00:45:07,719 --> 00:45:10,560 Speaker 1: are so many factors that go into bond yields now 758 00:45:10,800 --> 00:45:15,120 Speaker 1: not all of them related to the actual real economy, 759 00:45:15,160 --> 00:45:17,000 Speaker 1: that maybe it doesn't make sense to be looking at 760 00:45:17,040 --> 00:45:19,640 Speaker 1: the old curve for that sort of information about what 761 00:45:19,680 --> 00:45:21,759 Speaker 1: the market expects. You know what a headline I'm looking 762 00:45:21,800 --> 00:45:23,840 Speaker 1: at on the terminals right now that came from earlier. 763 00:45:24,160 --> 00:45:27,239 Speaker 1: Oh god, what is it? Larry Summers now more optimistic 764 00:45:27,280 --> 00:45:30,400 Speaker 1: on the US outlook the three months ago. Everyone coming around, 765 00:45:30,680 --> 00:45:33,080 Speaker 1: everyone coming around. You know what else I thought was 766 00:45:33,239 --> 00:45:37,759 Speaker 1: really interesting was the comments on geopolitics that maybe we 767 00:45:37,840 --> 00:45:40,680 Speaker 1: get because geopolitics always seems like one of those things 768 00:45:40,680 --> 00:45:44,360 Speaker 1: where it's like the idea of like forecasting, or it 769 00:45:44,360 --> 00:45:47,239 Speaker 1: seems like very difficult, and it feels like the risks 770 00:45:47,239 --> 00:45:50,200 Speaker 1: are always sort of in one direction, there's some black swan. 771 00:45:50,600 --> 00:45:53,080 Speaker 1: But this idea that maybe like we're in a position 772 00:45:53,080 --> 00:45:55,560 Speaker 1: where if you look at the major pressure points, whereas 773 00:45:55,640 --> 00:45:59,200 Speaker 1: Victor identified the tectonic plates or the intersection points, maybe 774 00:45:59,239 --> 00:46:03,040 Speaker 1: this is a pure of some like de pressurization. I'm hopeful. 775 00:46:03,200 --> 00:46:04,480 Speaker 1: I wanted to be true. I don't know if it 776 00:46:04,480 --> 00:46:06,000 Speaker 1: will be. If it will be, but I thought that 777 00:46:06,120 --> 00:46:08,960 Speaker 1: was an interesting comment. Shall we leave it there? Let's 778 00:46:09,000 --> 00:46:11,839 Speaker 1: leave it there? Okay, this has been another episode of 779 00:46:11,880 --> 00:46:14,680 Speaker 1: the ad Thoughts podcast. I'm Tracy Alloway. You can follow 780 00:46:14,680 --> 00:46:17,279 Speaker 1: me on Twitter at Tracy Alloway and I'm Joe wi 781 00:46:17,320 --> 00:46:20,200 Speaker 1: Isn't Though. You can follow me on Twitter at the Stalwart. 782 00:46:20,480 --> 00:46:24,600 Speaker 1: Follow our producers on Twitter Carmen Rodriguez She's at Carmen 783 00:46:24,760 --> 00:46:28,480 Speaker 1: armand Dash Bennett He's at dashbot. And check out all 784 00:46:28,520 --> 00:46:32,280 Speaker 1: of our podcasts at Bloomberg under the handle at podcasts 785 00:46:32,480 --> 00:46:35,719 Speaker 1: and for more Odd Lots content, go to Bloomberg dot 786 00:46:35,719 --> 00:46:39,280 Speaker 1: com slash odd Lots, we posh the transcripts, we blogged. 787 00:46:39,360 --> 00:46:41,920 Speaker 1: We have a weekly newsletter comes out every Friday. Go 788 00:46:42,080 --> 00:47:05,440 Speaker 1: there sign up. Thanks for listening to