WEBVTT - Viktor Shvets Declares Victory for Team Transitory and the Soft Landing 0:00:10.039 --> 0:00:13.440 Hello, and welcome to another episode of the All Thoughts Podcast. 0:00:13.520 --> 0:00:18.120 I'm Tracy Alloway and I'm Joe. Wisn't Joe? Uh? Soft 0:00:18.200 --> 0:00:21.760 landing seems to have sort of it's in the air. 0:00:22.239 --> 0:00:26.080 It's almost consensus at this point. I mean, markets are rallying, 0:00:26.800 --> 0:00:29.320 shrugging off a lot of the survey data which looks 0:00:29.320 --> 0:00:32.320 a little bit more pessimistic, which is all kind of 0:00:32.360 --> 0:00:35.400 strange because you still have big segments of the market, 0:00:35.479 --> 0:00:40.320 like bond yields, for instance, pointing towards recession. Yes, that's 0:00:40.360 --> 0:00:44.280 the really weird part to me, So risk asset stock market, 0:00:44.400 --> 0:00:47.000 really nice start to the year, much different tenor than 0:00:47.040 --> 0:00:51.040 in head in two. We are recording this January. As 0:00:51.040 --> 0:00:53.680 of right now, the NAS deck is up seven pc. 0:00:53.920 --> 0:00:56.480 Of course you got clever last year, but you know, 0:00:56.560 --> 0:00:58.560 you look at something like the short end of the 0:00:58.560 --> 0:01:01.360 curve three month two year markets are pricing in rate 0:01:01.400 --> 0:01:04.600 cuts really soon. Into my mind, I'm like, they're only 0:01:04.600 --> 0:01:06.760 going to happen if there's like a recession or some 0:01:06.880 --> 0:01:09.640 hard landing. Like it's hard for me to reconcile what 0:01:09.800 --> 0:01:12.840 we're seeing in different parts of the market right now. Absolutely, 0:01:12.920 --> 0:01:15.720 and it is. It does seem to have happened very quickly. 0:01:15.920 --> 0:01:19.800 The shift to you know, everyone's focused on China reopening, 0:01:19.840 --> 0:01:23.520 that unfolded pretty fast. Lots of the soft landing talk 0:01:23.560 --> 0:01:25.800 seems to have sort of come out of nowhere. You know, 0:01:25.840 --> 0:01:28.880 two or three months ago, everyone was talking about entrenched inflation, 0:01:29.240 --> 0:01:32.800 the possibility of a wage price spiral. But given the 0:01:32.840 --> 0:01:35.920 shift in sentiment, I think we need to speak with 0:01:36.000 --> 0:01:39.840 someone who has been consistent in their view that the 0:01:39.920 --> 0:01:45.000 world could avoid a high inflationary regime absolutely, because you 0:01:45.040 --> 0:01:46.960 have a lot of people going back and forth. I 0:01:47.040 --> 0:01:49.200 even saw something in the Wall Street Journal that's like 0:01:49.360 --> 0:01:53.640 maybe it was transitory all along, and we hadn't heard 0:01:53.640 --> 0:01:55.480 that word, and no one dared uttered it for like 0:01:55.560 --> 0:01:58.360 six months, and everyone was ashamed at ever even having 0:01:58.560 --> 0:02:01.760 used that term transit worry, and that was suddenly it's 0:02:01.800 --> 0:02:04.720 creeping back that maybe that a lot of the inflation 0:02:04.800 --> 0:02:07.720 really was due to these like massive shocks we experienced, 0:02:07.800 --> 0:02:10.480 the pandemic in the war, and that as these things 0:02:10.520 --> 0:02:14.560 at least normalized to some extent, that the residual inflation, 0:02:14.600 --> 0:02:17.040 the entrenched noess would not be as high as some 0:02:17.080 --> 0:02:19.639 people were concerned about. Right, So today we're going to 0:02:19.720 --> 0:02:23.399 be speaking with someone who was always on Team Transitory, 0:02:23.520 --> 0:02:26.840 who never left and defected like a lot of other people. 0:02:26.880 --> 0:02:29.280 I'm not going to name any names, but someone who 0:02:29.280 --> 0:02:32.200 has been I use that word consistent, someone who has 0:02:32.240 --> 0:02:34.760 been sort of banging the drum of this idea that 0:02:34.880 --> 0:02:38.560 actually a lot of the pandemic related disruptions might go 0:02:38.639 --> 0:02:41.520 away and we might return to more of what we 0:02:41.639 --> 0:02:44.560 saw over the past few years or so, you know, 0:02:44.760 --> 0:02:48.320 low interest rates, lower growth, that sort of environment. So, 0:02:48.919 --> 0:02:51.280 without further ado, today we're going to be speaking with 0:02:51.480 --> 0:02:54.560 Victor Schwetz. He is, of course global strategist over at 0:02:54.639 --> 0:02:58.960 McQuary Capital repeat a lots guest, one of our favorites. Victor, 0:02:59.080 --> 0:03:01.440 thank you so much for coming on our parts. Thank you, 0:03:01.560 --> 0:03:04.080 thank you for having me. So what was it like 0:03:04.200 --> 0:03:07.120 being on Team Transitory for the past year or so. 0:03:07.360 --> 0:03:10.560 I loved it um But for very simple reason. Whenever 0:03:10.600 --> 0:03:14.600 everybody agrees you know something is wrong, you know you 0:03:14.639 --> 0:03:17.880 need to get away from that. With inflation, I never 0:03:17.960 --> 0:03:21.560 felt I needed to get away. And the primary reason 0:03:21.639 --> 0:03:25.120 for me was that inflation that we have witnessed really 0:03:25.160 --> 0:03:27.920 have nothing to do with demand. If you think of 0:03:27.960 --> 0:03:33.040 the global economy, we are still below the trajectory pre COVID. 0:03:33.080 --> 0:03:36.240 In other words, global demand is less than what it 0:03:36.280 --> 0:03:39.480 would have been if there was no COVID. The only 0:03:39.560 --> 0:03:42.960 country that it's slightly different is the US. But even 0:03:43.000 --> 0:03:46.040 in the US, the aggregate demand is only about ninety 0:03:46.120 --> 0:03:48.760 bits higher than it would have been if there was 0:03:48.800 --> 0:03:52.280 no COVID. So it's not so much aggregate demand. Rather 0:03:52.520 --> 0:03:56.200 it is a disruption, unprecedented disruption of the goods market, 0:03:56.440 --> 0:04:00.480 services market, labor market that was responsible for that. So 0:04:00.520 --> 0:04:02.960 if you think of the goods market, for example, if 0:04:02.960 --> 0:04:06.360 we go back eighteen months ago, goods demand in the 0:04:06.480 --> 0:04:09.960 US and in Europe we're about ten to fifteen percent 0:04:10.120 --> 0:04:13.440 higher then it would have been pre COVID. So even 0:04:13.520 --> 0:04:16.240 if there was no disruption in ports, there was no 0:04:16.320 --> 0:04:19.680 disruption in supply, there was no way supplies could have 0:04:19.760 --> 0:04:23.600 expected demand to be fifteen percent higher than what it 0:04:23.720 --> 0:04:27.120 was today. If you think of Europe, goods demand is 0:04:27.160 --> 0:04:30.359 already below the pre COVID trajectory. If you think of 0:04:30.360 --> 0:04:33.479 the United States, it's right back to where it should 0:04:33.480 --> 0:04:36.680 have been if there was no COVID. But then before 0:04:36.720 --> 0:04:41.880 we normalized goods, we started destabilized services. So you find 0:04:41.880 --> 0:04:44.719 if you go back eighteen months ago, services would have 0:04:44.720 --> 0:04:48.839 been in the US about fift lower then it would 0:04:48.839 --> 0:04:52.320 have been pre COVID. Today they are within two percent 0:04:52.520 --> 0:04:55.520 of COVID. So in other words, services pretty much recovered. 0:04:55.800 --> 0:04:59.920 So even before we normalize goods, we started to destabilize serve. 0:05:00.680 --> 0:05:06.440 But theoretically, just like the goods market eventually normalizes, services 0:05:06.520 --> 0:05:09.960 market will eventually normalize. And the only problem, and that's 0:05:10.000 --> 0:05:14.599 your transitory part. The only problem if inflation become embedded 0:05:14.839 --> 0:05:17.120 in a goods market, in the labor market, in the 0:05:17.120 --> 0:05:20.720 wages market, as well as in the financial markets. And 0:05:20.760 --> 0:05:22.919 my argument for the last twelve months was that I 0:05:22.920 --> 0:05:26.640 don't see any evidence at all of embedding. Now, if 0:05:26.680 --> 0:05:30.279 you don't have the evidence of embedding, then inflation should 0:05:30.360 --> 0:05:33.560 come off pretty quickly, very similar what happened in nineteen 0:05:33.680 --> 0:05:38.560 forty six nine, and central banks then will adjust their 0:05:38.560 --> 0:05:42.280 policies accordingly. So the reason I was not in favor 0:05:42.279 --> 0:05:45.280 of a global recession is that I never felt that 0:05:45.360 --> 0:05:48.840 we need to destroy demand in order to lower the inflation. 0:05:49.200 --> 0:05:52.320 It's interesting, so it's almost like the issue is not 0:05:52.520 --> 0:05:56.440 aggregate demand. It's almost like the issue is disaggregated demand. 0:05:56.480 --> 0:05:59.480 It was this shift, and we have an infrastructure there 0:05:59.560 --> 0:06:02.039 was sort of designed for one sort of pattern of 0:06:02.120 --> 0:06:04.800 consumption and a certain amount of good, certain amount of services, 0:06:04.839 --> 0:06:07.680 and it was this shift. You know, there still is 0:06:07.760 --> 0:06:12.479 this fear of embeddedness and that you know, and people 0:06:12.520 --> 0:06:14.680 who are against team traditors like, yes, we know all 0:06:14.680 --> 0:06:17.039 the shocks or nother thing, but it doesn't matter because 0:06:17.040 --> 0:06:19.600 if inflation is elevated for too long, it can risk 0:06:19.839 --> 0:06:23.360 becoming embedded. What is that process? What does that mean 0:06:24.040 --> 0:06:29.360 in your view for how could inflation become embedded? Well, 0:06:29.440 --> 0:06:32.120 you're absolutely right, the longest lost, the more likely it 0:06:32.200 --> 0:06:34.719 is to become embedded. But we live in a very 0:06:34.800 --> 0:06:39.200 different and unusual world in a sense that unlike nineteen 0:06:39.400 --> 0:06:43.719 sixties and nineteen seventies, where we had pretty much, certainly 0:06:43.720 --> 0:06:47.320 from late sixties into early eighties pretty much inflationary prescious, 0:06:47.360 --> 0:06:51.760 was not any disinflationary off sets or ES two thousand, 0:06:51.880 --> 0:06:55.680 when we had pretty much dec inflationary prescious with no 0:06:55.880 --> 0:06:59.920 inflationary off sets. Today we have boats we have very 0:07:00.040 --> 0:07:05.240 strong disinflationary pressures. That's your circular stagnation. In other words, demographics, 0:07:05.320 --> 0:07:10.240 inability to add labor inputs, things like wealth, extreme wealth inequalities, 0:07:10.240 --> 0:07:15.480 things like technology, things like financialization and indebtedness. They're incredibly 0:07:15.560 --> 0:07:20.760 strong and they create a disinflationary backdrop. Now, against that, 0:07:21.760 --> 0:07:25.280 you need to look at frequent black swans and fat tales. 0:07:25.600 --> 0:07:28.840 That's what we keep discussing is that normal distribution of 0:07:28.920 --> 0:07:32.680 events no longer exist. We're getting a lot of disruptions 0:07:32.760 --> 0:07:36.000 coming in now whenever black swants arrived, and they could 0:07:36.080 --> 0:07:39.640 be health scare driven, they could be geopolitically driven. What 0:07:39.800 --> 0:07:43.440 we have we have inflationary spikes that occur. But as 0:07:43.480 --> 0:07:46.400 soon as those pressures received either from a health scare 0:07:46.520 --> 0:07:50.840 or your political perspective, disinflation comes in very quickly. And 0:07:50.880 --> 0:07:55.000 so because of this disinflationary backdrop, it's incredibly hard to 0:07:55.080 --> 0:07:58.960 embed expectation because you're not on a one way street, 0:07:59.320 --> 0:08:01.960 either as if I ancial markets or the labor market 0:08:02.120 --> 0:08:05.240 or the corporates sink of corporates. Corporates these days they 0:08:05.280 --> 0:08:07.840 regain pricing powerful la a quarta too, and then they 0:08:07.880 --> 0:08:09.920 lose it, and then they gain it again or somebody 0:08:09.920 --> 0:08:13.920 else gains it. There is no consistency of corporate pricing power. 0:08:14.040 --> 0:08:17.480 There is no consistency of the labor pricing power, in 0:08:17.520 --> 0:08:20.720 which case it's very, very hard to embed those sorts 0:08:20.720 --> 0:08:40.280 of expectation. I was about to ask you, what do 0:08:40.320 --> 0:08:43.120 you say to critics who who maybe argue that it's 0:08:43.160 --> 0:08:46.800 too early to declare a win for team Transitory, given 0:08:46.840 --> 0:08:49.320 that CPI is still at six point five percent. But 0:08:49.480 --> 0:08:51.240 it sounds like you're making the argument that we can 0:08:51.280 --> 0:08:55.800 get these recurring spikes of disruption related inflation, but then 0:08:55.840 --> 0:08:59.920 the deflation narrative will like rapidly reassert itself. So may 0:09:00.040 --> 0:09:03.400 be a different way of asking that question. What would 0:09:03.520 --> 0:09:07.840 change your mind when it comes to endemic inflation? Is 0:09:07.840 --> 0:09:09.920 there something that you're looking out for for a sign 0:09:10.000 --> 0:09:13.160 that the regime really has changed. Yes, a couple of areas. 0:09:13.679 --> 0:09:17.439 One of them is deglobalization. One of the things that 0:09:17.559 --> 0:09:22.240 I've been debating whether diglobalization, as it progresses over the 0:09:22.280 --> 0:09:26.920 next ten ten years, whether it's inflationary, because the underlying 0:09:27.000 --> 0:09:30.840 idea is that the essence of globalization is arbitrage of cost, 0:09:31.000 --> 0:09:36.160 arbitrage of efficiencies opportunities. As you diglobalize, that arbitrage goes away, 0:09:36.520 --> 0:09:39.520 and therefore its inflationary. One of the things I've been 0:09:39.640 --> 0:09:44.760 arguing is that this time around, deglobalization will not be inflationary, 0:09:44.960 --> 0:09:47.120 and there are a couple of reasons for that reason. 0:09:47.200 --> 0:09:51.920 Number one is that labor is increasingly smaller percentage of 0:09:52.000 --> 0:09:55.000 the arbitrage. So if you go back twenty thirty years ago, 0:09:55.520 --> 0:09:59.080 labor in the let's say lab intensive industries like closing 0:09:59.080 --> 0:10:03.080 and footwear, would have been sixty arbitrage. Today it's only 0:10:04.480 --> 0:10:06.880 in some of the new industries labor is as little 0:10:06.920 --> 0:10:09.800 as five percent, So, in other words, labor is no 0:10:09.920 --> 0:10:14.319 longer as critical as it was twenty or thirty years ago. Secondly, 0:10:14.960 --> 0:10:17.560 unit labor costs in emerging markets have gone up. In 0:10:17.600 --> 0:10:21.080 other words, wages have increased faster than productivity, So in 0:10:21.120 --> 0:10:24.439 other word, the opportunities for barbitrage is getting less. The 0:10:24.520 --> 0:10:28.840 third area is services. This day's services is one third 0:10:28.920 --> 0:10:32.920 of merchandise trade. You basically cannot do merchandise trade with art. 0:10:33.000 --> 0:10:38.000 Services and services have very different dynamics to merchandise trade. 0:10:38.120 --> 0:10:42.360 It can be located in various jurisdictions. It's much less inflationary. 0:10:42.400 --> 0:10:45.440 The other thing to remember, of course, is technology. Think 0:10:45.480 --> 0:10:49.360 of the United States. United States between nine two thousand 0:10:49.440 --> 0:10:53.840 seven d industrialized. Basically, you had manufacturing output in the 0:10:53.920 --> 0:10:56.800 US growing only one one and a half percent paranum. 0:10:57.200 --> 0:10:59.880 Global growth was more like three and a half four percent. 0:11:00.160 --> 0:11:03.360 In other words, US market share has rapidly declined. If 0:11:03.360 --> 0:11:05.960 you look over the last decade, US has been matching 0:11:06.440 --> 0:11:10.160 global numbers. Manufacturing output's been growing at three three and 0:11:10.160 --> 0:11:13.000 a half percent every year. Now the reason for that 0:11:13.320 --> 0:11:17.640 US is re industrializing, But US is re industrializing in 0:11:17.640 --> 0:11:21.760 a very different form. This is not nineteen sixties nineteen seventies, 0:11:22.120 --> 0:11:27.199 much less fixed assets, much less labor, more robotics, more automation, 0:11:27.640 --> 0:11:30.240 and so you don't see it really in a labor force. 0:11:30.360 --> 0:11:33.200 So as a percentage of labor force, manufacturing is down 0:11:33.720 --> 0:11:36.679 relative to what it was ten years ago, down from 0:11:36.720 --> 0:11:41.200 nine to eight point four percent. But US is reindustrializing. 0:11:41.280 --> 0:11:44.280 Was a much more flexible core structure, and so the 0:11:44.320 --> 0:11:48.439 result is on shoring that people expect probably won't be 0:11:48.520 --> 0:11:52.319 as inflationary as what people anticipate. So to me, there 0:11:52.360 --> 0:11:54.880 is a debate whether you look at the impact of technology, 0:11:55.200 --> 0:11:57.440 whether you look at the impact of services, whether you 0:11:57.480 --> 0:12:00.400 look at the impact of labor. I just and see 0:12:00.400 --> 0:12:04.880 it's going to be inflationary at all. As we gradually diglobalize, 0:12:05.000 --> 0:12:07.680 or to put it the other way, globalization is dying 0:12:07.760 --> 0:12:11.480 and natural deaths, and it will die over the next 0:12:11.480 --> 0:12:15.240 ten fifteen years. A new form of globalization will emerge 0:12:15.320 --> 0:12:20.000 which will not be dependent on relative costs or relative efficiencies. 0:12:20.440 --> 0:12:22.679 And so that's one area. If I'm wrong on that, 0:12:23.600 --> 0:12:26.160 then you find inflation become much more embedded. The other 0:12:26.200 --> 0:12:30.000 area is easy, particularly the e pot of e G. 0:12:30.880 --> 0:12:33.240 And so if you look at s G again, my 0:12:33.360 --> 0:12:34.959 view is that I'm I worry about the s G 0:12:35.120 --> 0:12:39.280 more then I worry about a gglobalization. But if you 0:12:39.360 --> 0:12:42.199 sing of the number one, we're going to take decades 0:12:42.280 --> 0:12:44.360 to do what we want to do. Nobody is going 0:12:44.400 --> 0:12:48.800 to touch the sacred goals of reduction of whatever it 0:12:48.920 --> 0:12:52.160 is we want to reduce, but we will be meandering 0:12:52.280 --> 0:12:55.719 towards that goal, will be trying to reconcile those subjectives 0:12:55.760 --> 0:12:59.160 with the realities on the ground that we're facing. And 0:12:59.200 --> 0:13:01.000 so number one is going to take a long time. 0:13:01.080 --> 0:13:03.600 It's going to be a lot of meandering. Number two, 0:13:03.880 --> 0:13:06.120 we're going to cut costs, not just put on new 0:13:06.160 --> 0:13:08.960 costs the way a lot of people are expecting. And 0:13:09.040 --> 0:13:12.400 the third area is that technology is reducing the cost 0:13:12.520 --> 0:13:15.520 of new technology as you apply it. So even if 0:13:15.559 --> 0:13:18.960 I look at E my argument basically it might not 0:13:19.160 --> 0:13:22.240 be as inflationary as what people expect. Now, there will 0:13:22.280 --> 0:13:26.600 be pockets of commodities that will be inflationary. So for example, oil, 0:13:26.679 --> 0:13:29.160 we've got plenty of world, we just don't deliver it appropriately. 0:13:29.360 --> 0:13:31.160 But we've got plenty of world we call we've got 0:13:31.240 --> 0:13:34.040 plenty of coal, which is again not using it the 0:13:34.080 --> 0:13:36.320 way we could have used it. But there are some 0:13:36.360 --> 0:13:41.680 commodities in the real shortage copper, nickel, cobbalt, lithium, rare earth, 0:13:42.040 --> 0:13:45.760 so there will be some increases and substantial increases in 0:13:45.800 --> 0:13:48.640 the value of that. But overall, as I said, I'm 0:13:48.679 --> 0:13:52.720 not totally convinced that E. S G actually will be inflationary. 0:13:52.920 --> 0:13:56.520 And the third area is geopolitics. As you know my view, 0:13:56.840 --> 0:13:59.079 and that's why part of my portfolio is what I 0:13:59.160 --> 0:14:01.800 called bullets and prey. Sasons for the last ten years 0:14:02.000 --> 0:14:05.120 is that I believed in the geopolitical and social dislocation 0:14:05.200 --> 0:14:07.920 for a decade now, and I can believe that the 0:14:07.960 --> 0:14:10.280 next ten years could be even worse than a ten 0:14:10.360 --> 0:14:14.600 years we've experienced so far. But geopolitics is a process, 0:14:14.760 --> 0:14:18.120 it's not an event. In other words, I usually say 0:14:18.120 --> 0:14:20.320 it took Hitler fifteen years to come to power, so 0:14:20.640 --> 0:14:24.640 it doesn't happen overnight. And so the critical area to 0:14:24.720 --> 0:14:28.440 me is judging the periods where geo political pressures might 0:14:28.480 --> 0:14:33.240 be less acute and identifying periods where your political pressures 0:14:33.240 --> 0:14:36.480 will be more acute, recognizing that over ten fifteen years 0:14:36.520 --> 0:14:39.480 period it's going to be worse, but there will be 0:14:39.560 --> 0:14:43.320 windows of two or three years when those pressures actually 0:14:43.320 --> 0:14:47.120 will be less prevalent. And I think twenty twenty three 0:14:47.280 --> 0:14:51.240 and twenty twenty four will be a period of lower pressures, 0:14:51.280 --> 0:14:53.840 not higher pressures. There are so many different threads there. 0:14:53.880 --> 0:14:56.640 That was such a fascinating answer. I want to talk 0:14:56.640 --> 0:14:59.480 more about geopolitics, but before I want to actually go 0:14:59.520 --> 0:15:02.120 back to what you're are saying about the reindustrialization of 0:15:02.200 --> 0:15:05.880 the U. S economy, because I think that's really fascinating, particularly, 0:15:06.280 --> 0:15:08.560 you know, thinking about the impact of some of the 0:15:08.560 --> 0:15:11.640 big legislation that was recently passed in the United States, 0:15:12.000 --> 0:15:15.720 the Chips Act, which attempts to onshore recreate a domestic 0:15:15.960 --> 0:15:19.240 semiconductor capacity, and of course the Inflation and Reduction Act, 0:15:19.520 --> 0:15:23.880 which has incentives for domestic battery manufacturing other things like that. 0:15:24.120 --> 0:15:26.040 Can you talk a little bit more about what this 0:15:26.160 --> 0:15:29.560 new vision of a sort of re industrialized United States 0:15:29.560 --> 0:15:33.440 economy looks like and how you see the pretty big, 0:15:33.480 --> 0:15:37.680 substantial sort of industrial policy spending plans sort of moving 0:15:37.680 --> 0:15:40.520 the dial. I usually like to compare us to China, 0:15:41.120 --> 0:15:44.040 and I basically say sink of China as the equivalent 0:15:44.080 --> 0:15:49.040 of the United States of nineteen seventies. China today responsible 0:15:49.080 --> 0:15:54.240 for about global manufacturing. China today is very heavy in 0:15:54.360 --> 0:15:59.360 fixed assets, very heavy in manufacturing, very low on cash flow, 0:16:00.000 --> 0:16:03.800 relatively low and intellectual inputs. This is exactly what United 0:16:03.840 --> 0:16:07.480 States look like in nineteen seventies. So China is in 0:16:07.560 --> 0:16:13.480 the very earlier stages of conventional d industrialization, whereas US 0:16:13.640 --> 0:16:15.720 on the opposite side. And that is why people in 0:16:15.760 --> 0:16:18.640 Michigan and are higher voting the way they do. It's 0:16:18.640 --> 0:16:22.560 already had the body blow of the industrialization and all 0:16:22.600 --> 0:16:26.160 the social consequences, and now they're approaching it from a 0:16:26.160 --> 0:16:30.200 different direction. How do we re industrialize in a different form. 0:16:30.480 --> 0:16:33.720 And by the way US re and re industrialization started 0:16:33.760 --> 0:16:37.360 a decade ago, this is pre dates Biden, It predates 0:16:37.400 --> 0:16:40.080 any of the plans, because there are obvious ways of 0:16:40.200 --> 0:16:43.960 on shoring now at a very different cost structure and 0:16:44.000 --> 0:16:47.240 a very different positioning. That's why for a decade now, 0:16:47.280 --> 0:16:50.760 manufacturing output in the US was broadly matching the global 0:16:50.800 --> 0:16:54.760 manufacturing output, and US market share can no longer decline. 0:16:55.000 --> 0:16:57.440 So the interesting thing to me is that if I 0:16:57.480 --> 0:17:00.120 think of the US, twelve thirteen million people are so 0:17:00.320 --> 0:17:06.200 in manufacturing, they are generating manufacturing out but half of China's. Now, 0:17:06.240 --> 0:17:09.000 if you think of China, nobody really knows the numbers 0:17:09.040 --> 0:17:13.399 in the sense that we only measure urban employment, but 0:17:13.440 --> 0:17:16.440 there's also a lot of rural employment which actually directly 0:17:16.520 --> 0:17:20.560 or indirectly feeds into manufacturing. So there's all sorts of estimates, 0:17:20.640 --> 0:17:23.520 but the numbers are anywhere from eighty two hundred and 0:17:23.600 --> 0:17:27.960 fifty million people involved directly or indirectly in manufacturing. So 0:17:28.040 --> 0:17:30.080 think of it this way, twelve million in the US 0:17:30.160 --> 0:17:36.000 generating half the output of what million China labors and 0:17:36.000 --> 0:17:39.760 and workers are manufacturing. That tells you how much more 0:17:39.760 --> 0:17:43.120 productive it is and what sort of malowa unit labor 0:17:43.160 --> 0:17:46.240 costs you're gradually getting in the US. So the way 0:17:46.240 --> 0:17:48.800 I look at chip ACT and everything else is it. 0:17:49.000 --> 0:17:55.520 US finally recognized that instead of just staying ahead of China, 0:17:55.720 --> 0:17:59.119 they do need to slow down China. In a sense, 0:17:59.160 --> 0:18:01.879 they do need you put China at least couple of 0:18:01.920 --> 0:18:05.600 generations behind. And the problem is, in my view, there 0:18:05.680 --> 0:18:08.880 is not much China can do about it, because at 0:18:08.880 --> 0:18:11.000 the end of the day, it's not about billions of 0:18:11.040 --> 0:18:15.639 dollars you want to spend. It's about science. And the 0:18:15.760 --> 0:18:20.200 reason Trump administration first stuff and then Biden administration were 0:18:20.280 --> 0:18:24.760 so successful at kneecapping the high tech industries in China 0:18:25.200 --> 0:18:30.400 is because China completely depends on the Western intellectual contribution. 0:18:30.760 --> 0:18:33.879 If you cut it off, then the ability of China 0:18:34.040 --> 0:18:37.920 to maintain its position and improve its position is very 0:18:37.960 --> 0:18:40.800 significantly retarded. So the way I look whether you look 0:18:40.880 --> 0:18:44.720 at batteries where they look at rare ars, and materials 0:18:44.720 --> 0:18:47.159 where they look at by attack, where they look at chips, 0:18:47.520 --> 0:18:50.080 the idea is to try to put you as even 0:18:50.119 --> 0:18:55.719 further ahead and strategically, to me, that is the right approach. Ultimately, 0:18:55.920 --> 0:18:59.800 ultimately nobody can hold anybody back or any length of time. 0:19:00.200 --> 0:19:05.280 But given the predominance of the US in intellectual sphere, 0:19:05.320 --> 0:19:09.159 given that almost everybody realies in some form on the 0:19:09.200 --> 0:19:14.400 intellectual contribution of the United States, they can actually widen 0:19:14.640 --> 0:19:17.000 the gap against China. So that's the way I look 0:19:17.040 --> 0:19:18.960 at that. Not so much there is a plan for 0:19:19.040 --> 0:19:22.399 re industrialization as such, that's been happening for a while, 0:19:22.760 --> 0:19:26.760 but shift the United States even more towards the frontier. China, 0:19:26.800 --> 0:19:30.840 on the other hand, is facing a period of conventional 0:19:30.960 --> 0:19:34.560 de industrialization over the next decade or two, which they 0:19:34.600 --> 0:19:37.760 need to they need to challenge how to do that. 0:19:37.800 --> 0:19:42.280 They also face agricultural revolution. China had many revolutions, but 0:19:42.320 --> 0:19:45.439 agriculture was not one of them. So China has a 0:19:45.600 --> 0:19:50.000 much lower output in agriculture, even though they deploy two 0:19:50.840 --> 0:19:54.000 million people in this area you asked as a fraction 0:19:54.040 --> 0:19:57.720 of that, and a much larger agricultural output. So China 0:19:57.800 --> 0:20:02.320 is facing conventional the industrial sization, it's facing agricultural revolution 0:20:02.480 --> 0:20:05.840 or improvements and yields in agriculture that they need to do, 0:20:06.320 --> 0:20:10.000 and many other aspects compared to US. Was just focusing 0:20:10.720 --> 0:20:14.760 on reindustrializing in a different form. Just on the topic 0:20:14.800 --> 0:20:16.879 of China. You know, we mentioned in the intro that 0:20:16.920 --> 0:20:20.479 the reopening has become a big theme in markets. The 0:20:20.560 --> 0:20:24.800 prospect of China really trying to restimulate economic growth, and 0:20:24.840 --> 0:20:27.040 it does seem like to some extent they are opening 0:20:27.080 --> 0:20:30.439 these bigots of credit once again. They're rolling back some 0:20:30.520 --> 0:20:34.080 of the previous policy crackdowns on sectors like real estate, 0:20:34.359 --> 0:20:38.320 some aspects of consumer tech. Two questions here. One is 0:20:38.359 --> 0:20:42.160 the China reopening going to export inflation to the rest 0:20:42.240 --> 0:20:45.280 of the world because it stimulates higher demand or is 0:20:45.320 --> 0:20:49.240 it going to export deflation because industrial capacity is getting 0:20:49.280 --> 0:20:52.479 boosted at the same time. And then secondly, is it 0:20:52.520 --> 0:20:56.960 possible for China to return to the period of high growth, 0:20:57.040 --> 0:21:00.320 you know, above five percent? And you know Joe mentioned 0:21:00.359 --> 0:21:02.680 that we're recording this on January eighteenth. I think we 0:21:02.760 --> 0:21:05.400 had China's GDP figures just a day or two ago 0:21:05.520 --> 0:21:09.680 coming in at sub three something like that. Yeah, Well, 0:21:09.920 --> 0:21:13.399 answering sort of the second question. First, if you think 0:21:13.640 --> 0:21:16.440 of beyond the recovery from COVID so, in other words, 0:21:16.440 --> 0:21:19.680 beyond second half of twenty three and the first half 0:21:19.680 --> 0:21:24.160 of twenty four, if we start looking into twenty and beyond, 0:21:24.680 --> 0:21:28.199 I don't believe China can return back to anything like 0:21:28.320 --> 0:21:31.280 five six percent GDP growth rates. And the reason, but 0:21:31.359 --> 0:21:35.320 it is simple contribution of labor is now zero. In fact, 0:21:35.400 --> 0:21:39.240 even if you include quality adjustments. In other words, labor 0:21:39.280 --> 0:21:42.800 force becomes more educated over time. Even if you include that, 0:21:43.080 --> 0:21:47.280 there is virtually no labor contribution. Secondly, capital contribution has 0:21:47.320 --> 0:21:49.280 been very high. Look at the last year, it was 0:21:49.320 --> 0:21:53.840 all investment that draw the China's China's performance. So the 0:21:53.880 --> 0:21:58.720 result is efficiency of capital utilization is declining, Incremental capital 0:21:58.720 --> 0:22:01.400 output ratious and eight ten times. So in other ways, 0:22:01.400 --> 0:22:04.240 you need eight ten dollars of investment for every dollar 0:22:04.320 --> 0:22:08.600 of GDP that you generate. That explains why China it 0:22:08.840 --> 0:22:15.040 is reluctant to stimulate conventionally, it's reluctant to unleash infrastructure 0:22:15.040 --> 0:22:17.359 and real estate the same way as they did on 0:22:17.400 --> 0:22:20.440 the previous three occasions over the last ten years, because 0:22:20.440 --> 0:22:24.159 they don't want efficiency of capital utilization continue to declining 0:22:24.400 --> 0:22:27.080 or the opposite side of a debt increasing. That's why 0:22:27.200 --> 0:22:30.160 China is caring sixty trillion dollars of debt right now. 0:22:30.720 --> 0:22:33.080 And that leaves you only was one area of growth, 0:22:33.720 --> 0:22:36.680 and that's multi factor productivity. So if you don't contribute labor, 0:22:36.720 --> 0:22:40.800 if you constrain capital, you only have multi factor productivity. Now, 0:22:40.800 --> 0:22:43.600 the problem is multi factor. Productivity in China has been 0:22:43.640 --> 0:22:47.760 declining consistently for the last ten years, even on official numbers. 0:22:47.760 --> 0:22:51.679 On unofficial numbers, it actually even bordering negative numbers. In 0:22:51.680 --> 0:22:55.200 other words, productivity detracts from GDP growth rates. So how 0:22:55.200 --> 0:22:58.040 do you restart productivity? Well, to me, there is only 0:22:58.040 --> 0:23:00.399 two ways. Whither you go back to the polls is 0:23:00.560 --> 0:23:05.320 from nine eighties until GFC, and that is shrinking of 0:23:05.400 --> 0:23:08.320 the state, shrinking of the role of state on enterprises, 0:23:08.720 --> 0:23:12.560 opening up private sector. You either do that chances of 0:23:12.640 --> 0:23:16.560 reversal of policy that they had since two thousand eight 0:23:16.760 --> 0:23:19.240 for the last fifteen years, and that is the opposite 0:23:19.240 --> 0:23:22.080 of it, growing state on enterprises, growing the role of 0:23:22.080 --> 0:23:26.080 the state. Chances of that reversal occurring is near zero. 0:23:26.480 --> 0:23:28.600 So what else do you have, Well, the only other 0:23:28.640 --> 0:23:33.760 way to grow productivity is through technology. This is your robotics, automation, 0:23:33.920 --> 0:23:37.240 fusion of infotech, bi attack, this is the alternative energy 0:23:37.359 --> 0:23:40.760 transport platforms. But this takes a very long time to 0:23:40.880 --> 0:23:43.920 come to pass. It's a right approach, it's totally right approach, 0:23:43.960 --> 0:23:46.600 but it takes a very very long time. So the 0:23:46.640 --> 0:23:49.280 only other way to try to grow productivity is to 0:23:49.440 --> 0:23:51.720 mix and match all of that as much as you can, 0:23:52.160 --> 0:23:55.880 and embark on domestic services agriculture. We just talked about 0:23:55.880 --> 0:24:00.560 agricultural revolution improving domestic productivity now, so to me, when 0:24:00.560 --> 0:24:03.840 I combine those numbers, I can't really see how they're 0:24:03.880 --> 0:24:07.080 going to come back to five six groce rates. And 0:24:07.119 --> 0:24:10.480 if they do, they're either committing even more capital, which 0:24:10.480 --> 0:24:14.639