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Speaker 1: Bloomberg Audio Studios, Podcasts, Radio News.

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Speaker 2: Hello and welcome to another episode of the Odd Blots podcast.

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Speaker 2: I'm Tracy Alloway.

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Speaker 3: And I'm Joe Wisenthal.

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Speaker 2: Joe, did you watch the FOMC presser recently?

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Speaker 1: No?

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Speaker 3: I did not, because we were recording an episode of

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Speaker 3: the Odd Lots podcast. Yeah, that happened, So I know

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Speaker 3: that you didn't watch it either, unless you watch it

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Speaker 3: on video afterwards, in which case you are a better

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Speaker 3: journalist than I am.

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Speaker 2: I didn't. Just to clear that up. What I did

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Speaker 2: was I read a bunch of analysis of the FED

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Speaker 2: meeting and a bunch of news summaries of what happened.

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Speaker 2: And I have to say there was one term that

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Speaker 2: I really liked, one description. I think it was in

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Speaker 2: the ft and they sort of described the FED as

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Speaker 2: a monument to stasis.

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Speaker 3: I mean that could be a good thing. First of all.

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Speaker 3: By the way, plug, there's a really the other thing

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Speaker 3: you can do if you miss a pressor on the

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Speaker 3: Bloomberg terminal and I forget the code right now, but

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Speaker 3: they produce transcripts very fast, and the transcripts aren't published

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Speaker 3: of the press conferences like they don't appear anywhere, so

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Speaker 3: plug for our terminal here. But yes, look, it's been

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Speaker 3: a weird year for the FED, right, because I mean,

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Speaker 3: inflation continue at least through Q one of the year,

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Speaker 3: inflation hot to then expect it, all these expectations of

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Speaker 3: cuts keep getting priced out. Everyone's higher for longer. It's

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Speaker 3: unclear whether the sort of simple models that we use, like,

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Speaker 3: I mean, I think everyone sort of knows this. Nobody

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Speaker 3: really knows how inflation works. But did everything seems to

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Speaker 3: be okay, right.

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Speaker 2: I think one of the issues that the FED might

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Speaker 2: be facing is they put so much emphasis on data

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Speaker 2: dependency that it kind of means that like every monthly

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Speaker 2: reading of CPI can generate a completely different response. So

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Speaker 2: when CPI comes in stronger than expected, everyone starts panicking

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Speaker 2: about the lack of rate cuts, and maybe even you

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Speaker 2: get a rate hike at some point. When it comes

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Speaker 2: in weaker than expected, you know, as it was doing

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Speaker 2: up until fairly recently, everyone gets very excited and we

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Speaker 2: get that kind of goldilocks moment inequities.

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Speaker 3: There does seem to be like this weird tension between

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Speaker 3: I know, they don't use like formal forward guidance anymore,

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Speaker 3: but in a way the dots sort of serve that

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Speaker 3: purpose and sort of imply the FED so called reaction function,

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Speaker 3: And so we're supposed to sort of take all of

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Speaker 3: these data points, plug them into this black box reaction function,

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Speaker 3: and then sort of implicitly see what that means for policy.

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Speaker 3: But it does seem like things move a lot from

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Speaker 3: data point to data point, so it becomes very present oriented.

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Speaker 2: Man. Yes, that's a great way of putting it. And

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Speaker 2: then the other thing I would say is, in addition

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Speaker 2: to all the complexity around what's going on with the

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Speaker 2: US economy, and it's kind of phenomenal in many ways,

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Speaker 2: that we're still having intellectual arguments about what the impact

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Speaker 2: of higher interest rates actually is and whether or not

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Speaker 2: it actually does anything to bring down inflation. But beyond that,

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Speaker 2: the other thing that's starting to happen is we are

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Speaker 2: seeing international consequences and we've been talking about them on

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Speaker 2: the Show of the Higher for a longer stance. So

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Speaker 2: the dollar has been rising. I think the spot dollar

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Speaker 2: index is up almost four percent so far this year,

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Speaker 2: and then against specific currencies like the Japanese yen, it's

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Speaker 2: surged even more. And so we are seeing those tensions

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Speaker 2: between strength in the US economy, you know, ongoing inflationary pressures,

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Speaker 2: higher rates for longer, potentially kind of meet emerging markets

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Speaker 2: and also developed economies in the wider world totally.

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Speaker 3: You know. We had that interview recently with Hugh Hendry.

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Speaker 3: Extremely colorful character to say the least. But one of

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Speaker 3: the points that I found very interesting was like, we're

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Speaker 3: not really used to an environment in which it's the

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Speaker 3: US that's out, that's lapping everyone else, growing much faster

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Speaker 3: than G seven or G ten or G whatever. Peers

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Speaker 3: sort of powering ahead all this domestic investment, and so

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Speaker 3: we get this upward pressure, higher rates, higher dollar stress elsewhere.

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Speaker 3: It's an interesting environment.

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Speaker 2: G whatever is a good term.

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Speaker 3: Can coin that, yeah, because I know Ian Brember has

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Speaker 3: the G zero, but like I don't, I like G whatever.

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Speaker 2: The G whatever summit that should be a thing.

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Speaker 3: Okay, any country can come.

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Speaker 2: Okay, But when we want to connect the dots between

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Speaker 2: what's happening with central banks around the world, between the

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Speaker 2: US economy and the FED, and the global macro situation,

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Speaker 2: there's one person that we like to call in particular.

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Speaker 2: So today we are bringing back Victor Schwetz. He is,

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Speaker 2: of course a strategist over at McCrory, and we love

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Speaker 2: talking to him. So Victor, thank you so much for

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Speaker 2: coming back on all thoughts.

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Speaker 4: Thank you for having me remind.

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Speaker 2: Us before we begin, it's not just us, right, the

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Speaker 2: data dependency of the Fed. They have emphasized that a

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Speaker 2: number of times, and to some extent it seems like

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Speaker 2: it is coming back to haunt them whenever there is

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Speaker 2: a stronger than expected inflation print. And then we had

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Speaker 2: payrolls since CPI, and payrolls came in lower than expected

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Speaker 2: for the first time in ages and everyone got really

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Speaker 2: excited about that.

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Speaker 4: You're absolutely right, Tracy, that what essentially we have is

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Speaker 4: a federal reserve is a prisoner of policies they start

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Speaker 4: putting in a couple of years ago, which is essentially

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Speaker 4: being extremely data dependent rather than forward looking. There is

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Speaker 4: another problem, and that's the dots, one of the most

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Speaker 4: destructive instruments from Bernaki era. So it's not anything to

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Speaker 4: do with j.

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Speaker 5: Powell.

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Speaker 4: I think if he could, he would have good rid

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Speaker 4: of dots today. The problem he has is that the

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Speaker 4: volatility getting rid of dots probably will be greater than

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Speaker 4: the volatility dots themselves are creating. So you're trying to

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Speaker 4: denigrate it by arguing that dots degenerate almost immediately as

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Speaker 4: soon as they are published, So he's trying to take

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Speaker 4: our attention away from dots. But as long as they

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Speaker 4: have published, they are the materials. So you've got a

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Speaker 4: data dependency on the one side, which is basically dependency

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Speaker 4: on a backward looking or at best contemporaneous numbers that

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Speaker 4: you have. You also have a lot of faulty numbers,

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Speaker 4: whether it is how you determine shelter expenses or ornery

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Speaker 4: equivalent rent, how do you relate secondhand cup prices, how

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Speaker 4: do you measure insurance policy or financial markets. But there's

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Speaker 4: also major problems with Bureau label statistics. I mean, I'm

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Speaker 4: glad that they've increased or revised hours work last week,

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Speaker 4: which basically showed the productivity miracle wasn't really there. So

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Speaker 4: you have quite a faulty numbers both from Bureau of

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Speaker 4: Labor statistics. On a labor market, you have mostly backward

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Speaker 4: looking or contemporaneous numbers. In terms of inflation, and if

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Speaker 4: you become data dependent, you starting to create exceptional volatility

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Speaker 4: because you basically like a deer in a in alarmed

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Speaker 4: in a light. You are stuck. You are you cannot

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Speaker 4: move to the left, you cannot move to the right. Now,

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Speaker 4: what I think jerrem Pal is doing quite well is

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Speaker 4: trying to introduce some degree of forward guidance. So essentially,

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Speaker 4: what he's saying, and what he said last week is

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Speaker 4: that if I think of the shelter expenses, they're not

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Speaker 4: quite as bad as the numbers look. And he's absolutely

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Speaker 4: right if he talks about other service oriented numbers again,

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Speaker 4: whether it's insurance or anything else, he kept emphasizing they're

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Speaker 4: not as bad as what they appear, BOSS and CPI

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Speaker 4: and PCEE, and he's been quite vocal that the labor

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Speaker 4: market actually a lot loser than what Bureau Labor statistics highlights.

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Speaker 4: But the problem is tracy. If you are a prisoner

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Speaker 4: of data dependency and dots, the chances of committing a

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Speaker 4: policy error increases. And so one of the questions I

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Speaker 4: struggle with whether in fact it matters if at a

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Speaker 4: reserve does commit a policy error.

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Speaker 3: I feel like we could have a whole episode just

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Speaker 3: on the dots, and the problem with this is a

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Speaker 3: communication strategy. Maybe we will, but anyway, it's interesting you

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Speaker 3: said this just I guess it was either today, earlier today,

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Speaker 3: or yesterday. Minneapolis Fed Neil kesh Curry ended his speech

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Speaker 3: the final section of his speech shout out to our

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Speaker 3: old colleague Lukawa for flagging this. This is also a

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Speaker 3: communication challenge for policymakers. In my own summary of economic projections,

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Speaker 3: except the formal name for the dots submission, I have

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Speaker 3: only modestly increased my longer run nominal neutral funds rate.

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Speaker 3: Blah blah blah. This step does not provide a simple

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Speaker 3: way to communicate the policy that the neutral rate might

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Speaker 3: be at least temporarily elevated.

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Speaker 5: De codet.

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Speaker 3: What is the issue as you see it with the dots.

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Speaker 4: Well, well, there are a couple of these shoes, Okay,

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Speaker 4: one of them. Dots work very well. If everything is plus,

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Speaker 4: it not a problem. Whenever you have a high degree

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Speaker 4: volatility ISAAC externally or internally driven dots really don't tell

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Speaker 4: you anything because it's really a personal opinion of several governors.

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Speaker 4: Some are voting, some are not voting right now, and

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Speaker 4: it's not linked to either federal policy. It's not vetted,

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Speaker 4: it's not researched. There is nothing in it so long

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Speaker 4: as the line of sight is relatively stable thoughts are

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Speaker 4: absolutely fine. As soon as you get the volatility, they

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Speaker 4: are not. And I think Philipplow, who was who retired

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Speaker 4: as a governor of Reserve Bank of Australia late last

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Speaker 4: year put it the best way. He said, central banks

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Speaker 4: will never see again inflation contained in a narrow range.

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Speaker 4: Now what it basically means that this idea that you

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Speaker 4: have relatively flatish outlaw and you try to manage it

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Speaker 4: on a margin, is becoming irrelevant. So for example, Federal

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Speaker 4: Reserve at the end of last year, on a number

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Speaker 4: of variables, they went past their mandate. In fact, they've

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Speaker 4: overachieved their amendate. And if you look at what subsequent

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Speaker 4: three or four months, suddenly they were ahead of their mandate.

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Speaker 4: And that's what Philip Law was highlighting that from now

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Speaker 4: on you're going to have a great deal of volatility

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Speaker 4: of those numbers. And I think the dots by themselves

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Speaker 4: magnify that volatility rather than creating a gretic sort of

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Speaker 4: clarity for market participants.

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Speaker 2: So why do you say that a FED policy error

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Speaker 2: might not matter? And I should caveat this with you know,

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Speaker 2: Joe and I spend a lot of time online and

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Speaker 2: coing pie some of the you know social media discourse.

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Speaker 2: The world basically revolves around whether or not the Fed's

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Speaker 2: going to make a policy error. And the bias is

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Speaker 2: always the FED is doing something wrong in one way

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Speaker 2: or another. But why do you think it might not matter?

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Speaker 4: Well? I usually say to people, Look, we had terrific tightening,

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Speaker 4: we had some withdrawal of liquidity. Could you explain to

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Speaker 4: me how high yield spreads only about three percent, which

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Speaker 4: is the lowest. Ever, how could you explain to me

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Speaker 4: it's a double b bad debt is trading at only

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Speaker 4: two percent spreads? How can you explain to me that

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Speaker 4: despite a very significant rise in US dollar, which both

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Speaker 4: of you have just highlighted, the basis swaps are only

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Speaker 4: five BIPs. They should be more like fifty BIPs are

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Speaker 4: above and so to me, the advantage of our era

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Speaker 4: is that, first of all, we have too much capital.

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Speaker 4: In other words, the idea of scarcity of capital that

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Speaker 4: underlines thinks like DCF calculation or underlines most of the

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Speaker 4: investment decision do not apply when you have too much capital.

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Speaker 4: Now it is not evenly or fairly distributed by any means,

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Speaker 4: But there is plenty of capital. And the way you

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Speaker 4: can measure it is essentially, what is the value of

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Speaker 4: all your financial instruments globally against real underlying economies and

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Speaker 4: what do you find? Depending how you do all balance

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Speaker 4: it commitments, how you do derivatives, you could be looking

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Speaker 4: five to ten times larger than the underlying economies. So

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Speaker 4: we have plenty of capital. What it basically means, no

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Speaker 4: matter what Federal Reserve does, it's very hard to tighten

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Speaker 4: because that capital just keeps circulating looking for diminishing returns.

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Speaker 4: The second thing we have, and Bloomberg plays a great

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Speaker 4: role in it, is that we have instantaneous repricing. So anybody,

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Speaker 4: any word in the market, it's instantaneously gets repriced. And

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Speaker 4: the third thing we have is that central banks are

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Speaker 4: rolling out policies and an incredible speed. They're not even

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Speaker 4: debating what is the outcome of those policies or what

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Speaker 4: are the implications of what we're doing. Usually something happens

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Speaker 4: on Thursday and Friday, and by Monday it's all fixed.

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Speaker 4: And so are we going to have new policies for

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Speaker 4: private capital or private debt equivalent to what we have

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Speaker 4: for Silicon Valley Bank? Are we going to have special

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Speaker 4: policies for perity trade basis trade from some of some

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Speaker 4: of the niches in a high yield market. Of course

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Speaker 4: we are so if you have too much capital, if

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Speaker 4: you're repricing instantaneously, and if central banks are willing and

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Speaker 4: prepared to plug the holes almost instantaneously, this is a

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Speaker 4: world of no risk. In other ways, the way I

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Speaker 4: put it, if the risk is everywhere, the risk is nowhere,

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Speaker 4: and if the risk is nowhere, then you can explain speculation.

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Speaker 4: You can explain goal price of bitcoin. You can explain

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Speaker 4: why high yields will be trading at only three percent

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Speaker 4: spreads because there is no risk. And the reason central

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Speaker 4: banks are doing it not because they're greedy for power

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Speaker 4: anything else. There is no shadow, you know, deep state

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Speaker 4: or anything like that. The reason they're doing it is

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Speaker 4: because of the dangers of not doing it. If you

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Speaker 4: sink of dot Com, that was only one asset price

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Speaker 4: going wrong. If you think of GFC, that's really a

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Speaker 4: bigger asset, but only one Today. You know, land mines

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Speaker 4: are everywhere, and those land mines, each one of them,

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Speaker 4: could be bigger than the original GFC. And so the

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Speaker 4: result is central banks really don't have a choice. So

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Speaker 4: even if Federal Reserve does commit a policy error, which

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Speaker 4: is possible, they can unwind it in split second. The

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Speaker 4: way I describe it in my notes is to say,

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Speaker 4: let's assume you get up, get in the morning, say

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Speaker 4: oh my god, it's going to be a terrible day.

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Speaker 4: By lunchtime, I know it's okay. And by evening, let's

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Speaker 4: have a dinner, and the whole thing just evaporated. Now

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Speaker 4: the key question, however, to ask what price do we

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Speaker 4: pay for it? And the price we pay for it

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Speaker 4: is a volatility of inflation rates. Is this volatility? It

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Speaker 4: is volatility of the neutral rates. In other words, the

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Speaker 4: way describe it, risk does not disappear. It just migrates.

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Speaker 4: So if you keep the market plus it, which is

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Speaker 4: what we're doing, risks simply migrates somewhere else. It migrates

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Speaker 4: into politics, it migrates into social sphere, it migrates into geopolitics.

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Speaker 4: And so we do pay a price. We do pay

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Speaker 4: a price for this. But to argue that central bank

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Speaker 4: is committing an error furniture must be broken is wrong.

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Speaker 4: Even if they commit the error, which is possible, they

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Speaker 4: can unwind it in thirty seconds.

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Speaker 3: I want to get into maybe migrate the conversations geopolitics

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Speaker 3: and this migration of risks, because you write a lot

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Speaker 3: very well on that, but just sort of real quickly

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Speaker 3: before we do that. In your view, you describe this

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Speaker 3: world of like so much capital relative to GDP. You

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Speaker 3: know people, you know, they blame q E for stuff

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Speaker 3: like this or whatever. Is there like an original policy sin?

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Speaker 3: And I don't even know if.

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Speaker 4: It's a same Paul Walker?

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Speaker 3: Okay, explain, So what is this sort of original sin

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Speaker 3: that created this world.

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Speaker 4: Of a Bundy? Well, if you say of Paul Walker,

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Speaker 4: he mostly known of course for squashing inflation, but if

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Speaker 4: you go back in time, I think his much bigger

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Speaker 4: legacy is creating that system of global recycling of capital

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Speaker 4: and addiction to dead and addiction to asset prices prior tonight. Well, essentially,

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Speaker 4: what happened. We've deregulated the financial sphere. We've deregulated the

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Speaker 4: regulating capital flow. The idea was that United States will

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Speaker 4: take the money from other people and stimulate consumption, and

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Speaker 4: those other people will be buying treasury bones, for example,

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Speaker 4: in order to get return to lower the cost for

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Speaker 4: US consumers, but also to reduce their currency and make

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Speaker 4: themselves more competitive. Now, Paul Walker was expecting that currency

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Speaker 4: eventualist will recalibrate this process, but they never did because

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Speaker 4: nobody ever wanted to have an appreciating currency, and so

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Speaker 4: we're stuck in the world of accumulating against disparities between

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Speaker 4: savings and spending. In other words, US and the UK

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Speaker 4: consistently net spender, Germany, Netherlands, China career, Japan consistently net saber,

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Speaker 4: and we've never really rebalanced it properly. So one of

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Speaker 4: the side effects of that was that it become easier

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Speaker 4: and easier to borrow, easy and easier to bring future

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Speaker 4: consumption to the present to maintain your lifestyle. It became

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Speaker 4: easy and easier to multiply credit. Instead of having one

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Speaker 4: instrument parasset, we can now have five instrument parasets ten

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Speaker 4: in each one of those instruments can be leveraged yet

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Speaker 4: again and yet again, and so all of that created

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Speaker 4: massive amount of capital. I mean, if you think of

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Speaker 4: the financial stability, or they tried to calculate the overall

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Speaker 4: level of financialization, they're usually behind time. They only have

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Speaker 4: twenty twenty two numbers. But essentially what they were showing

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Speaker 4: about five hundred trillion dollars, and that's based on the

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Speaker 4: net derivatives and not including any of balance IT commitments

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Speaker 4: or major ones, and so that's effectively was five times

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Speaker 4: global GDP. So that's what started. So if you were

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Speaker 4: to ask one person or one time when that happened,

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Speaker 4: it's really Paul Walker who created our debt and asset

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Speaker 4: based culture now green spent in late eighties, or he did.

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Speaker 4: He took Walker's idea and brought it to logical conclusion,

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Speaker 4: and that's was a green spent put which Bernark and

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Speaker 4: Yellen subsequently maintained.

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Speaker 2: Yeah, it is interesting. I think I might have written

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Speaker 2: a little bit about this in the All Lots newsletter

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Speaker 2: or kind of thought out loud about it. It feels

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Speaker 2: like we're internalizing the idea that the supply of credit

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Speaker 2: can expand even as the cost of money goes up

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Speaker 2: via benchmark rates, which might not necessarily be a new

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Speaker 2: dynamic as you just described, but like one that was

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Speaker 2: probably underappreciating.

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Speaker 3: Intuitive.

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Speaker 2: Yeah, unintuitive and underappreciated until this very moment in time.

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Speaker 2: I want to ask one more thing on the US

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Speaker 2: economy and the FED before we maybe broaden out the

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Speaker 2: conversation to geopolitics and pressures in other parts of the world.

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Speaker 2: But I remember one of the things I really liked

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Speaker 2: about your framing of the post pandemic period was, unlike

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Speaker 2: a lot of other pundits, you did not go back

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Speaker 2: to the nineteen seventies as your preferred historical analogy. You

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Speaker 2: went back to the nineteen eighteen Spanish flu, which resulted

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Speaker 2: in a big run up in inflation, but then a

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Speaker 2: pretty rapid deflationary bust. And I'm curious, you know, here

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Speaker 2: we are in twenty twenty four. Inflation is still relatively strong.

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Speaker 2: We haven't seen interest rate cuts at all, and as

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Speaker 2: expected maybe back in late twenty twenty two, going into

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Speaker 2: twenty twenty three, there are a lot of people who

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Speaker 2: predicted we'd see cuts and recessions, and I think you

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Speaker 2: might have been one of them. But have you been

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Speaker 2: surprised by I guess, the stubbornness of inflation and the

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Speaker 2: higher for longer scenario in the US. And how is

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Speaker 2: that stacking up against that nineteen eighteen parallel.

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Speaker 4: Well, the way I look at it, my argument was,

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Speaker 4: there will be no recessions in the US. There will

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Speaker 4: be no recession globally, because we don't have recession, there

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Speaker 4: is nothing to recover from, so don't expect any significant recovery.

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Speaker 4: That's why my global growth rates always pitched that around

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Speaker 4: two two and a half percent, which is at least

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Speaker 4: seventy five basis points less than what we used to

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Speaker 4: have with the previous decade, and about one hundred basis

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Speaker 4: points less than what we used to have in the pause.

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Speaker 4: My view, as you correctly said that as you have

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Speaker 4: sort of misilocation of demanded supply curves, as we have

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Speaker 4: destabilization of demanded supply curves, gradually winds down, inflation should

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Speaker 4: come out. No need for recession, no need for unemployment,

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Speaker 4: but there is a price we pay, and the price

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Speaker 4: we pay, there will be no recovery, and there will

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Speaker 4: more or less a circular stagnation argument. Globally, some countries

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Speaker 4: will grow a little bit faster than others, and that

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Speaker 4: will be primarily driven by primary deficits, because overall deficits

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Speaker 4: don't matter. Primary deficits doue and the US happened to

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Speaker 4: have the highest deficits. US is now running about three

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Speaker 4: three and a half percent of GDP primary deficits. Europe

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Speaker 4: is less than one. Japan is less than two. So

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Speaker 4: if you have a higher primary deficits, you push up

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Speaker 4: your neutral rates higher compared to for example, European Monetary

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Speaker 4: Union or Japan. Now, this inflationary trend in the global

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Speaker 4: is still continuing. Now. If you sink of G five CPI.

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Speaker 4: For example, when we were here last time in sort

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Speaker 4: of late twenty two early twenty three, the number was

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Speaker 4: five percent. In March it was two point four. Now

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Speaker 4: two point four. It's only twenty thirty BIPs higher than

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Speaker 4: it was over the previous twenty five years. But the

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Speaker 4: leadership changed. If you sing up the second half of

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Speaker 4: twenty three, this inflation in the US was extremely strong,

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Speaker 4: but inflation in Europe, UK and Japan actually was climbing,

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Speaker 4: not down. What you saw over the last four months

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Speaker 4: is it inflation start breaking in the UK, start breaking

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Speaker 4: at Eurozone, start breaking in Japan. This inflation got stronger

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Speaker 4: in China as we progress, but in the US it's

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Speaker 4: stuck and actually gone up a bit. Now the question

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Speaker 4: is whether that's something unique to United States a weather.

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Speaker 4: In fact, in the second half of twenty four, we're

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Speaker 4: going to relieve what we had in the second half

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Speaker 4: of twenty three and the United States will join the

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Speaker 4: rest of the world in a disinflationary trend. That's my

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Speaker 4: base case. Now what underpins it is neutral rates and productivity. Now,

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Speaker 4: my view is that neutral rate has not changed. Neutral

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Speaker 4: rate is a long term process. That's why almost all

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Speaker 4: models are still showing that neutral rates in the US

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Speaker 4: are fifty to one hundred basis points real, which means

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Speaker 4: policy rates should be closer to three, not five and

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Speaker 4: a half on that basis. But in a short term

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Speaker 4: you can have a spike in those neutrals rates. Now

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Speaker 4: I do sing neutral rate spike, despite the fact that

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Speaker 4: models don't show it. I think it did spike. Now

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Speaker 4: the question is whether it's already coming off or whether

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Speaker 4: somehow we can keep neutral rate at a much higher level.

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Speaker 4: One of the key elements there is productivity. Now, I'm

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Speaker 4: not a buyer that there will be any productivity improvements.

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Speaker 4: In other words, labor productivity or multi factor productivity is

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Speaker 4: not going to recover for at least ten years, possibly

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Speaker 4: even twenty years. Now, if you take a view that

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Speaker 4: productivity is not going to drive it, then either you

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Speaker 4: have to have much higher primary deficits continuing, or you

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Speaker 4: have to have some other form of shocks in the

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Speaker 4: system in order to drive it up. So if I'm

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Speaker 4: correct that neutral rates have not changed and it's still

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Speaker 4: fifty to one hundred bases points real, then it must

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Speaker 4: be coming off. As it comes off, deflator comes off

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Speaker 4: normenal GDP drops from In the US, it's already down

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Speaker 4: from twelve percent to five point four. As it starts

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Speaker 4: dropping towards four percent. You can't keep policy rates at

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Speaker 4: five and a half unless so you want to have

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Speaker 4: a recession. That's the only reason to have it. So

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Speaker 4: I'm still in the same camp, except as desynchronized or

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Speaker 4: going back to the Reserve Bank of Australia. It's violent

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Speaker 4: how it moves. Also, on more point, in the US,

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Speaker 4: inflation is really in pockets. In twenty two or twenty one,

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Speaker 4: even in early twenty three it was all over the place.

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Speaker 4: Right now is just in pockets. So all you need

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Speaker 4: to do is to bring those pockets down to a

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Speaker 4: low level.

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Speaker 3: I mean, we could also just talk for an hour

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Speaker 3: about why it don't take twenty years before we see

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Speaker 3: a productivity boom, but let's talk a little geopolitics. So

436
00:23:35,040 --> 00:23:38,040
Speaker 3: this idea risk has been taken out of the financial

437
00:23:38,080 --> 00:23:41,800
Speaker 3: system and it migrates elsewhere. Maybe the politics, maybe the

438
00:23:41,840 --> 00:23:45,320
Speaker 3: geopolitics were obviously in a moment, and you can just

439
00:23:45,320 --> 00:23:47,640
Speaker 3: see it by all the trips people in the administration

440
00:23:47,800 --> 00:23:49,960
Speaker 3: take to trips to China, where there was a significant

441
00:23:49,960 --> 00:23:55,800
Speaker 3: amount of anxiety about China geopolitically, military to military communication,

442
00:23:56,280 --> 00:24:00,400
Speaker 3: cooling the temperature, coupled with industrial anxiety. Are they going

443
00:24:00,440 --> 00:24:03,080
Speaker 3: to own the EV market for the entire world, et cetera.

444
00:24:03,840 --> 00:24:07,040
Speaker 3: Draw that line for us, maybe start there, Draw that

445
00:24:07,240 --> 00:24:10,159
Speaker 3: line for us between the sort of taking out of

446
00:24:10,600 --> 00:24:13,400
Speaker 3: financial risk and that migration and how that fits into

447
00:24:13,440 --> 00:24:14,159
Speaker 3: the China phasis.

448
00:24:14,359 --> 00:24:18,120
Speaker 4: Sure. Well, one of the things I disagreed with almost

449
00:24:18,160 --> 00:24:20,600
Speaker 4: everyone over the last two or three years. Remember the

450
00:24:20,680 --> 00:24:23,320
Speaker 4: view was that China is running out of people and

451
00:24:23,359 --> 00:24:27,520
Speaker 4: so China will be exporting inflation. Now, my argument all

452
00:24:27,520 --> 00:24:31,640
Speaker 4: along was China cannot export inflation. Their major export of disinflation,

453
00:24:32,200 --> 00:24:35,119
Speaker 4: and the reason for that is very simple. China, just

454
00:24:35,160 --> 00:24:39,240
Speaker 4: like Japan's seventies eighties, has a very high national saving rates.

455
00:24:39,240 --> 00:24:42,280
Speaker 4: I RUNIC at about forty five percent, just like Japan

456
00:24:42,320 --> 00:24:45,000
Speaker 4: and seventies eighties. Could have put policies in place to

457
00:24:45,080 --> 00:24:48,679
Speaker 4: consume it, but they didn't, neither have China. And so

458
00:24:48,800 --> 00:24:51,320
Speaker 4: the result is they must invest at least forty two

459
00:24:51,359 --> 00:24:53,680
Speaker 4: to forty three percent of GDP sink of the numbers.

460
00:24:53,880 --> 00:24:57,520
Speaker 4: That's an equivalent of nine to ten trillion dollars invested

461
00:24:57,640 --> 00:25:01,639
Speaker 4: every year. It's double of GDP of Japan invested every

462
00:25:01,680 --> 00:25:04,800
Speaker 4: single year. Now, if you invest in that sort of money,

463
00:25:04,880 --> 00:25:07,879
Speaker 4: it doesn't really matter what you invest in. You create

464
00:25:08,040 --> 00:25:11,960
Speaker 4: massive over capacities. And if you go into niches sayings

465
00:25:12,160 --> 00:25:18,400
Speaker 4: like what Chi shipping calls productive forces, seeings like electric vehicles, robotics, automation,

466
00:25:18,960 --> 00:25:22,440
Speaker 4: solar industry, if you go onto smaller niches, you almost

467
00:25:22,520 --> 00:25:26,560
Speaker 4: automatically create three times global demand, if not more. Now,

468
00:25:26,600 --> 00:25:30,840
Speaker 4: at that point they have very limited choices. Either they

469
00:25:31,040 --> 00:25:35,800
Speaker 4: change their pivot, their policies, dramatically send checks to people

470
00:25:35,840 --> 00:25:37,360
Speaker 4: instead of building another factory.

471
00:25:37,600 --> 00:25:39,960
Speaker 2: You know, raise social safety.

472
00:25:40,040 --> 00:25:44,000
Speaker 4: Now, raise universal basic income. They already have universal basic

473
00:25:44,040 --> 00:25:46,960
Speaker 4: income in China. Just raise it and equalize it across

474
00:25:47,080 --> 00:25:49,640
Speaker 4: across the country. So you either do that, But if

475
00:25:49,640 --> 00:25:52,120
Speaker 4: you're not willing to do that, which they're not, then

476
00:25:52,280 --> 00:25:54,760
Speaker 4: the only way you can do it is except that

477
00:25:54,840 --> 00:25:58,320
Speaker 4: you lost the capital and close the factories and we

478
00:25:58,359 --> 00:26:01,800
Speaker 4: will discover China potentially much smaller country than what we

479
00:26:01,880 --> 00:26:05,280
Speaker 4: thought it was, or the other alternative dump that access

480
00:26:05,320 --> 00:26:09,719
Speaker 4: capacity onto other countries. But given the amounts of money involved,

481
00:26:10,000 --> 00:26:13,040
Speaker 4: there is not much you can dumb on Kazakhstan that

482
00:26:13,080 --> 00:26:18,639
Speaker 4: there is only UK, European Monetary Union or EU, United States, Japan.

483
00:26:18,680 --> 00:26:22,000
Speaker 4: There's very few places that can take that sort of capacity.

484
00:26:22,760 --> 00:26:26,160
Speaker 4: And so what's happening those countries are putting up barriers now.

485
00:26:26,160 --> 00:26:29,440
Speaker 4: The reason they're putting up barriers is that China also

486
00:26:29,520 --> 00:26:32,520
Speaker 4: wants to change the world. They want to redesign everything,

487
00:26:32,640 --> 00:26:35,320
Speaker 4: whether it's human rights information, whether it's the role of

488
00:26:35,320 --> 00:26:38,680
Speaker 4: state versus individual, whether it's the role of state subsidies,

489
00:26:38,880 --> 00:26:41,680
Speaker 4: trade rules. They want to change everything. So if China

490
00:26:41,760 --> 00:26:44,720
Speaker 4: did not try to change the world, I think the

491
00:26:44,800 --> 00:26:47,520
Speaker 4: extent to which the barriers would have come up would

492
00:26:47,560 --> 00:26:50,680
Speaker 4: not have been as aggressive. But now China has a

493
00:26:50,760 --> 00:26:54,240
Speaker 4: catch twenty two barriers will come up, which means it's

494
00:26:54,280 --> 00:26:57,720
Speaker 4: harder to sell that access capacity. You don't want to

495
00:26:57,720 --> 00:27:01,000
Speaker 4: recognize the loss of the capital, and what you're trying

496
00:27:01,000 --> 00:27:03,200
Speaker 4: to do is to go on a charm offensive. That's

497
00:27:03,200 --> 00:27:06,600
Speaker 4: why a Chinese president is in Europe right now. From

498
00:27:06,600 --> 00:27:10,080
Speaker 4: a US perspective, what US is trying to do is

499
00:27:10,240 --> 00:27:14,680
Speaker 4: gradually grind China out of the Western system, but without

500
00:27:14,720 --> 00:27:20,159
Speaker 4: dislocating refrigerator prices or without dislocating things that housewives are using.

501
00:27:20,560 --> 00:27:22,879
Speaker 4: And the way you do it is starting from the top,

502
00:27:23,000 --> 00:27:25,199
Speaker 4: starting from the high tag, and just keep moving and

503
00:27:25,320 --> 00:27:29,320
Speaker 4: slowly grinding them out, slowly retarding their gross rates at

504
00:27:29,400 --> 00:27:32,600
Speaker 4: least relative to what you can do, but without triggering

505
00:27:33,000 --> 00:27:36,040
Speaker 4: a real conflict. So to me, that's a cold war.

506
00:27:36,119 --> 00:27:39,760
Speaker 4: You're walking at tritrop between degrading as much as you

507
00:27:39,840 --> 00:27:44,800
Speaker 4: can your opponent without triggering something really nasty. And I think,

508
00:27:44,840 --> 00:27:47,639
Speaker 4: so far, to be fair, whether it's Jenet Yellen, whether

509
00:27:47,720 --> 00:27:50,600
Speaker 4: it's Blinking, whether it's Sullivan, I think they've done pretty

510
00:27:50,600 --> 00:27:54,680
Speaker 4: good job of actually achieving that balance. Whether that can

511
00:27:54,760 --> 00:27:59,119
Speaker 4: be maintained, however, depends extent to which Chinese economy and

512
00:27:59,200 --> 00:28:02,040
Speaker 4: society perform to some extent, I mean, it also depends

513
00:28:02,080 --> 00:28:04,199
Speaker 4: what happens in the US, of course, but if you

514
00:28:04,320 --> 00:28:06,959
Speaker 4: just look at China, it depends on that because remember

515
00:28:07,000 --> 00:28:10,439
Speaker 4: normenal GDP in China already fallen from ten percent to

516
00:28:10,600 --> 00:28:14,080
Speaker 4: four now. In other words, as you create more disinflation

517
00:28:14,160 --> 00:28:17,080
Speaker 4: as you saw in Japan. It is really norminal GDP

518
00:28:17,359 --> 00:28:20,200
Speaker 4: that tells you the extent of the pressure. Now, if

519
00:28:20,280 --> 00:28:24,959
Speaker 4: economy and society a geared towards a double digit normal GDP,

520
00:28:25,440 --> 00:28:29,480
Speaker 4: if you can't raise it, inevitably pressure starts rising. And

521
00:28:29,520 --> 00:28:32,320
Speaker 4: so the question is extent to which the pressure rises.

522
00:28:32,560 --> 00:28:36,280
Speaker 4: What is China's response, both in terms of in terms

523
00:28:36,280 --> 00:28:39,080
Speaker 4: of geopolitics, in terms of politics, but also in terms

524
00:28:39,120 --> 00:28:41,400
Speaker 4: of economic policies, and how are you going to change them?

525
00:28:41,520 --> 00:28:43,760
Speaker 2: Well, this is kind of what I don't get, and

526
00:28:43,800 --> 00:28:45,520
Speaker 2: this came up in the episode we did with Hugh

527
00:28:45,560 --> 00:28:48,480
Speaker 2: Henry recently as well, where he was talking about the

528
00:28:48,600 --> 00:28:53,000
Speaker 2: old traditional Chinese export model for reasons that you just

529
00:28:53,080 --> 00:28:55,960
Speaker 2: laid out as well, just isn't going to work anymore,

530
00:28:56,080 --> 00:28:58,920
Speaker 2: because you know, Europe is not going to accept a

531
00:28:58,920 --> 00:29:02,440
Speaker 2: flood of cheap electric vehicles coming in from China. And

532
00:29:02,480 --> 00:29:05,240
Speaker 2: so I guess I'm a little bit confused exactly what

533
00:29:05,480 --> 00:29:09,240
Speaker 2: China is planning here, because the resistance from the rest

534
00:29:09,240 --> 00:29:13,520
Speaker 2: of the world seems so glaringly obvious. When China first

535
00:29:13,560 --> 00:29:18,520
Speaker 2: started talking about building up, you know, technological independence in

536
00:29:18,560 --> 00:29:24,240
Speaker 2: things like semiconductors or strategically important technologies. I was under

537
00:29:24,240 --> 00:29:26,800
Speaker 2: the impression that, like some of the idea there was

538
00:29:26,880 --> 00:29:30,800
Speaker 2: to sell it into the domestic population so that you

539
00:29:30,880 --> 00:29:33,520
Speaker 2: don't have to worry about the US suddenly cutting you

540
00:29:33,600 --> 00:29:37,200
Speaker 2: off from important chips. You would have your own supply

541
00:29:37,520 --> 00:29:39,040
Speaker 2: and then you could do with it what you will.

542
00:29:39,560 --> 00:29:44,200
Speaker 2: But as you've laid out, like boosting domestic consumption doesn't

543
00:29:44,200 --> 00:29:46,400
Speaker 2: actually seem to be a priority right now, they still

544
00:29:46,400 --> 00:29:49,600
Speaker 2: seem to be very focused on exports. So I guess

545
00:29:49,680 --> 00:29:52,040
Speaker 2: I just don't get it, because to me, the problem

546
00:29:52,080 --> 00:29:54,760
Speaker 2: with that strategy seems so obvious.

547
00:29:55,760 --> 00:29:58,400
Speaker 4: One of the ways I describe it is a way

548
00:29:58,440 --> 00:30:01,040
Speaker 4: I look at cheshipping and the well look at Chinese

549
00:30:01,120 --> 00:30:04,120
Speaker 4: leadership right now. It's sort of a mixture very stern,

550
00:30:04,280 --> 00:30:09,760
Speaker 4: paternalistic attitude. You know, being soft is bad, suffering is good.

551
00:30:09,880 --> 00:30:12,160
Speaker 4: That's one side of it. The other side of it is

552
00:30:12,320 --> 00:30:16,680
Speaker 4: very classical economics and Marxist economics. They effectively harping back

553
00:30:16,720 --> 00:30:20,720
Speaker 4: to the day of Quinsy, David Ricardo, Adam Smith, cal

554
00:30:20,760 --> 00:30:23,640
Speaker 4: Marx and those people were not thinking of prices, that

555
00:30:23,720 --> 00:30:27,720
Speaker 4: were thinking of value. Now, since late nineteenth century economy

556
00:30:27,760 --> 00:30:30,280
Speaker 4: is abundant value. So we only look at the prices.

557
00:30:30,280 --> 00:30:32,320
Speaker 4: So if you're a billionaire, you must have add value

558
00:30:32,320 --> 00:30:35,480
Speaker 4: because price is telling us you have Classical economy says no,

559
00:30:35,640 --> 00:30:39,440
Speaker 4: this guy just captured somebody else's value. He didn't create value.

560
00:30:39,760 --> 00:30:43,080
Speaker 4: And so if you take that mindset, who is creating value?

561
00:30:43,080 --> 00:30:46,720
Speaker 4: Who is destroying value? If you ask David Ricarda does

562
00:30:46,760 --> 00:30:50,640
Speaker 4: he think financial markets or capital markets value creative? The

563
00:30:50,760 --> 00:30:53,200
Speaker 4: answer would have be no. The best thing you can argue,

564
00:30:53,200 --> 00:30:55,800
Speaker 4: they're relocated, but they don't don't create it. Who is

565
00:30:55,840 --> 00:30:59,560
Speaker 4: creating value? And so for Ricardo or Adam Smith, or

566
00:30:59,600 --> 00:31:03,600
Speaker 4: even before that, the argument people who produce stuff, whether

567
00:31:03,640 --> 00:31:07,240
Speaker 4: it was agriculture early on, whether it's manufacturing, whether it's technology,

568
00:31:07,520 --> 00:31:10,640
Speaker 4: and so the emphasis seemed to be much more In supply,

569
00:31:11,040 --> 00:31:14,320
Speaker 4: the emphasis seemed to be much more production. The emphasis

570
00:31:14,840 --> 00:31:17,680
Speaker 4: is to start to strengthen as Chi Chi Pink calls

571
00:31:17,680 --> 00:31:21,720
Speaker 4: it productive forces, which is a classic Marxist argument productive

572
00:31:21,840 --> 00:31:26,680
Speaker 4: versus unproductive. Strengthen them, put obstacle in front of people

573
00:31:26,720 --> 00:31:30,120
Speaker 4: who you don't regard as productive, and they're incredibly suspicious

574
00:31:30,200 --> 00:31:32,240
Speaker 4: of capital markets and finance.

575
00:31:32,520 --> 00:31:36,280
Speaker 2: So the disorderly expansion that's right, what.

576
00:31:36,240 --> 00:31:39,560
Speaker 4: Carl Marx used to call fictitious capital, capital that multiplies

577
00:31:39,600 --> 00:31:42,920
Speaker 4: for its own sake without doing anything good to anybody else.

578
00:31:43,240 --> 00:31:45,280
Speaker 4: And so if you take that mindset, then that is

579
00:31:45,320 --> 00:31:47,680
Speaker 4: not the mindset of Western economists. But if you take

580
00:31:47,720 --> 00:31:51,640
Speaker 4: that mindset, the sort of stern, paternalistic attitude and the

581
00:31:51,680 --> 00:31:54,960
Speaker 4: emphasis of what he described productive forces, you understand why

582
00:31:54,960 --> 00:31:59,440
Speaker 4: they're reluctant to actually do anything about it. Now. Eventually,

583
00:31:59,480 --> 00:32:02,040
Speaker 4: as I said early on, the precious has to rise

584
00:32:02,680 --> 00:32:04,560
Speaker 4: and they will have to pivot. And we saw this

585
00:32:04,760 --> 00:32:09,200
Speaker 4: COVID in late October early November twenty twenty two, that

586
00:32:09,560 --> 00:32:12,320
Speaker 4: he can pivot very very quickly. That's why there was

587
00:32:12,360 --> 00:32:15,400
Speaker 4: a disorderly opening after COVID. And so there is a

588
00:32:15,400 --> 00:32:19,080
Speaker 4: possibility that there will be that moment when you actually

589
00:32:19,120 --> 00:32:23,280
Speaker 4: will have the change. But the longer he waits, the

590
00:32:23,320 --> 00:32:25,640
Speaker 4: worst it gets. And the reason is very simple. China

591
00:32:25,720 --> 00:32:28,200
Speaker 4: is not Japan. Japan had an open capital account and

592
00:32:28,240 --> 00:32:31,680
Speaker 4: fluctuating currency and convertible currency. So when Japan run into

593
00:32:31,720 --> 00:32:35,959
Speaker 4: the wall, they just collapse overnight. China has close capital account,

594
00:32:36,240 --> 00:32:39,640
Speaker 4: currency is not convertible, central bank is not independent, actually

595
00:32:39,800 --> 00:32:42,360
Speaker 4: lost all the power pretty much commercial banks are not

596
00:32:42,400 --> 00:32:44,920
Speaker 4: commercial and private sector is not really private. So when

597
00:32:44,960 --> 00:32:49,040
Speaker 4: you're operating behind the wall garden, you can't have Minski moments.

598
00:32:49,080 --> 00:32:51,400
Speaker 4: You can't just hit the wall and collapse. But what

599
00:32:51,560 --> 00:32:55,840
Speaker 4: you can do you can basically add increasing headwinds as

600
00:32:55,880 --> 00:32:59,320
Speaker 4: you keep going. So if Japan operated Chinese system in

601
00:32:59,400 --> 00:33:01,640
Speaker 4: nineteen ninety, they didn't have to go down. They could

602
00:33:01,680 --> 00:33:05,000
Speaker 4: have survived until ninety six or ninety seven. But the

603
00:33:05,120 --> 00:33:08,239
Speaker 4: longer you go with that, the worse it gets, and

604
00:33:08,320 --> 00:33:11,600
Speaker 4: so they need to recalibrate. So recalibration, which is needed.

605
00:33:11,960 --> 00:33:16,640
Speaker 4: Change your policy settings quite dramatically. Number two, change your

606
00:33:16,680 --> 00:33:20,600
Speaker 4: geopolitical stance quite dramatically. In a sense, stop trying to

607
00:33:20,640 --> 00:33:25,160
Speaker 4: rebuild the world and change the world and change domestic politics.

608
00:33:25,200 --> 00:33:28,120
Speaker 4: In other words, give a little bit of freedom for people,

609
00:33:28,160 --> 00:33:32,200
Speaker 4: both businesses and consumers and households. If there is is

610
00:33:32,680 --> 00:33:35,520
Speaker 4: pivot change, you still have to pay a price. Because

611
00:33:35,560 --> 00:33:39,000
Speaker 4: one of the things I highlight is capital stock. IMF

612
00:33:39,040 --> 00:33:42,120
Speaker 4: calculates it. And if you think of two thousand and four,

613
00:33:42,400 --> 00:33:45,720
Speaker 4: China had capital stock of I forgot like four trillion dollars.

614
00:33:45,800 --> 00:33:48,960
Speaker 4: India had one in twenty twenty eight, they will have

615
00:33:48,960 --> 00:33:52,760
Speaker 4: one hundred and five trillion dollars. US for example, will

616
00:33:52,760 --> 00:33:55,360
Speaker 4: have seventy seventy five India will only have six. So

617
00:33:55,520 --> 00:33:59,880
Speaker 4: China absorbed over one hundred trillion dollars of depreciated capital

618
00:34:00,160 --> 00:34:03,240
Speaker 4: in a couple of decades. When you absorb so much capital,

619
00:34:03,240 --> 00:34:06,160
Speaker 4: which is entire world GDP, when you absorb so much

620
00:34:06,240 --> 00:34:10,719
Speaker 4: capital so quickly, inevitably, you have an indigestion period. So

621
00:34:11,040 --> 00:34:13,680
Speaker 4: that indigestion period will be with you even if you

622
00:34:13,800 --> 00:34:17,080
Speaker 4: make a policy pivot today. But what will happen if

623
00:34:17,120 --> 00:34:20,759
Speaker 4: they do that? Risk premia will improve because China is

624
00:34:20,800 --> 00:34:23,160
Speaker 4: the only market in the world, and the only acid

625
00:34:23,200 --> 00:34:25,880
Speaker 4: in the world where risk premier over the last several

626
00:34:26,000 --> 00:34:30,080
Speaker 4: years have gone up almost everywhere risk premier actually for.

627
00:34:46,560 --> 00:34:49,960
Speaker 3: I want to push on two specific things you said.

628
00:34:50,000 --> 00:34:53,080
Speaker 3: So one is you talked about Chinese dumping, and I

629
00:34:53,160 --> 00:34:56,920
Speaker 3: sort of understand conceptually the idea of dumping in a

630
00:34:56,960 --> 00:35:00,520
Speaker 3: commodity like steel or they're you know, produce bonds you

631
00:35:00,560 --> 00:35:02,719
Speaker 3: can't use it all at home, or maybe even like

632
00:35:02,840 --> 00:35:05,160
Speaker 3: solar or something like that. But a lot of the

633
00:35:05,239 --> 00:35:09,560
Speaker 3: Chinese exports success seems to be in making high quality

634
00:35:09,640 --> 00:35:13,560
Speaker 3: non commodities that are just very competitive for cost reasons

635
00:35:13,600 --> 00:35:17,160
Speaker 3: and in some arguably quality reasons. One example would be

636
00:35:17,880 --> 00:35:19,880
Speaker 3: people saying that the shell me phone now has a

637
00:35:19,920 --> 00:35:22,319
Speaker 3: better camera, say than the iPhone. So that's one thing.

638
00:35:22,360 --> 00:35:24,480
Speaker 3: And then the other thing is you say you credit

639
00:35:24,560 --> 00:35:29,239
Speaker 3: yelling and blink in for maintaining something reasonably. Well, this

640
00:35:29,320 --> 00:35:34,040
Speaker 3: attempt to degrade China, but not necessarily provoke something stronger.

641
00:35:34,320 --> 00:35:37,240
Speaker 3: What have they actually done substantively? Because I see the trips,

642
00:35:37,239 --> 00:35:39,440
Speaker 3: and I see the talk and the anxiety and the

643
00:35:39,520 --> 00:35:42,480
Speaker 3: you know, the ft columns about jumping and all that stuff,

644
00:35:42,520 --> 00:35:45,920
Speaker 3: but I don't really understand or can't quite internalize what

645
00:35:46,120 --> 00:35:47,960
Speaker 3: substantively they have accomplished.

646
00:35:48,239 --> 00:35:52,320
Speaker 4: Well, what do you need to avoid is very dramatic moves. Okay,

647
00:35:52,640 --> 00:35:55,279
Speaker 4: So in other words, the last thing you want is

648
00:35:55,320 --> 00:35:59,400
Speaker 4: to stop slapping terraffs on very primitive products. But I

649
00:35:59,440 --> 00:36:04,640
Speaker 4: remember mostly actually does law great stuff. People focused on cameras, etc.

650
00:36:05,040 --> 00:36:08,360
Speaker 4: But a lot of China is basic chemicals, it's toys,

651
00:36:08,680 --> 00:36:12,200
Speaker 4: It's that sort of stuff. So try to avoid displacing

652
00:36:12,280 --> 00:36:15,640
Speaker 4: that trade as much as possible. Try to focus on

653
00:36:15,760 --> 00:36:19,279
Speaker 4: the areas that are important for you strategically, And that's

654
00:36:19,320 --> 00:36:21,719
Speaker 4: what Trump started to do but very chaotically, and what

655
00:36:21,800 --> 00:36:25,520
Speaker 4: Biden administration have done very systematically over the last four

656
00:36:25,600 --> 00:36:29,839
Speaker 4: years now, except that China trade will get rerouted. Now,

657
00:36:29,880 --> 00:36:33,200
Speaker 4: the fact that suddenly Mexico and Vietnam became major partners

658
00:36:33,200 --> 00:36:35,279
Speaker 4: of the United States have very little to do with

659
00:36:35,360 --> 00:36:38,120
Speaker 4: capacity of those countries to actually produce it. It's a

660
00:36:38,160 --> 00:36:41,319
Speaker 4: lot of Chinese trade gets rerouted through those places, and

661
00:36:41,400 --> 00:36:44,120
Speaker 4: accept that because you're getting some of the benefit of that,

662
00:36:44,760 --> 00:36:49,160
Speaker 4: including sometimes better quality law prices that consumers and businesses

663
00:36:49,200 --> 00:36:52,000
Speaker 4: in the United States can benefit from. At the same time,

664
00:36:52,080 --> 00:36:55,000
Speaker 4: what you're trying to do is re establish as much

665
00:36:55,120 --> 00:36:59,799
Speaker 4: contact as you possibly can, because as Defense Secretary was

666
00:36:59,800 --> 00:37:02,440
Speaker 4: saying back in Singapore when Chinese refused to talk to

667
00:37:02,520 --> 00:37:05,120
Speaker 4: him eighteen months ago, he said, with the Soviets, we

668
00:37:05,200 --> 00:37:08,439
Speaker 4: never agreed on anything, but we talked. And the same

669
00:37:08,520 --> 00:37:11,400
Speaker 4: is here. You need to maintain the lines of conversation

670
00:37:11,880 --> 00:37:14,759
Speaker 4: so that you know how far you can go, where

671
00:37:14,880 --> 00:37:17,640
Speaker 4: you cannot go, how far you can push, how high

672
00:37:17,640 --> 00:37:19,880
Speaker 4: you can bring it back. So what you try to

673
00:37:19,920 --> 00:37:22,520
Speaker 4: avoid is a chaos. What you try to avoid just

674
00:37:22,520 --> 00:37:25,760
Speaker 4: slapping stuff all over the place, trying to avoid pushing

675
00:37:25,880 --> 00:37:29,120
Speaker 4: China too far and at the same time gradually, as

676
00:37:29,160 --> 00:37:32,080
Speaker 4: I said, degrading it. Now there is a possibility, and

677
00:37:32,120 --> 00:37:34,560
Speaker 4: it is a small possibility right now, but there is

678
00:37:34,600 --> 00:37:38,439
Speaker 4: a possibility that something horrible is going to happen, either

679
00:37:38,480 --> 00:37:41,759
Speaker 4: in Russia Ukraine, or something horrible might happen across down

680
00:37:41,800 --> 00:37:45,280
Speaker 4: One Straits, and the whole thing will start escalating beyond

681
00:37:45,480 --> 00:37:48,400
Speaker 4: what you're trying to do. And at that point we

682
00:37:48,480 --> 00:37:52,239
Speaker 4: could potentially see zeroing out even of Chinese and Hong

683
00:37:52,320 --> 00:37:55,480
Speaker 4: Kong assets. You can even see US Department of Treasury

684
00:37:56,080 --> 00:37:59,080
Speaker 4: arguing that they don't recognize, for example, the currency in

685
00:37:59,120 --> 00:38:01,960
Speaker 4: Hong Kong dollar. Extreme you can have a very extreme

686
00:38:02,000 --> 00:38:06,760
Speaker 4: outcomes which I think are not likely so long as

687
00:38:06,800 --> 00:38:09,879
Speaker 4: there is no as I said, disasters occurring along the way.

688
00:38:11,040 --> 00:38:12,840
Speaker 2: So we just have a few minutes left, and I

689
00:38:12,880 --> 00:38:15,680
Speaker 2: want to go back to what you said earlier, where

690
00:38:15,719 --> 00:38:19,120
Speaker 2: you were talking about the idea of financial risks migrating

691
00:38:19,520 --> 00:38:23,240
Speaker 2: into I guess, the real world, into the political sphere

692
00:38:23,239 --> 00:38:26,000
Speaker 2: in one way or another. And you are actually the

693
00:38:26,040 --> 00:38:29,640
Speaker 2: only Cell side analyst I know of who has mentioned

694
00:38:29,719 --> 00:38:33,120
Speaker 2: the Columbia protests specifically. We're here in New York. Columbia

695
00:38:33,160 --> 00:38:35,680
Speaker 2: is not that far from us. Talk to us a

696
00:38:35,719 --> 00:38:40,920
Speaker 2: little bit about how that kind of political discontent plays

697
00:38:40,960 --> 00:38:43,560
Speaker 2: out in your world, in the world of you know,

698
00:38:43,680 --> 00:38:47,319
Speaker 2: investment and macro and things like that. Why is that

699
00:38:47,400 --> 00:38:48,080
Speaker 2: on your radar?

700
00:38:48,480 --> 00:38:53,560
Speaker 4: Well, Usually when you have generational replacement and everything is fine,

701
00:38:53,719 --> 00:38:57,280
Speaker 4: like economies are fine, finance is fine, technology is fine,

702
00:38:57,400 --> 00:39:01,719
Speaker 4: there is no displacement politically or geopolitic, then one generation

703
00:39:01,920 --> 00:39:05,640
Speaker 4: just slips into another almost unnoticed. That's what happened to

704
00:39:05,680 --> 00:39:08,719
Speaker 4: Baby Boomers and X generation. But whenever you have.

705
00:39:08,719 --> 00:39:12,320
Speaker 3: An X generation, we never were. We slipped out before

706
00:39:12,360 --> 00:39:16,880
Speaker 3: we were even in are you no, No, I'm eighty,

707
00:39:17,160 --> 00:39:17,600
Speaker 3: I'm X.

708
00:39:18,520 --> 00:39:21,719
Speaker 4: I go. But but whenever you have whenever you have

709
00:39:22,200 --> 00:39:27,360
Speaker 4: a major technological financial disruption, what happens is that you

710
00:39:27,480 --> 00:39:31,200
Speaker 4: have or whenever circumstances change massively for the better for

711
00:39:31,239 --> 00:39:35,359
Speaker 4: the worst, one generation cannot slip into another generation. That's

712
00:39:35,360 --> 00:39:39,200
Speaker 4: what happened to Baby Boomers. Compared to a silent and

713
00:39:39,480 --> 00:39:42,799
Speaker 4: GI generation. The Baby Boomers could not relate to their

714
00:39:42,840 --> 00:39:46,680
Speaker 4: parents or to their grandparents. They had verdically different views

715
00:39:47,000 --> 00:39:49,640
Speaker 4: what they wanted to do, and so the younger generation

716
00:39:49,760 --> 00:39:53,120
Speaker 4: anybody born sort of after sort of early eighties onwards

717
00:39:53,760 --> 00:39:56,400
Speaker 4: have a very different view of the world. And the

718
00:39:56,440 --> 00:39:58,560
Speaker 4: reason they have very different view of the world because

719
00:39:58,600 --> 00:40:01,879
Speaker 4: they did not experience a world where jobs were plentiful,

720
00:40:02,320 --> 00:40:05,560
Speaker 4: where you've gone to college, you automatically had a good job.

721
00:40:05,960 --> 00:40:10,120
Speaker 4: They found that the jobs degrade, They found the professional

722
00:40:10,160 --> 00:40:13,920
Speaker 4: lives degrede They found that technology gives you many tools,

723
00:40:13,960 --> 00:40:17,040
Speaker 4: but it also degrades both your pricing power and marginal

724
00:40:17,080 --> 00:40:22,200
Speaker 4: pricing power. They found that politics become disoriented as that occurs.

725
00:40:22,600 --> 00:40:27,160
Speaker 4: They found that democratic policies cannot solve the problem extreme polarization.

726
00:40:27,680 --> 00:40:32,080
Speaker 4: So they're in the mixture of technological, financial, and political revolution.

727
00:40:32,640 --> 00:40:37,080
Speaker 4: And when you have that change, that generation sinks very differently,

728
00:40:37,400 --> 00:40:40,600
Speaker 4: and eventually they become a very large cohort. And when

729
00:40:40,680 --> 00:40:43,680
Speaker 4: they become a large cohort, they demanded change. Now, what

730
00:40:43,800 --> 00:40:47,400
Speaker 4: Baby Boomas were asking for is not what this generation

731
00:40:47,560 --> 00:40:50,360
Speaker 4: is asking for, But they're asking for change. And my

732
00:40:50,520 --> 00:40:53,680
Speaker 4: view the change all the surveys that come out, the

733
00:40:53,760 --> 00:40:57,680
Speaker 4: change they're asking is very much community based, is very

734
00:40:57,760 --> 00:41:01,920
Speaker 4: much community of equals, is very much governments supported. In

735
00:41:01,960 --> 00:41:06,600
Speaker 4: other words, harping to their grand grandparents who lived in

736
00:41:06,719 --> 00:41:10,600
Speaker 4: nineteen forties and nineteen fifties rather than to their parents

737
00:41:10,600 --> 00:41:14,560
Speaker 4: and grandparents. And so usually it starts with those types

738
00:41:14,560 --> 00:41:17,560
Speaker 4: of demonstration. Doesn't really matter what the excuses, whether it's

739
00:41:17,560 --> 00:41:20,120
Speaker 4: the civil rights, whether it's a Cold War, whether it's

740
00:41:20,200 --> 00:41:25,120
Speaker 4: Vietnam War, whether it's inequalities, whatever, that is something triggers it.

741
00:41:25,640 --> 00:41:27,640
Speaker 4: But then as they get big and bigger part of

742
00:41:27,680 --> 00:41:31,839
Speaker 4: the population, they really drive the policy. So today late

743
00:41:31,880 --> 00:41:35,040
Speaker 4: millenniums in Z already almost fifty percent of the population,

744
00:41:35,320 --> 00:41:38,080
Speaker 4: but they are only about thirty nine percent of the adults.

745
00:41:38,239 --> 00:41:40,560
Speaker 4: They only twenty five percent of the voters.

746
00:41:40,239 --> 00:41:40,800
Speaker 2: In the US.

747
00:41:41,120 --> 00:41:44,759
Speaker 4: Mathematically, by twenty eight twenty nine, there will be majority

748
00:41:45,040 --> 00:41:48,359
Speaker 4: of adults, and by earlier to mid twenty thirties there

749
00:41:48,400 --> 00:41:52,120
Speaker 4: will be absolute majority of both voting and the adults.

750
00:41:52,280 --> 00:41:57,280
Speaker 4: And so the question is what type of policies, economic policies, political,

751
00:41:57,480 --> 00:42:01,280
Speaker 4: social policies would they demand. People must want it freedom,

752
00:42:01,800 --> 00:42:05,400
Speaker 4: free enterprise, personal responsibility. You give me the rope and

753
00:42:05,440 --> 00:42:07,480
Speaker 4: I can hang myself with it, or I can succeed

754
00:42:08,080 --> 00:42:11,719
Speaker 4: this guy's asking for something else, And so how would

755
00:42:12,200 --> 00:42:14,839
Speaker 4: all of those policies change? And I'm thinking they're going

756
00:42:14,880 --> 00:42:18,439
Speaker 4: to bring us back to nineteen fifties, that probably will

757
00:42:18,480 --> 00:42:21,160
Speaker 4: be a more likely outcome rather than sort of nineteen

758
00:42:21,239 --> 00:42:22,279
Speaker 4: nineties two thousands.

759
00:42:22,560 --> 00:42:25,240
Speaker 2: I like how conceptually we've sort of come full circle

760
00:42:25,280 --> 00:42:29,680
Speaker 2: because we're back to I guess demographic changes driving potentially

761
00:42:29,760 --> 00:42:34,200
Speaker 2: higher deficits over the long term, fueling US exceptionalism in

762
00:42:34,239 --> 00:42:37,480
Speaker 2: some ways. Maybe, Yeah, let's take it. Victor Schwetz, thank

763
00:42:37,480 --> 00:42:39,200
Speaker 2: you so much for coming back on odd Lots.

764
00:42:39,520 --> 00:42:40,800
Speaker 5: Thank you. I appreciate it.

765
00:42:40,880 --> 00:42:41,719
Speaker 2: That was great.

766
00:42:41,960 --> 00:42:56,120
Speaker 5: As always, Joe.

767
00:42:56,040 --> 00:42:59,880
Speaker 2: I feel like any mention of generations always leads to

768
00:43:00,400 --> 00:43:01,839
Speaker 2: over the cutoff points.

769
00:43:02,120 --> 00:43:03,799
Speaker 3: Well, I may have said, I don't know if I've

770
00:43:03,840 --> 00:43:05,640
Speaker 3: ever said on air, So I'll just say that I

771
00:43:05,680 --> 00:43:09,640
Speaker 3: have a very simple test for the dividing line between

772
00:43:10,080 --> 00:43:12,120
Speaker 3: X and millennial because some people say seventy nine or

773
00:43:12,160 --> 00:43:12,600
Speaker 3: eighty one or.

774
00:43:12,640 --> 00:43:14,480
Speaker 2: Yeah i've heard nineteen eighty and above.

775
00:43:14,719 --> 00:43:16,400
Speaker 3: Yeah I've heard that too. But I think there's a

776
00:43:16,480 --> 00:43:18,200
Speaker 3: very simple test to do it, which is, did you

777
00:43:18,239 --> 00:43:20,839
Speaker 3: have Facebook in college? Because that gets you in that

778
00:43:20,920 --> 00:43:27,160
Speaker 3: ballpark automatically, yeah, but also that's generationally transformative. Social media

779
00:43:27,719 --> 00:43:30,520
Speaker 3: is like clearly a dividing line. I did not have

780
00:43:30,600 --> 00:43:32,640
Speaker 3: Facebook when I was in college. I got my first

781
00:43:32,680 --> 00:43:34,919
Speaker 3: account I don't know, like twenty two. It was after

782
00:43:34,960 --> 00:43:37,480
Speaker 3: I graduated by a couple of years. You apparently did,

783
00:43:37,480 --> 00:43:40,720
Speaker 3: so I'm X your millennial. That makes a lot of sense,

784
00:43:40,880 --> 00:43:44,080
Speaker 3: Thank you. I think it's a test and apparently, I

785
00:43:44,120 --> 00:43:46,719
Speaker 3: guess it's probably rolled out to people in Harvard earlier.

786
00:43:46,960 --> 00:43:50,719
Speaker 3: The implication is that people at Harvard became millennial before

787
00:43:50,760 --> 00:43:51,720
Speaker 3: the rest of everyone else.

788
00:43:51,840 --> 00:43:53,880
Speaker 2: Well, yeah, I was at LSE and I think we

789
00:43:53,880 --> 00:43:56,400
Speaker 2: were one of the first, yeah, so international universities to

790
00:43:56,440 --> 00:43:58,560
Speaker 2: get it. I have to say part of me kind

791
00:43:58,560 --> 00:44:01,480
Speaker 2: of misses the college era of Facebook, where like we

792
00:44:01,600 --> 00:44:04,839
Speaker 2: just spent an inordinate amount of time like poking each other.

793
00:44:04,920 --> 00:44:07,440
Speaker 2: I don't know if you remember that. Anyway, back to Macro,

794
00:44:07,719 --> 00:44:09,879
Speaker 2: there's so much to pull out of that conversation. It's

795
00:44:09,880 --> 00:44:12,880
Speaker 2: always great talking to Victor. I guess one of the

796
00:44:12,920 --> 00:44:17,120
Speaker 2: things that strikes me is, you know, he highlighted the

797
00:44:17,360 --> 00:44:21,960
Speaker 2: I guess unexpectedly loose financial conditions, and to me, it

798
00:44:22,000 --> 00:44:24,120
Speaker 2: does feel like that is a key part of what's

799
00:44:24,160 --> 00:44:26,759
Speaker 2: happening in markets right now, and it kind of goes

800
00:44:26,800 --> 00:44:29,040
Speaker 2: back to that point I was making earlier, where I

801
00:44:29,040 --> 00:44:31,520
Speaker 2: don't think anyone expected the cost of money to go

802
00:44:31,640 --> 00:44:35,960
Speaker 2: up so much viz. Benchmark rates and the FED rate hikes,

803
00:44:36,520 --> 00:44:40,080
Speaker 2: while the supply of credit continues to expand. And that,

804
00:44:40,160 --> 00:44:41,840
Speaker 2: to me is sort of like the key to a

805
00:44:41,840 --> 00:44:44,319
Speaker 2: lot of what's going on in asset prices. Why we

806
00:44:44,400 --> 00:44:48,000
Speaker 2: haven't seen that huge default cycle that people were predicting,

807
00:44:48,040 --> 00:44:51,000
Speaker 2: Why we haven't necessarily seen as many layoffs as a

808
00:44:51,040 --> 00:44:52,960
Speaker 2: lot of people were predicting, and things like that.

809
00:44:53,280 --> 00:44:55,719
Speaker 3: Yeah, totally Like we can easily point to a few

810
00:44:55,760 --> 00:45:00,400
Speaker 3: different categories, like aspects of real estate and which. Sure, No,

811
00:45:00,480 --> 00:45:02,759
Speaker 3: it's totally true that it's sort of a puzzle, and

812
00:45:02,760 --> 00:45:05,720
Speaker 3: I don't think anyone is a great answer for why.

813
00:45:06,440 --> 00:45:08,719
Speaker 3: You know, people talk about refinancing and everyone has a

814
00:45:08,760 --> 00:45:11,280
Speaker 3: third year fixed. Maybe that has something to do with it. Still,

815
00:45:12,040 --> 00:45:14,880
Speaker 3: it's not entirely intuitive why that hasn't had a larger

816
00:45:14,920 --> 00:45:18,399
Speaker 3: compressing effect on asset prices. You know, there's so much

817
00:45:18,400 --> 00:45:21,960
Speaker 3: to pull out of that conversation and every conversation with Victor.

818
00:45:22,120 --> 00:45:23,799
Speaker 3: Like I said, we could have talked for like an

819
00:45:23,840 --> 00:45:26,600
Speaker 3: hour on the problem with the dots, and maybe we

820
00:45:26,640 --> 00:45:28,720
Speaker 3: should do that, because it does seem like that's getting

821
00:45:28,760 --> 00:45:31,080
Speaker 3: more attention to sort of being handcuffed by the dots

822
00:45:31,080 --> 00:45:34,040
Speaker 3: perhaps you know, obviously, and we'll do more China episodes.

823
00:45:34,080 --> 00:45:36,520
Speaker 3: But is it really possible? And I guess I have

824
00:45:36,600 --> 00:45:38,920
Speaker 3: my doubts. But what do I know, like to degrade

825
00:45:39,320 --> 00:45:41,800
Speaker 3: China's cutting edge capacity in such a way that doesn't

826
00:45:41,840 --> 00:45:47,080
Speaker 3: provoke actual geopolitical conflict something more mild, big questions there?

827
00:45:47,680 --> 00:45:51,480
Speaker 2: Dots seem so innocuous to me. It's so it's it's funny,

828
00:45:51,520 --> 00:45:53,319
Speaker 2: Well what we're talking about them? As last?

829
00:45:53,400 --> 00:45:53,520
Speaker 1: Wait?

830
00:45:53,560 --> 00:45:55,520
Speaker 3: Can I give it confession? And I always do my

831
00:45:55,600 --> 00:45:59,880
Speaker 3: confessions at the end because I hope that no one's listening.

832
00:46:00,480 --> 00:46:03,279
Speaker 3: I always turn off turn off laws right here. I

833
00:46:03,320 --> 00:46:07,920
Speaker 3: always forget whether the dots are what the individual FOMC

834
00:46:08,120 --> 00:46:12,880
Speaker 3: member thinks should be the optimal path of monetary policy

835
00:46:12,920 --> 00:46:17,120
Speaker 3: going forward versus what that FMC member thinks the policy

836
00:46:17,440 --> 00:46:21,080
Speaker 3: will be going forward. And I like, I know there's

837
00:46:21,080 --> 00:46:23,120
Speaker 3: a right intern one, but I always forget which is which.

838
00:46:23,160 --> 00:46:25,279
Speaker 2: Oh I hate stuff like this because it makes me

839
00:46:25,800 --> 00:46:27,480
Speaker 2: It's one of those things like you just talk about

840
00:46:27,560 --> 00:46:30,560
Speaker 2: kind of naturally without thinking about what you're actually looking at.

841
00:46:30,560 --> 00:46:33,200
Speaker 2: But I think it might be what they think appropriate

842
00:46:33,360 --> 00:46:34,920
Speaker 2: monetary policy should be.

843
00:46:35,160 --> 00:46:36,960
Speaker 3: No, you're right, I just as I was saying, I

844
00:46:37,040 --> 00:46:40,279
Speaker 3: also pulled up the Bloomberg dots explainer anyway.

845
00:46:40,040 --> 00:46:43,840
Speaker 2: Which I mean also you would expect it to be that, right, Yeah, right, well,

846
00:46:43,920 --> 00:46:47,399
Speaker 2: I mean yeah, bring back the boe fan charts. That's

847
00:46:47,440 --> 00:46:50,520
Speaker 2: what I say. Let go of the dots and let's

848
00:46:50,600 --> 00:46:53,600
Speaker 2: just do a range of probabilities for interest rates and

849
00:46:53,640 --> 00:46:56,400
Speaker 2: we can have either fan charts or those hair charts,

850
00:46:56,480 --> 00:46:59,120
Speaker 2: the hairy charts, the MEDUSA charts, which I love, or.

851
00:46:59,800 --> 00:47:01,879
Speaker 3: Just go back to the old days where they don't

852
00:47:01,880 --> 00:47:04,239
Speaker 3: even tell you what rate that they sent and the

853
00:47:04,239 --> 00:47:06,680
Speaker 3: market has to figure it out because of the overnight rate.

854
00:47:06,760 --> 00:47:08,600
Speaker 3: That would probably be fine too. I don't think we

855
00:47:08,640 --> 00:47:11,480
Speaker 3: need all this communication. I appreciate it. I like the speeches.

856
00:47:11,520 --> 00:47:14,160
Speaker 3: They're interesting, but we don't even we went for years

857
00:47:14,200 --> 00:47:14,560
Speaker 3: without that.

858
00:47:14,880 --> 00:47:18,120
Speaker 2: It would be very interesting, to Victor's point about sort

859
00:47:18,120 --> 00:47:21,600
Speaker 2: of real time repricing, to see what a system like

860
00:47:21,680 --> 00:47:24,560
Speaker 2: that would would mean for financial markets right now, maybe

861
00:47:24,600 --> 00:47:26,560
Speaker 2: it would be better. Let's all slow down.

862
00:47:26,600 --> 00:47:27,440
Speaker 3: I think it's possible.

863
00:47:27,480 --> 00:47:28,600
Speaker 2: All right, shall we leave it there?

864
00:47:28,680 --> 00:47:29,399
Speaker 3: Let's leave it there.

865
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Speaker 2: This has been another episode of the All Thoughts podcast.

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Speaker 2: I'm Tracy Alloway. You can follow me at Tracy Alloway and.

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Speaker 3: I'm Joe Wisenthal. You can follow me at the Stalwart,

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Speaker 3: follow our producers Carman Rodriguez at Kerman Ermann Dash, Ol

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Speaker 3: Bennett at Dashbot and Kilbrooks at Kilbrooks. Thank you to

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Speaker 3: our producer Moses ONEm. For more odd Lags content, go

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00:47:48,080 --> 00:47:50,879
Speaker 3: to Bloomberg dot com slash odd lotfere. We have transcripts,

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00:47:50,880 --> 00:47:53,560
Speaker 3: a blog, and a newsletter comes out every Friday, and

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00:47:53,600 --> 00:47:56,640
Speaker 3: you can chat with fellow listeners in our discord chat

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00:47:56,680 --> 00:47:59,600
Speaker 3: room twenty four to seven. Talk about all these topics

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00:48:00,120 --> 00:48:03,240
Speaker 3: scor dot gg slasht blots and if.

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00:48:03,120 --> 00:48:05,920
Speaker 2: You enjoy all blots, if you like it when we

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Speaker 2: try to figure out what the dot plot actually is,

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00:48:08,360 --> 00:48:11,000
Speaker 2: then please leave us a positive review on your favorite

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Speaker 2: podcast platform. And remember, if you are a Bloomberg subscriber,

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Speaker 2: you can listen to all of our episodes absolutely ad free.

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Speaker 2: with Apple Podcasts. Thanks for listening.