WEBVTT - Kopi Time E155 - Capital Wars with Dr. David Skilling 0:00:05.989 --> 0:00:08.879 Welcome to COI Time, a podcast series on markets and 0:00:08.880 --> 0:00:12.709 economies from DBS Group Research. I'm Tambe, chief economist, welcoming 0:00:12.710 --> 0:00:17.349 you to our 155th episode. Today, we are delighted to 0:00:17.350 --> 0:00:22.069 have with us David Skilling, founding director of Landfall Strategy Group. Uh, 0:00:22.149 --> 0:00:25.950 David is based out of Amsterdam, but as you will 0:00:25.950 --> 0:00:28.780 realize during the course of this conversation, his scope is global, 0:00:29.110 --> 0:00:31.069 and I have known David from the days he used 0:00:31.069 --> 0:00:33.189 to live in Singapore, so of course, he takes a 0:00:33.189 --> 0:00:34.589 great deal of interest in Asia. 0:00:35.130 --> 0:00:38.040 Um, so the way we will structure the discussion is 0:00:38.040 --> 0:00:39.680 get a sense of, you know, what is David up 0:00:39.680 --> 0:00:41.040 to on a day to day basis, and then we 0:00:41.040 --> 0:00:43.680 will talk about a paper that he recently wrote which 0:00:43.680 --> 0:00:45.759 caught a lot of my attention. So with that in mind, 0:00:46.000 --> 0:00:47.958 David Skilling, welcome to COI time. 0:00:48.450 --> 0:00:49.759 Great, thanks so much. Good to be here. 0:00:50.360 --> 0:00:52.520 Great to have you, David. I've been looking forward to this. 0:00:52.680 --> 0:00:57.680 Your outfit landfall strategy focuses on the intersection of global economics, 0:00:57.889 --> 0:00:59.959 geopolitics and economic policy. 0:01:00.540 --> 0:01:03.779 Well, you certainly have been busy this year. Uh, let's 0:01:03.779 --> 0:01:06.319 begin by getting a sense, David, of the sentiment of 0:01:06.319 --> 0:01:07.370 your clients so far. 0:01:08.379 --> 0:01:12.738 I, I, I think the overall, uh, sense is, uh, overwhelmed, uh, 0:01:12.750 --> 0:01:15.989 just by the, the fire hose, the torrent of developments, 0:01:16.410 --> 0:01:19.470 you know, directionally, not super surprisingly, Mr. Trump did tariffs 0:01:19.470 --> 0:01:21.789 in his first term, he signaled tariffs again. So in 0:01:21.790 --> 0:01:24.229 a sense, some of what he's done is not hugely surprising, 0:01:24.269 --> 0:01:27.259 but I think the, the magnitude, the scale, the reach, 0:01:27.349 --> 0:01:30.790 the tone, the aggression has taken people by surprise. Uh, 0:01:30.910 --> 0:01:33.149 and certainly for those who thought that Trump won, would 0:01:33.150 --> 0:01:33.830 be a good guy. 0:01:33.974 --> 0:01:36.684 Trump too, which wasn't me, but for some, you kind 0:01:36.684 --> 0:01:39.154 of thought that you could calibrate against what we saw 0:01:39.154 --> 0:01:41.194 several years ago. I think they have been taken by surprise. 0:01:41.345 --> 0:01:43.675 You know, Mr. Trump in a second term, a much 0:01:43.675 --> 0:01:47.875 more disruptive, much more consequential, uh, agenda, you know, tariffs 0:01:47.875 --> 0:01:49.235 to the start. But I think there's a sense that 0:01:49.235 --> 0:01:51.474 actually this is going much further than um than tariffs 0:01:51.474 --> 0:01:54.824 to capital flows, exchange rates, geopolitics. I think, you know, 0:01:54.995 --> 0:01:58.035 one is just sort of surprise. Uh, the second, I think, is, 0:01:58.074 --> 0:01:59.535 you know, as you mentioned, I, I 0:01:59.959 --> 0:02:02.230 Work with clients around the world. I think in Europe 0:02:02.230 --> 0:02:05.879 there is a sense of, you know, real pessimism, uh, 0:02:05.949 --> 0:02:07.900 you know, a sense that the sky is falling in, 0:02:08.149 --> 0:02:11.228 or the ground is moving, uh, beneath their feet in 0:02:11.229 --> 0:02:14.070 terms of both on geopolitics or on economics. The US 0:02:14.070 --> 0:02:16.070 is not what they thought that it was, uh, in 0:02:16.070 --> 0:02:17.669 a real sense that the rules of the game are 0:02:17.669 --> 0:02:20.589 being fundamentally rewritten in a way that's not, uh, that's 0:02:20.589 --> 0:02:22.710 not positive, that carries real risk. But when I talk 0:02:22.710 --> 0:02:24.500 to folk in the Middle East, in Asia, I mean, yes, 0:02:24.508 --> 0:02:25.919 that's all true, Singapore. 0:02:26.460 --> 0:02:29.008 Southeast Asia, for example, are exposed to tariffs and the 0:02:29.008 --> 0:02:31.479 trade wars, and so on. But there's also a sense 0:02:31.479 --> 0:02:33.649 of the world is tilting in their direction, right? There, 0:02:34.050 --> 0:02:35.929 there are clouds to be sure, but there are some 0:02:35.929 --> 0:02:38.609 silver linings, there are some opportunities as well. So I think, yeah, 0:02:38.690 --> 0:02:41.288 there is a mixed view, depending on geography, you know, uh, 0:02:41.490 --> 0:02:45.079 Europe quite depressed, uh, quite concerned, uh, Asia, the Middle East, 0:02:45.089 --> 0:02:46.369 I think, a bit less so. 0:02:47.720 --> 0:02:51.000 David, why isn't there a sense of this too shall pass, 0:02:51.110 --> 0:02:53.038 I mean, there was Trump 1.0, but there will be 0:02:53.038 --> 0:02:55.910 Trump 2.0 and at some point Trump will be gone. 0:02:57.720 --> 0:03:00.559 Why is there so much pessimism and why is the 0:03:00.559 --> 0:03:04.678 sentiment that this is structural, not just US political cycle? 0:03:05.258 --> 0:03:08.229 So I think two things, uh, at least. Uh, firstly, 0:03:08.240 --> 0:03:11.630 is that this is Mr. Trump's second go. During Trump 0:03:11.630 --> 0:03:15.429 wonder since, OK, it's 4 years, it's bad, we'll manage 0:03:15.429 --> 0:03:17.270 it through, and then in 4 years, we can kind 0:03:17.270 --> 0:03:20.429 of return to, uh, some sense of normality. But the 0:03:20.429 --> 0:03:22.949 mere fact that Mr. Trump has now been elected twice, uh, 0:03:23.070 --> 0:03:26.210 and obviously more recently on a fairly aggressive, uh, kind 0:03:26.210 --> 0:03:28.550 of agenda, you know, it says that actually there is 0:03:28.550 --> 0:03:29.229 something structural. 0:03:29.306 --> 0:03:30.977 This is not going to go away. It's not simply 0:03:30.977 --> 0:03:32.697 a matter of waiting this out for 4 years and 0:03:32.697 --> 0:03:36.576 hoping for a better outcome in the next election. And 0:03:36.576 --> 0:03:38.886 obviously just the speed at which Mr. Trump is moving 0:03:39.097 --> 0:03:42.197 to kind of rewrite the rules, be it the trade rules, uh, 0:03:42.337 --> 0:03:46.257 be it the geopolitical or security guarantees, be it Ukraine, um, uh, 0:03:46.376 --> 0:03:48.136 East Asia, and the like. You know, I think there 0:03:48.136 --> 0:03:50.526 is a sense that actually there's a lot that is changing, 0:03:50.947 --> 0:03:53.177 and Mr. Trump can actually do quite a lot. You know, but. 0:03:53.604 --> 0:03:58.363 and relatedly, there was, you can draw a fairly coherent 0:03:58.363 --> 0:04:02.953 line in US policy between Trump one, the Biden administration, 0:04:03.283 --> 0:04:05.893 and now Trump too. Different in character, to be sure, 0:04:06.044 --> 0:04:09.244 in rhetoric. Mr. Biden didn't undo very much of what Mr. 0:04:09.384 --> 0:04:11.884 Trump did in terms of tariffs. He became more hawkish 0:04:11.884 --> 0:04:16.204 on China, technology, investment, and other restrictions. And so there 0:04:16.204 --> 0:04:17.454 is a sense that, you know, 0:04:17.630 --> 0:04:22.109 Mr. Trump is reflecting, uh, underlying shift in US sentiment 0:04:22.110 --> 0:04:24.680 as much as he is kind of the cause, if 0:04:24.680 --> 0:04:26.311 you like. This is not simply about Mr. Trump. This 0:04:26.311 --> 0:04:29.270 is about different US attitudes to the world. That's why 0:04:29.270 --> 0:04:32.450 he's been elected now, twice. And I think, you know, 0:04:32.630 --> 0:04:36.330 there is a realization that actually, whoever wins in a 0:04:36.330 --> 0:04:39.911 few years' time, the next presidential election, the US is 0:04:39.911 --> 0:04:41.661 just quite a different proposition. 0:04:42.000 --> 0:04:43.619 Uh, and I think you know it's just a reminder 0:04:43.619 --> 0:04:46.359 that that Europe, Asia, the rest of the world need 0:04:46.359 --> 0:04:49.260 to accommodate themselves to a structurally different US approach to 0:04:49.260 --> 0:04:52.039 the world, both in economics and in terms of geopolitics. 0:04:53.799 --> 0:04:55.829 Uh, David, I couldn't agree with you more. I think 0:04:55.829 --> 0:04:59.760 that many recoil at certain actions of Trump, but I 0:04:59.760 --> 0:05:02.239 think that reactions should be seen in the context of 0:05:02.238 --> 0:05:04.640 the fact that half of America does support a lot 0:05:04.640 --> 0:05:07.799 of the things that Donald Trump is doing, and and 0:05:07.799 --> 0:05:11.190 that support is going to outlast Trump becoming president again 0:05:11.190 --> 0:05:11.558 and again. 0:05:11.635 --> 0:05:15.375 Or or his successor. David, I was in Denmark last week. 0:05:15.494 --> 0:05:17.945 I went to grocery stores where they put little stars 0:05:17.945 --> 0:05:20.385 next to Made in America products because there is a 0:05:20.385 --> 0:05:22.825 product boycott going on in Denmark. I mean, there's of 0:05:22.825 --> 0:05:25.975 course the Iceland issue, uh, the Greenland issue is certainly 0:05:25.975 --> 0:05:28.894 catching people's imagination, but again, it doesn't feel like a fad, 0:05:28.904 --> 0:05:29.424 it seems. 0:05:30.350 --> 0:05:34.950 Seems like, uh, in some ways, uh, Trump may have 0:05:34.950 --> 0:05:38.429 done it in an aggressive manner, but the uh events 0:05:38.428 --> 0:05:40.309 of this year seem to be more of a symptom 0:05:40.309 --> 0:05:44.149 than an underlying uh uh cause itself, underlying causes that 0:05:44.149 --> 0:05:47.709 the US is stretched and it is looking inward and 0:05:47.709 --> 0:05:50.428 uh we will have to sort of deal with that 0:05:50.428 --> 0:05:51.469 independent of the political cycle. 0:05:51.899 --> 0:05:55.618 OK, so let's not wallow in the despondency, um, your 0:05:55.619 --> 0:05:59.130 job certainly is to look for opportunities for your clients. So, um, 0:05:59.178 --> 0:06:01.850 you're based in Europe, but you've spent a lot of your, uh, 0:06:01.859 --> 0:06:06.980 life in Asia. Is Donald Trump inadvertently bringing these two 0:06:06.980 --> 0:06:07.769 regions together? 0:06:08.839 --> 0:06:11.308 I mean, yes and yes and no, the, the kind 0:06:11.309 --> 0:06:14.359 of the obvious answer, I suppose, is yes. I mean 0:06:14.359 --> 0:06:17.230 Europe is now looking for kind of additional friends, as 0:06:17.230 --> 0:06:18.200 is Asia for that matter. 0:06:18.500 --> 0:06:21.040 You know, kind of like-minded countries that want to trade, 0:06:21.119 --> 0:06:23.600 that want to invest, that want to hold on to 0:06:23.600 --> 0:06:26.599 what remains of a kind of a rules-based open order. 0:06:26.720 --> 0:06:29.959 So for Europe's part, you know, they are more aggressively 0:06:29.959 --> 0:06:32.920 looking for free trade agreements, uh, both in Asia, with India, 0:06:32.959 --> 0:06:36.488 notably developing relationships with Vietnam and other Southeast Asian countries, 0:06:36.559 --> 0:06:39.010 also with Latin America, uh, doing an FTA with, with 0:06:39.010 --> 0:06:41.529 the Mercosur group, Mr. Macron. 0:06:41.940 --> 0:06:45.429 Uh, was at the Shangri-La Dialogue recently in Singapore talking up, 0:06:45.540 --> 0:06:48.739 you know, Europe-Asia relationships, uh, in, in its case, uh, 0:06:48.829 --> 0:06:51.700 in the security and geopolitical realm. But I think more broadly, 0:06:51.980 --> 0:06:54.510 you know, Europe is looking for options. Uh, it wants 0:06:54.510 --> 0:06:57.619 to reduce its exposure to the US both economically and 0:06:57.619 --> 0:07:02.299 on other dimensions, uh, and developing relations with Japan, with 0:07:02.299 --> 0:07:06.149 South Korea, with Southeast Asia, with Australasia, with India, you know, I, 0:07:06.220 --> 0:07:08.578 I think is very much top of the agenda. There 0:07:08.579 --> 0:07:11.239 are lots of shared interests between. 0:07:11.299 --> 0:07:14.329 Between the two. But I think the elephant in the 0:07:14.329 --> 0:07:16.609 room on this is China. I mean, China is a 0:07:16.609 --> 0:07:21.119 big part of Asia. Europe's relationships with China remain tense. 0:07:21.649 --> 0:07:25.059 They are not what they were 56 years ago. You know, 0:07:25.250 --> 0:07:29.010 there are an accumulating series of trade tensions, um, you know, 0:07:29.049 --> 0:07:32.529 tariffs being imposed on Chinese electric vehicles, uh, rare earth 0:07:32.529 --> 0:07:35.850 restrictions being imposed in the other directions, uh, recently restrictions 0:07:35.850 --> 0:07:38.359 on things like medical technology. So there's a raft of 0:07:38.359 --> 0:07:40.649 kind of trade disputes and frictions. 0:07:41.329 --> 0:07:44.809 That will constrain the extent of, uh, you know, the 0:07:44.809 --> 0:07:48.170 European pivot, if you like, uh, towards China. It's not 0:07:48.170 --> 0:07:50.609 going to move away from the US towards China. We'll 0:07:50.609 --> 0:07:52.209 be pragmatic, to be sure, but it's not going to 0:07:52.209 --> 0:07:56.170 pivot markedly. And I think on a geopolitical realm, there's 0:07:56.170 --> 0:07:58.649 a sense that China is a rival, is a competitor. 0:07:58.769 --> 0:08:01.959 It is supporting Russia, which is a direct threat to Europe. 0:08:02.130 --> 0:08:04.450 So I think there are going to be limits, if 0:08:04.450 --> 0:08:08.730 you like, to how far Europe can maintain. 0:08:09.220 --> 0:08:13.739 cordial relations with China. But for Asia, China, I think 0:08:13.739 --> 0:08:17.779 certainly there is going to be increased European interest, investment, 0:08:18.209 --> 0:08:20.320 both at a government level and at a firm level 0:08:20.750 --> 0:08:24.018 in developing relations with like-minded countries in Asia. 0:08:25.890 --> 0:08:29.489 David, last year, Mario Draghi's paper on competitiveness certainly caught 0:08:29.489 --> 0:08:30.929 a lot of eyes, and I feel that it had 0:08:30.929 --> 0:08:33.799 a lot of resonance within Europe even before Trump's election, 0:08:34.090 --> 0:08:34.789 and I think that 0:08:35.710 --> 0:08:39.989 Even rings truer today that Europe really needs to invest 0:08:39.989 --> 0:08:43.789 on improving its productivity performance. Do you think that there 0:08:43.789 --> 0:08:46.429 is a sense that the fact that China is going 0:08:46.429 --> 0:08:49.830 through a bit of a techs search, uh, all sorts 0:08:49.830 --> 0:08:52.419 of new technologies of the future are coming out of China, 0:08:52.669 --> 0:08:54.960 that there is a degree of symbiosis that could happen 0:08:55.270 --> 0:08:57.739 in an amiable world without the US meddling too much 0:08:57.739 --> 0:09:02.989 into the China-Europe relationship where Europe can both provide as 0:09:02.989 --> 0:09:04.750 well as benefit from Chinese technology. 0:09:05.729 --> 0:09:07.989 I mean, yes, I mean you already see just a 0:09:07.989 --> 0:09:11.570 prosaic example, you know, a lot more Chinese EVs on 0:09:11.570 --> 0:09:16.159 European roads still fairly small in absolute numbers, but, but growing, uh, 0:09:16.169 --> 0:09:19.770 quite quickly. You know, China obviously is fundamentally important to 0:09:19.770 --> 0:09:22.289 the green transition, uh, in Europe, a provider of cheap 0:09:22.289 --> 0:09:24.049 solar panels and batteries and 0:09:24.400 --> 0:09:27.760 Uh, parts, wind turbines, uh, and the like. So there 0:09:27.760 --> 0:09:32.319 is complementarity between what China offers, what Europe needs. The 0:09:32.320 --> 0:09:35.719 challenge from a European perspective is that China has progressively 0:09:35.719 --> 0:09:39.179 eroded the market share, uh, the competitive edge of lots 0:09:39.179 --> 0:09:39.390 of 0:09:39.469 --> 0:09:43.390 European industries. Obviously, the auto industry, Europe 1015 years back 0:09:43.390 --> 0:09:45.909 had a very strong solar industry that's pretty much been 0:09:45.909 --> 0:09:49.750 decimated by China. So yes, you can, at one level 0:09:49.750 --> 0:09:55.750 see strong sort of complementarities between the two economies in 0:09:55.750 --> 0:09:58.939 both directions. Europe has a lot, but China still wants also. 0:09:59.369 --> 0:10:02.130 Uh, but there's also a real competitive tension. There's concern 0:10:02.130 --> 0:10:06.849 in Europe about dumping, uh, around Chinese subsidies, around Chinese mercantilism, uh, 0:10:06.979 --> 0:10:09.809 and the like, which is why Europe has been imposing 0:10:09.809 --> 0:10:11.760 various tariffs, and I think there is more to come, 0:10:12.010 --> 0:10:14.729 you know, in concern about, uh, sort of goods that 0:10:14.729 --> 0:10:16.890 can't go into the US because of tariffs being diverted 0:10:16.890 --> 0:10:20.049 into into Europe. We're already seeing that in terms of steel. 0:10:20.150 --> 0:10:21.849 So I mean, I think yes, there is an answer, 0:10:21.890 --> 0:10:22.969 and that's certainly been the European. 0:10:23.815 --> 0:10:27.085 view over the last 1015 years. China's a big export market, 0:10:27.215 --> 0:10:30.994 China's an important source of cheap manufactured goods. But I 0:10:30.994 --> 0:10:34.765 think there is a sense that Europe's strategic autonomy, uh, 0:10:34.974 --> 0:10:37.494 the ability for it to control its supply chains to 0:10:37.494 --> 0:10:42.255 maintain a critical mass in core strategic industries, be they energy, 0:10:42.335 --> 0:10:45.924 be they defense, be it tech, is being undermined by China. 0:10:46.094 --> 0:10:49.444 So I think Europe is going to be pragmatic. It 0:10:49.445 --> 0:10:50.844 understands the importance of China. 0:10:51.549 --> 0:10:53.070 Uh, it's not going to do a US in terms 0:10:53.070 --> 0:10:55.270 of trying to cut itself off from China, but I 0:10:55.270 --> 0:10:58.150 think there's also growing awareness, certainly post Ukraine, but you 0:10:58.150 --> 0:11:01.859 don't want to become overly exposed in terms of energy, uh, 0:11:01.950 --> 0:11:04.270 in terms of tech, in terms of auto to a 0:11:04.270 --> 0:11:07.190 particular market, particularly one with whom you're not fully values aligned. 0:11:07.270 --> 0:11:08.710 So there are going to be, there are going to 0:11:08.710 --> 0:11:09.229 be limits. 0:11:10.080 --> 0:11:14.000 Yeah, absolutely. David, one anecdote I'll share with you last 0:11:14.000 --> 0:11:16.039 week when I was in Denmark, I met with representatives 0:11:16.039 --> 0:11:20.959 of a large uh biotech company and they had an 0:11:20.960 --> 0:11:23.079 additional sort of, you know, wrinkle on this conversation. They 0:11:23.080 --> 0:11:27.429 said that the reason they remain heavily invested in China, 0:11:27.770 --> 0:11:30.520 of course, market access, B, they do a lot of 0:11:30.520 --> 0:11:32.919 exporting out of China from the products that they manufacture 0:11:32.919 --> 0:11:33.359 in China. 0:11:33.580 --> 0:11:35.840 But third is that they felt that in the life 0:11:35.840 --> 0:11:38.710 sciences area where they sort of stand at the frontier, 0:11:39.039 --> 0:11:41.070 some of the real big breakthroughs are coming from China 0:11:41.070 --> 0:11:43.590 and therefore they need to be in China to watch 0:11:43.590 --> 0:11:47.599 that develop and seize that technology from a very close 0:11:47.599 --> 0:11:49.919 proximity as opposed to being in Europe and just saying, well, 0:11:50.000 --> 0:11:52.450 you know, that's a different world. I felt that that 0:11:52.450 --> 0:11:55.039 conversation I would have not heard 57 years ago. It's 0:11:55.039 --> 0:11:57.880 a new development, uh, that some of these breakthroughs coming 0:11:57.880 --> 0:11:58.659 from China and then 0:11:58.713 --> 0:12:02.502 It behooves on enlightened companies to be in China just 0:12:02.502 --> 0:12:06.223 for that proximity. Um, so I I I've come back 0:12:06.223 --> 0:12:10.543 from Europe with a new appreciation of China to some extent. Now, David, 0:12:10.752 --> 0:12:14.732 we were talking about, you know, Asia and Europe. Uh, 0:12:15.062 --> 0:12:17.812 one thing that Asia and Europe have in common is 0:12:17.812 --> 0:12:22.783 that both are capital surplus economies, uh, both have been 0:12:22.783 --> 0:12:23.492 more prudent. 0:12:23.856 --> 0:12:26.726 Their American counterparts in terms of savings and have racked 0:12:26.726 --> 0:12:30.005 up large surpluses and they've exported quite happily a large 0:12:30.005 --> 0:12:32.166 part of the capital to the US over the years 0:12:32.166 --> 0:12:35.635 and decades, allowing the US current account deficit to be financed. 0:12:35.806 --> 0:12:38.005 Things are changing and you have been thinking about this. 0:12:38.285 --> 0:12:43.036 You recently wrote an article telling the entitled Capital Wars, 0:12:43.125 --> 0:12:45.286 and one of your arguments in that paper is that 0:12:45.285 --> 0:12:49.074 a structural change to cross-border capital inflows is in the making. 0:12:49.565 --> 0:12:50.606 Let's expand on that. 0:12:51.760 --> 0:12:53.829 Sure, so it's two parts. So if you think about 0:12:53.830 --> 0:12:55.880 kind of demand for capital and supply for capital. So 0:12:55.880 --> 0:12:59.080 on the supply side, as you say, China, many other 0:12:59.080 --> 0:13:02.848 East Asian economies, Japan, most notably, but also the ASEAN economies, 0:13:03.289 --> 0:13:09.059 also the Gulf countries have been saving for many years, consistent, persistent, 0:13:09.239 --> 0:13:12.909 fairly large current account surpluses that have in the main 0:13:12.909 --> 0:13:16.439 been invested in the US. The US is on the 0:13:16.440 --> 0:13:20.190 demand side, the large demander of capital. It's run. 0:13:20.489 --> 0:13:23.659 Consistent current account deficits for a long period of time. 0:13:23.770 --> 0:13:26.450 The UK also, but the US is the, uh, is 0:13:26.450 --> 0:13:29.020 the large game in town. So you've had a, you know, 0:13:29.169 --> 0:13:32.848 a picture where you've got persistent current account surpluses, exporting 0:13:32.849 --> 0:13:35.530 capital into uh, into the US. But if you look 0:13:35.530 --> 0:13:38.419 at the surplus countries, you know, there are dynamics that 0:13:38.419 --> 0:13:41.049 suggest that the extent of those surpluses is going to 0:13:41.049 --> 0:13:42.479 reduce over the next 5, 10 years. 0:13:42.650 --> 0:13:47.280 In Europe, Germany is the major moving part here, the 0:13:47.280 --> 0:13:50.559 new government and change German attitudes. It's going to be 0:13:50.559 --> 0:13:54.309 more fiscal spending, more investment, be it military, be it energy, 0:13:54.559 --> 0:13:56.919 other forms of infrastructure. The same is going to be 0:13:56.919 --> 0:13:59.479 true to a lesser extent across most European countries. There 0:13:59.479 --> 0:14:02.718 is an understanding that defense expenditure has to increase, and 0:14:02.719 --> 0:14:04.799 so we are going to see reduced government. 0:14:05.030 --> 0:14:07.750 saving. I think also reduced household saving as well, but 0:14:07.750 --> 0:14:10.789 government saving is going to be the big thing that shifts. 0:14:10.929 --> 0:14:13.348 And so I think we can expect reasonably for the 0:14:13.349 --> 0:14:17.840 size of the European current account surplus to reduce as 0:14:17.840 --> 0:14:23.030 savings comes down as investment in Europe comes up. Similarly, 0:14:23.059 --> 0:14:26.909 in the Gulf, oil prices down, increased investment at home. 0:14:27.419 --> 0:14:31.820 So again, Gulf surpluses are going to constrain, Japan. Interest 0:14:31.820 --> 0:14:35.219 rates are normalizing during the rise, like they have repatriation 0:14:35.219 --> 0:14:38.780 of capital for various reasons, I think also Japanese surpluses 0:14:38.780 --> 0:14:42.179 reduced and over time, possibly China as well as China 0:14:42.179 --> 0:14:46.130 moves to a more an economic model where domestic demand 0:14:46.130 --> 0:14:48.460 is a more important component of final demand. So on 0:14:48.460 --> 0:14:52.119 all of the big current account surplus countries for various reasons, uh, 0:14:52.340 --> 0:14:52.849 you see. 0:14:52.969 --> 0:14:55.020 dynamics that I think are going to shrink the size 0:14:55.020 --> 0:14:58.400 of capital, the capital pool that is exported. And then 0:14:58.400 --> 0:15:00.809 you've got the US on the other side. The US 0:15:00.809 --> 0:15:05.049 has said run very large deficits, largely due to its 0:15:05.049 --> 0:15:08.020 large and expanding fiscal deficit, and as we know from 0:15:08.020 --> 0:15:10.659 the last few weeks, that seems to be moving up. 0:15:10.700 --> 0:15:13.500 The budget working its way through the House at the moment, 0:15:13.609 --> 0:15:15.859 or the House and Senate at the moment, looks to 0:15:15.859 --> 0:15:18.380 be expanding that deficit. 0:15:18.989 --> 0:15:21.789 Uh, but that's going to become tricky. Uh, you know, 0:15:21.900 --> 0:15:25.020 if the pool of capital from overseas is shrinking, the 0:15:25.020 --> 0:15:27.299 US is going to have to work harder, if you like, 0:15:27.309 --> 0:15:30.859 or find it more difficult to attract that capital at 0:15:30.859 --> 0:15:33.369 a minimum, we're gonna, we're seeing interest rates move up 0:15:33.369 --> 0:15:36.950 to make the US more attractive, which we are already seeing. Um, 0:15:37.390 --> 0:15:39.820 the dollar will probably come off, which again is what 0:15:39.820 --> 0:15:41.580 we're seeing. But this is happening as we know, at 0:15:41.580 --> 0:15:44.580 a time where people are questioning the risk profile of 0:15:44.580 --> 0:15:48.159 the US. Is the US an unambiguous safe haven? You know, 0:15:48.219 --> 0:15:48.570 what sort of 0:15:48.614 --> 0:15:51.164 risk premium do we need to attach to the US? Uh, 0:15:51.284 --> 0:15:54.094 and so, you know, the US is in a much 0:15:54.094 --> 0:15:57.255 more intense competition for capital because the pool of available 0:15:57.255 --> 0:15:59.684 global capital is shrinking. Now at the same time as 0:15:59.684 --> 0:16:03.085 we're seeing, uh, some question marks. So capital wars, it's 0:16:03.085 --> 0:16:05.364 partly a sense of, you know, there are, there's just 0:16:05.364 --> 0:16:07.724 going to be an intense competition for capital. We're also 0:16:07.724 --> 0:16:09.695 going to see, I think, more capital nationalism, you know, 0:16:09.844 --> 0:16:13.075 countries wanting to kind of hold on to their national savings, uh, 0:16:13.164 --> 0:16:16.594 to finance, uh, strategic investment, be it defense or energy 0:16:16.594 --> 0:16:18.125 or infrastructure, and the like. 0:16:18.489 --> 0:16:20.690 Uh, and so trade wars, I think, are very much, uh, 0:16:20.770 --> 0:16:23.409 kind of a precursor to some of the, the international 0:16:23.409 --> 0:16:26.679 cross-border conflict we'll see in terms of, uh, attracting, uh, 0:16:26.710 --> 0:16:29.000 and retaining capital, and these, I think, will be at 0:16:29.000 --> 0:16:32.169 least as consequential, uh, as the, uh, as the trade 0:16:32.169 --> 0:16:33.289 wars that we're beginning to see. 0:16:34.369 --> 0:16:36.030 So David, I want to sort of do a little 0:16:36.030 --> 0:16:38.710 tour of the world, region by region in the context 0:16:38.710 --> 0:16:40.869 of capital war. So let's start with the US. To 0:16:40.869 --> 0:16:44.510 your point, the US is not really heading in the 0:16:44.510 --> 0:16:48.309 direction of lower fiscal and current account deficit, but at 0:16:48.309 --> 0:16:50.830 the same time, the world seems to be assigning higher 0:16:50.830 --> 0:16:53.789 risk premium to the US and therefore you expect interest 0:16:53.789 --> 0:16:56.729 rates to be higher. Do you also expect the US 0:16:57.539 --> 0:16:59.719 to do some of the things that Stephen Moran wants 0:16:59.719 --> 0:17:03.109 to do, which is force the world to buy US 0:17:03.179 --> 0:17:06.149 Treasuries in return for getting US security protection. 0:17:06.968 --> 0:17:09.838 Yeah, I think we need to be open to, if 0:17:09.838 --> 0:17:14.239 you like, unorthodox, uh, measures. Uh, you know, the US 0:17:14.239 --> 0:17:17.198 has a major imbalance that it needs to, uh, correct 0:17:17.198 --> 0:17:20.279 in terms of external account. It's got a clearly unsustainable 0:17:20.279 --> 0:17:24.479 fiscal path, and international investors in particular are worried about 0:17:24.479 --> 0:17:27.318 the US. So market forces will take you a bit 0:17:27.318 --> 0:17:30.078 of a way. Bond vigilantes doing their thing, trying to 0:17:30.078 --> 0:17:31.879 curb some of the fiscal excesses. 0:17:32.339 --> 0:17:34.669 You know, uh, uh, just given the politics in the US, 0:17:34.750 --> 0:17:37.030 I'm not sure that is going to be, uh, enough. 0:17:37.079 --> 0:17:38.949 And so, you know, I, I think we are going 0:17:38.949 --> 0:17:42.530 to see a sort of unorthodox measures being, uh, investigated, 0:17:42.589 --> 0:17:44.430 at least, so you mentioned Stephen Moran's paper. 0:17:44.859 --> 0:17:47.099 You know, I would be very surprised if in the 0:17:47.099 --> 0:17:50.099 context of the current tariff or trade negotiations that the 0:17:50.099 --> 0:17:53.069 US are underway with countries like Japan and South Korea 0:17:53.069 --> 0:17:56.540 and others, that as part of those negotiations, there weren't 0:17:56.540 --> 0:17:59.900 some sense of, look, if you want to, you know, 0:17:59.979 --> 0:18:02.660 have lower tariffs, if you want to continue to benefit 0:18:02.660 --> 0:18:05.500 from the US kind of security guarantee. 0:18:06.170 --> 0:18:08.959 Uh, be it East Asia or elsewhere, uh, then we 0:18:08.959 --> 0:18:12.170 are expecting you to buy, you know, $100 billion of 0:18:12.170 --> 0:18:14.410 US Treasury, perhaps on the market, but we expect you 0:18:14.410 --> 0:18:17.349 not to be selling these down, um, and probably to, 0:18:17.479 --> 0:18:18.968 to buying more. So in a sense you're trying to 0:18:18.969 --> 0:18:22.469 expand the pool of demand, uh, for US Treasuries, you know, 0:18:22.650 --> 0:18:24.930 not by, and it's essentially a kind of a coerced 0:18:24.930 --> 0:18:25.349 or kind of. 0:18:25.405 --> 0:18:28.694 The duress, uh, purchase, you know, we'll tariff you, we'll 0:18:28.694 --> 0:18:30.833 remove US troops if you don't do this. So I 0:18:30.834 --> 0:18:33.435 would be very surprised if we didn't see some pressure 0:18:34.035 --> 0:18:36.795 in that regard. for countries like China, it's more problematic, 0:18:36.875 --> 0:18:40.754 but for allies like Japan, like South Korea and others, 0:18:40.994 --> 0:18:43.275 I'd be very surprised if we didn't see that. And 0:18:43.275 --> 0:18:46.265 then one step further than that, beyond this kind of 0:18:46.265 --> 0:18:48.073 international government to government negotiation. 0:18:48.589 --> 0:18:50.989 You know, if that's not sufficient to do the trick 0:18:50.989 --> 0:18:54.389 in terms of raising demand for US Treasuries, you know, I, 0:18:54.469 --> 0:18:58.819 I think that, you know, issues around financial repression, requiring 0:18:58.819 --> 0:19:02.510 commercial banks, uh, or households, or the Fed, uh, to 0:19:02.510 --> 0:19:05.149 buy more government debt issuance, the type of thing we 0:19:05.150 --> 0:19:08.199 haven't really seen at scale for, for many decades, you know, 0:19:08.310 --> 0:19:08.589 I think. 0:19:08.699 --> 0:19:10.410 on the table. So this is, you know, just the 0:19:10.410 --> 0:19:14.680 fiscal math is very difficult to resolve unless you begin 0:19:14.680 --> 0:19:16.728 to contemplate some of these other measures. I mean, ideally, 0:19:16.849 --> 0:19:19.560 markets and fiscal discipline in the Congress would be enough. 0:19:19.750 --> 0:19:21.849 I'm not sure what it is. Uh, and so I 0:19:21.849 --> 0:19:26.359 think bracing ourselves for some more unorthodox measures, you know, 0:19:26.449 --> 0:19:28.800 those sort of things are not, are not off the table. 0:19:30.270 --> 0:19:33.229 I mean, OK, so in terms of domestic policies, you'll 0:19:33.229 --> 0:19:34.890 make it sound like the US is about to become 0:19:34.890 --> 0:19:37.708 like India in the 1980s and 1990s, um, but let 0:19:37.709 --> 0:19:41.699 me stay on the external side, uh for a moment. uh, David, 0:19:41.869 --> 0:19:44.349 the US has tried this before, uh Plaza Accord in 0:19:44.349 --> 0:19:48.430 the 80s, they sort of course both Japan and Germany 0:19:48.430 --> 0:19:52.069