Odd Lots - Lots More on the Coming 20-Year Storm with Viktor Shvets

Episode Date: November 29, 2024

The election of Donald Trump, with his promise of more tariffs and a much tighter stance on immigration is a source of major macro uncertainty. To some it marks the end of a certain neoliberal consensus about globalization, and the pre-eminent role played by financial markets. According to today's guest, we're at the beginning of a long, turbulent period that may not be resolved for two decades to come. On this episode, we speak with macro strategist Viktor Shvets, and author of the new book, The Twilight Before the Storm: From the Fractured 1930s to Today's Crisis Culture. He talks about the big rethink that's underway on a whole host of issues that pertain to the global economy, starting with trade, and why it will take years for the dust to settle.Become a Bloomberg.com subscriber using our special intro offer at bloomberg.com/podcastoffer. You’ll get episodes of this podcast ad-free and exclusive access to our daily Odd Lots newsletter. Already a subscriber? Connect your account on the Bloomberg channel page in Apple Podcasts to listen ad-free.See omnystudio.com/listener for privacy information.

Thanks for listening to Odd Lots. Follow the show on Amazon Music for more future episodes or just ask, Alexa, play the Odd Lots podcast on Amazon Music. Today's show is brought to you by Vanguard. To all the financial advisors listening, let's talk bonds for a minute. Capturing value and fixed income is not easy. Bond markets are massive, murky, and let's be real. Lots of firms throw a couple flashy funds your way and call it a day. But not Vanguard. At Vanguard, institutional quality isn't a tagline. It's a commitment to your clients. We're talking top-grade products across the board of over 80 bond funds, actively managed by a 200-person global squad of sector specialists, analysts, and traders. These folks live and breathe fixed income. So if you're looking to give your clients consistent results year in and year out, go see the record for yourself at vanguard.com slash audio. That's vanguard.com slash audio.

All investing is subject to risk vanguard marketing corporation distributor. Bloomberg Audio Studios. Podcasts, Radio News. Joe, it started. It started. It's what, like two, three weeks later? Yeah, so we had, yeah, three weeks basically since the election and the trade war, at least to some extent, maybe a trade skirmish.

We don't really know what's going to happen. It's kind of begun. It started last night. Yeah, so Trump, he didn't tweet. He said on truth social. Is that what it's called? And by the way, I respect that he still uses truth social. Yeah, kind of a slap in the face to Elon Musk, I guess.

I did a deadlift. One, two, three. Hedgemi. Okay, go. What's the... GEMany. Barges. This is an after-school special, except...

I've decided I'm going to base my entire personality going forward on campaigning for a strategic pork reserve in the U.S. Where's the best squid impostin? These are the important questions. Is it robots taking over the world? No, I think that, like, in a couple of years, the air... I will do a really good job of making the Odd Lots podcast. And people are saying, I don't really need to listen to Joe and Tracy anymore. We do have...

Cha-ching. The perfect guest. Welcome to Lots More, where we catch up with friends about what's going on right now. Because even when Odd Lots is over, there's always lots more. And we really do have The Perfect Guest. But he said he's thinking about or he's going to impose 10% terrorism. tariffs on goods from China and 25% tariffs on goods from Mexico and Canada for some reason. By the way, we're recording this November 26th, Tuesday. And he specifically tied those

tariff threats to Mexico and Canada to which various conditions that theoretically can be met related to immigration crackdowns and the flow of drugs across the border. Yeah. So this is the thing that's being debated in markets right now. To what? what extent is this a negotiating tactic? You know, you come in with a big threat and you start from there and you sort of whittle it down or, again, how serious is Trump actually about this? Well, I think it's both domestic and international in a sense that if you think what drives it and why the likes of Bernie Sanders and the likes of Donald Trump read the mood of American people much more than institutionalized people like Biden or Harris is really to do.

what I described, actually Donnie Roderick of Harvard University described as a political tralem of global economy. You cannot have globalization and economic integration, nation states and democracy all at the same time. You can pick up two out of the three, but you can't have all three, and you can't have all at the same time. So if you think of domestic and international pressures, I think Trump is reflecting both of them. If you go back in time, it's really Paul Walker deregulating global financial system, followed by Bill Clinton in 1994 NAFTA, followed by China entering WTO in 2001, have created environment where people feel justifiably or not, but they feel that their jobs, their livelihoods somehow were stolen by other people. And so this is a response to that,

to say to people, I am looking after you. I am trying to protect it. But at the same time, there is also inflationary element that I think Trump fully understand, or he must fully understand, that the principal reason why Biden lost was inflation. And so the question is, when you start imposing those terrorists, you have to remember that up to half of all U.S. imports are intermediate goods. So if you actually impose tariffs, you're taxing your own manufacturers and your own exporters. So there is an element of domestic and international. We are here with Victor Schwetz. He is, of course, a global strategist and author of the new book, The Twilight Before the Storm, How to Avoid a World on Fire. World on Fire sounds kind of ominous. Yeah. Well, since you

mentioned the tensions in the neoliberal order or what remains of it, What do you see on the horizon? Like, what political system are we actually on course for? Well, that's a great question. One of the things my new book explores is that the last time we had the same degree of our disequilibrium or polarization was really in 1930s. And back then, there were three systems on a menu. You could choose communism, you could choose fascism, or you could choose constrained democracy. It wasn't a choice between freedom or liberty. It was just a question, how much freedom do we need to sacrifice in order to load the tensions and defying the extremes? So today, in a very similar position, the world as a whole does not agree on what is the right social policies, political system, economic systems, business systems.

And if we don't agree what is the right thing to do, alternatives proliferate. So today, there are various alternatives competing against each other, whether China, Russia, Iran, U.S. trying to redefine what it is. Europe is trying to redefine what it is. And we're in this period, which might last up to a decade, where ultimately we will find a compromise. Ultimately, there will be consensus that will be established. And the only question the book asks, do we need to go through the world of fire of 1940s? Or can we just go straight in the 1950s and forget the 1940s? I'd sign up for the 1950s. Yeah, I'd choose the latter path. When you presented your trilemma. So just globalization, the nation state, as we know it, and democracy. And you mentioned that

candidates like Bernie Sanders and Donald Trump, both to some extent, for better or worse, correctly or incorrectly, there is the economic vulnerability that perhaps people feel. But it also sounds, when you say nation state specifically, and when you contrasting that against globalization, it sounds like there is, yes, there is an economic impulse, anxiety, security, etc. But also this notion of legitimate sovereignty of a nation. A nation has the right to control its borders to some degree and to modulate and turn the dial on who can get in or out. It has the right, we see this in the war in Ukraine, the legitimate right to have a military and a precondition to having a military is some sort of domestic manufacturing capacity to build weapons. It feels

like there's a big element of what's being debated now in the U.S. specifically is the re-exercise of sovereignty across a number of different dimensions. Totally, totally. I mean, if you think of, I usually describe it as three eyes, inflation, inequalities, immigration. Yeah. If you think of those three elements, if you combine them, that pretty much explains almost everything you need to know. So if inflation was much lower, in a sense of absolute prices have come down to a level

that people regard as acceptable. if inequalities, whether it's wealth or income, we're much better managed, if immigration was not major issues, either in Europe or in the United States, most other issues, whether it's cultural wars or anything else, will just fade into oblivion. So in other words, the cultural issues color, how you look at those three eyes. And so if you do not fix inflation, if you do not fix inequalities, and if you do not fix immigration and control of your borders, then, culture issues become even more dominant, driving into a certain conclusion. Speaking of the culture wars, one thing I wanted to ask you from an investment perspective

is we have also seen them kind of creep in to the corporate sector where companies basically are forced into choosing a side. So for instance, tractor supply rolled back its DEI initiatives. There was the Bud Light boycott and then Coors Light. I think. Walmart, just last night. Oh, really? Yep. This was a big news just last night. Walmart becomes, I'm reading an NPR headline, Walmart becomes latest and biggest company to roll back DEI policies. I think that's huge. Yeah, that's massive. How do investors handle like the politicization of companies that at one point said they were just out to maximize shareholder returns and now seem to be doing something else? Yeah, that's exactly what my book discusses, that the idea neoliberal philosophy that really become embedded in the late 1970s, early 1990s, 1980s really died around the global financial crisis, around 2010. Over the last decade of 15 years, we'll all be trying to find, as I said, what is a new

societal consensus? How important are corporates, private sector, public sector, what responsibilities do they have? So the idea of Milton Friedman, that the primary objective of a corporate is to generate returns to shareholders actually died around 2019 when the U.S. Business Council already redefined objectives. But right now, societies still don't agree. What is right? What is wrong? And so corporates are trying to be careful because corporates are nothing more than an outgrowth of societies therein. I think one of the things I mentioned in the book, if societies decided that burning witches is the right thing to do, we probably would have been burning witches. And so corporates have to reflect society. And so what you find, corporates try to find the middle ground somewhere between extreme. But however, as I said early on, five, ten years from now, and I keep looking in this book, into Millennian and Z generations, and what those generations actually want to have, as they become

the dominant voting bloc, because today they're only around 30% of the votes. When they become a dominant voting block, they will identify exactly the frontiers, the borders, how far you can go, where should you go? And at that point in time, the corporates could actually solidify. But right now, they're in a flux. They're reflecting purely societal flux. It feels to me like when Trump won in 2016, corporations in the way, they're like, you know what, the election happened, but we're going to continue on.

This doesn't change our commitments to net zero. This doesn't change our commitments to diversity. This doesn't change our commitments to gender equality and so forth. It feels like they're following the mood of the election much more this time. I was really struck by a utility company the day after the election. Say, yeah, we're probably going to burn more coal now in line with changing regulations. You see the Walmart news three weeks afterwards. I want to get at something else about the three eyes.

There are tensions among them. And how much does the American way of life, the middle class or the upper middle class way of life in some way, you know, there's a lot of tension about the cost of living. How much, though, is it somewhat predicated on? inequality and the ongoing influx of cheap immigrant labor to sustain what people expect is this sort of like comfortable middle class to upper middle class life here. Totally. One thing, whenever Donald Trump discusses current account deficits, I'm not sure if you fully realize it's an accounting identity. The deficits of one country is equal to surplus of another country. Unless we start trading with Mars or extraterrestrials, exports and inputs, surpluses and deficits

has to line up. And so one of the things the incoming Treasury Secretary is discussing is basically unwinding Paul Walker's revolution, which led to significant discontinuities. In other words, some countries being accumulating significant surpluses. Other countries were accumulating significant deficits. So one thing, American people probably don't realize that they can't just maintain consumption at the current level and still not run the deficits. At the same time, if Americans run the deficits. By definition, China, Germany, Japan have to run the surpluses. But just on the immigration component as well, how much does the U.S. standard of living, as we know it, and our service sector labor, restaurants? I mean, I'm thinking back to the

immediate post-pandemic period when we had this fairly modest labor market tightening. And people went ballistic about the quality of service they were getting in restaurants, because workers didn't immediately go back to their jobs at the pace that was expected. ironic if Trump won because of post-pandemic inflation caused by labor tightness in part. And then part of his administration is basically imposing a new form of labor market tightness. Well, that's right. But you also have to separate politics, optical illusion, what you're trying to do and the reality. If you remember, well, you don't remember, but anyway, Eisenhower in Operation, I think it was called Wetpack Operation, which is a horrible name.

But anyway, Eisenhower expelled 1.1 million Mexicans in 1950s, only to see them all trickling back into the country in a matter of months and years. So you have to separate politics, what you're trying to do, optical illusion you're trying to create, and the reality of what is actually being achieved. My view is that there is sufficient guardrails in a system in the US to prevent probably the worst outcomes that potentially could have happened. Now, the first clearly guardrail is an electoral process.

US is one of those countries that elections never end. I mean, they just carry on all the time. So if you think of inauguration in January, within 12 months, everybody will be in the midterm mode. Everybody will be discussing what's going to happen to midterm. So if you're not careful and you're causing significant frictions in the labor market, significant tightening, some inflation coming back, you have to roll back your policies. But there are other areas, capital markets.

is a classic example. That's why you get your Treasury secretary, a hedge fund manager, because at the end of the day, markets are bigger than individuals, and they're bigger even than the underlying economies. So any distress that you're going to see in risk premium, in mortgage rates, and interest rates, or anything like that, they will have to pedal back a lot. So what that basically implies, there is a friction here between political objectives, what you're trying to do, what you genuinely believe, and I think Trump probably does believe, it's a good idea, to expel those people out of the country, and economic reality, inflationary reality that you're going to face.

Don't also forget commercial and corporate interests, like he's talking about getting rid of Chips Act or IRA Act. Over 80% of the money in those acts went into the red districts, which are represented in Congress, which has a tiny majority. You really are looking at only four or five seats they're going to have in a majority in the Congress. So there is constant tension. Now, that tension will create volatilities inevitably.

They're going to create currency volatility. They're going to create equity volatility, interest rate volatility. So that's inevitable. But the hope is that the gutrails between electoral cycles, tiny majority in a Congress, between corporate interest, the capital markets, stickiness of institutions. Remember, you can't just unscramble a lot of the commitments that the United States have, whether it's a WTO, whether it's NATO, whether it's UN, whether it's NAFTA, you can't really do that. That there is enough there that, as I said, tariffs are not going to go up to 20%.

They will increase from 3, 4, to maybe 6, 7, 8, but they're not going to 20. You're going to not be expelling millions of people. Labor force increase will shrink, but probably no more than 25, 30%, rather than a much more robust numbers that could have occurred. And that should moderate some of the inflationary. outcomes and economic outcomes. Today's show is brought to you by Vanguard. To all the financial advisors listening, let's talk bonds for a minute.

Capturing value and fixed income is not easy. Bond markets are massive, murky, and let's be real. Lots of firms throw a couple flashy funds your way and call it a day. But not Vanguard. At Vanguard, institutional quality isn't a tagline. It's a commitment to your clients. We're talking top-grade products across the board of over 80 bond funds, actively managed by a 200-person global squad of sector specialists, analysts, and traders.

These folks live and breathe fixed income. So if you're looking to give your clients consistent results year in and year out, go see the record for yourself at vanguard.com slash audio. That's vanguard.com slash audio. All investing is subject to risk vanguard marketing corporation distributor. Eating well shouldn't be complicated, but somehow it turns into recipes, prep, cleanup, and half your Sunday gone. Actors solves all that. These are fresh, ready-to-eat meals designed by dietitians, delivered to your

door and ready in just minutes. No prep, no cleanup, no excuses. And it's not just about convenience. You're getting real food, balanced nutrition, and zero artificial stuff. Meals that help you stay on track for all of your goals without the grind of doing it all yourself. Grilled chicken, roasted veggies, steak plates, postables. They taste like something you get in a restaurant, but they come out of your microwave in two minutes flat. If time, Cost or effort have been holding you back from eating better? Factor just took those off the table. Right now get 11 meals, free shipping, and free sides for life. Hurry, this offer won't last long. Go to factormeels.ca and use code fit. That's 11 meals, free shipping and free sides for life,

but only with the code fit at factormeals.ca. Factor, Canada's number one ready-to-eat meal delivery service. You said earlier that the 1930s were your preferred historical analogy to our current time period, one thing that happened in the 1930s was also tariffs and the Smoot-Hawley Act and then we had retaliation. And expulsion of all the illegals, too. Oh, oh. So it happened. US was doing six times expulsions in 1930s and they were doing in 1920s. Oh, wow.

So it happened. There was a big wave in the 1930s and the 1950s. That's right. That's right. America has a long history of expelling immigrants. But not just the US was expelling in 1930s. So was Germany. So was many other countries.

So desire to close the borders, the desire to expel foreigners, the desire to establish terrorists, protect local interests, it was all prevalent in 1930s. But what I was going to ask is, how worried are you or what's the potential for retaliation by other countries? Because we've obviously been focused on the U.S. everyone is focused on what Trump is doing, but he is not the only actor here. No, he is not. And that's one of the issues that, and I think he probably understands that if he's been negotiating with anybody, he has to understand it, that the other side will try not to reciprocate aggressively, primarily because of the size and importance of the U.S. domestic market. But you can't push them too far.

You have to find that middle ground. And that's where discussion of negotiating tactics that I think you've started from, I think comes in. that I do think that the U.S. side understands that you have to find a compromise. And that compromise optically should look better for the United States. It's like if you're seeing a renegotiation of NAFTA back in 2017, 2018, it hasn't actually changed a lot. But optically, it was presented as a much better case for the United States going forward. So you need to find that sort of our middle ground.

If you don't, if you actually do become aggressive, as it happened in 1930s, yes, you could have retaliatory actions very quickly. That's one of the things I keep highlighting that today, people are angry, people are polarized, but they are not yet met enough to burn down the house. Whereas in 1930s, they were really mad. In other words, they were exacerbating, primarily because degree of suffering that actually people encountered in 1930s were significant. worse, that anything we're experiencing. So people are not happy, but they don't want to burn down

the house yet. That may be another war, another pandemic, and people will be really angry, but that is not today. So if people are not angry, they're pulling back the politicians within their countries. Also, because people are not angry, geopolitical tensions are kept under some degree of control. It's only when people magnify extremes that both geopolitical tensions and domestic tensions, get out of control. And I don't think we're at that point yet. I said we might be at some point in time, but not today. One of the things, and it came up during the first Trump administration significantly, and it's almost certainly going to come up now. And I mentioned sovereignty and an element of sovereignty is having a military and an element of having a military is having a domestic

weapons manufacturing economy. Trump has put a lot of pressure on the Europeans' allies specifically to spend more on defense, very angry at their military budgets, their lack of military budgets, et cetera. And, you know, in the dream society of peace, no one has to spend too much on military. How inflationary is that if, you know, there's this perception that the U.S. is going to pull back the security umbrella, so to speak, if there's this trade pressure, spend more, if there is a major rearmament, even setting aside war, which, of course, would be costly on multiple levels. If there is this sort of major impulse among governments around the world,

oh, we do have to spend more. Maybe we can't rely on the U.S. Maybe the U.S. is putting stress on us. Maybe we have to be more anxious about further Russian expansion. What does this do economically if more countries feel this pressure? It depends on the extent. Because one of the things I discussed in a book in 1950s and 60s, there was no inflation. In fact, inflation didn't pick up until 68, 69, and then much more into 1970s. At the time, military spending globally were about 5, 6% of GDP. Some countries were up to 7%. Today, global military spending already up to about 2.2, 2.3%. So in other words, we're spending more on defense than R&D, for example, on the global basis already. In the US, we're up to about 3.5, 3.6% of GDP. If all we're going to do is go up to

maybe five, and Europeans may go up to about three, there will be no inflationary impact at all. But if you have a much hotter conflict, that's where military spending goes up to 15, 20, 30, 40% of GDP. So, for example, in the World War I, US was spending 15% of GDP. In World War II, at the peak, in 1944, US was spending 40% of GDP on defense. If you're saying of countries like Britain or Japan, they were spending up to 80% of GDP on defense. So when you get to that level, normal economy just collapses. It's just war economy. That's all you're dealing with.

So long as we're staying around the area of the Cold War of 1950s, 1960s, that is, we're spending maybe 5% of GDP on defense, I do not believe there will be any significant inflationary impact. Despite all the scary things that we're talking about and the fact that you mentioned the world on fire as part of your book title. You kind of end the book on an optimistic note and you talk about things maybe getting better specifically in the 1940s. Maybe we'll get a big productivity boost and our social values will change and, you know, we could have a three-day work week or something like that. Of course, the irony is that I'll be retired by the 1940s right when that comes.

2040s. Oh, sorry. Then you're going to have to unretire in the 1950s. sorry. When your retirement portfolio gets eaten away. Yeah. Like, why did he, 2040s specifically? And then, like, what causes you to be optimistic, given everything that's going on? Make me feel better. Well, the way I look at it, human history is very convoluted and very complex, quite often contradictory. I like Kevin Drum phrase that I keep using constantly in the book. He's a blogger from California. When he said humans are just overclock.

primates that beneath a very thin layer of civilization relies five million years of primate evolution. And therefore, we are still bound by. You were supposed to say something comforting. We are tribal. We are subject to dominance, displays, and all the rest of it. And so human history is very complex. But one thing we've learned that over time, we overcome those challenges. Over time, productivity rises.

Over time, output increases. health care improves, you know, longevity improves. And there is no reason by at all to believe that this period will not be followed by this nirvana at some point in time. Why 20 years from now? To me, that's a process at the time you need in order to achieve two things. Number one, a sustainable increase in productivity. So in other way, it's not just one country grows productivity because they're eating demand from other countries and other countries are stagnating. But you actually have a global increase in productivity. To me, We're still residing on the bottom of the U-Curve, which means we have not yet figured it out how to use technology sufficiently to maintain aggregate demand to avoid unemployment and to drive productivity all at the same time.

But over a period of the next decade or two, we will find a way to do it. Now, that probably will imply a lot of people will not have a job. Probably many of us will not be even working. But the productivity probably will be 4 or 5%, 6% per annum instead of something closer to 1%. we have right now. So that's the first area. The second area is generational change. Because there is a reason why baby boomers and ex-generation behave as they do, you know, give me freedom, give me the rope and I can either hang myself or succeed, give me an opportunity without determining outcomes. And the reason why that is so, because they no longer have a fear. They've never seen chaos.

They've never seen bad stuff. And therefore, they assume that the institutions are of state or the environment will always be there. It's like the air you breeze. You don't think about it. But the younger generation, those who are today 30 years old, 35 years old, 25 years old, 20 years old, they actually have seen quite a lot of bad stuff occurring, from global financial crisis to never-ending wars to pandemics. They've seen a lot of bad stuff, not at the level that people who are growing up in the 30s and 40s saw, but nevertheless quite a lot of bad stuff. And so the question is, when this younger people become an electoral majority across most developed countries, what sort of world would they like to have?

And to me, all the service are pointing to much more state-driven world, much more community-driven world. Even if you think of Republican Party today, or Democratic Party, Republican Party today is not Ronald Reagan's Republicans. They're not Eisenhower Republicans. They accept that neoliberal framework is incorrect. The only difference between Democrats and Republicans is whether the role of the state will be indirectly through tariffs, through something else, or whether directly through investments, the way the Democrats wanted to do. But both of them essentially agree that the state role will increase, not decrease, the level at which state will penetrate your life in various forms, whether it's adjudicating discussions, whether anything else will change.

So to me, this 20-year period, number one, allow time to raise productivity. And number two, allow time for societies to call us around the consensus. And as I said, 20 years is about the right time when things will get much, much better in my view. All right, Joe, we're going to have to wait for 20 years. I love, so things are going to get better because we're really all primates and the next generation doesn't really believe in freedom as much. I feel great. I feel great. I feel great. Good. You know what's actually...

I feel really assured. You know what I'm actually still really upset about is the politicization of cheap beer. Because I like both Coors Light and Bud Light. And, you know, I don't want to make a political statement when I go to a bar. Miller High Life is the way through... The neutral alternative. That's right. Lots more is produced by Carmen Rodriguez and Dashel Bennett with help from Moses Andam and Kale Brooks.

Our sound engineer is Blake Maples, Sage, Bauman is the head of Bloomberg podcasts. Please rate, review, and subscribe to odd lots and lots more on your favorite podcast platforms. And remember that Bloomberg subscribers can listen to all our podcasts ad-free by connecting through Apple Podcasts. Thanks for listening. The news doesn't stop on the weekends. Context changes constantly. And now Bloomberg is the place to stay on top of it all. Hi, I'm David Gurra. Join us every Saturday and Sunday for the new Bloomberg this weekend.

I'm Christina Rafini. We'll bring you the latest headlines, in-depth analysis, and big interviews. All the stories that hit home on your days off. And I'm Lisa Mateo. Watch and listen to Bloomberg this weekend for thoughtful, enlightening conversations about business, lifestyle, people, and culture. On Saturday mornings, we put the past week's events into context, examining what happened in the markets and the world. That on Sundays, we speak with journalists, columnists, and key political figures to prepare you for the week ahead. Join us as soon as you wake up and bring up.

Bring us with you wherever your weekend plans take you. Watch us on Bloomberg Television. Listen on Bloomberg Radio, stream the show live on the Bloomberg business app, or listen to the podcast. That's Bloomberg this weekend. Saturdays and Sundays starting at 7 a.m. Eastern. Make us part of your weekend routine on Bloomberg Television, radio, and wherever you get your podcasts. What separates good leaders from transformational ones? I'm Jessica Chen, and in season two of Leading By Example, we'll sit down.

with executives like Grace Chen of Bertie Gray to find out. It's important to understand where you spike, but also really acknowledge where you don't and find people who can fill those gaps. Listen to leading by example, executives making an impact on the IHeart radio app, Apple Podcast, or wherever you get your podcasts.