Odd Lots - Odd Lots Live: What to Watch on Election Night and Beyond

Episode Date: November 5, 2024

It's Election Day in the US, so there's no need for any real explanation of what's at stake. Last night in New York City, we hosted a special live Odd Lots event, where we interviewed some of our regular guests on stage to talk about the vote, as well as the economic and market implications in the days and years ahead — regardless of who wins. First up, you'll hear a conversation about prediction markets, regular markets, and vote-watching with Skanda Amarnath of Employ America, Neil Dutta of Renaissance Macro, and prediction markets bettor Zvi Mowshowitz. And then in the second half of the show, we hear from the Council on Foreign Relations fellow Brad Setser on the global environment — what Brad calls an "unhealthy globalization" — that the next president will inherit. Read More: How the World Is Prepping for a Trump or Harris Victory 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. Bloomberg Audio Studios. Podcasts Radio News. Hello and welcome to another episode of the Odd Lots podcast. I'm Tracy Alloway. And I'm Joe Wisenthaw. Joe, this is very special. This is actually, this must be our fastest turnaround time on an episode ever. Well, it is Election Day. Yes. I think we had technically a faster turnaround day on the day of the Baltimore Bridge collapse. Okay, fine. But this was like four hours of content that we are squeezing into a very timely episode. So what you are about to hear is a live recording of the Oblots podcast, multiple panels, multiple conversations that took place on November 4th at a recording in front of a live audience in New York.

That's right. So today is an election day. last night was election eve we figured a bunch of people if they have preferences in this election we're probably anxious looking for something to do other than just sort of refresh the internet and refresh twitter all night so you figure why not get some of our favorite guests over the years from the podcast and get our fans who we always love seeing our listeners and uh hang out and talk politics and policy for a little while and uh i didn't drink actually but some people drank i stressed drink you did yeah i didn't but what better way to spend Election Day than listening to some live recordings of the All Thoughts podcast. So what you are

about to hear is a selection of the conversations. We had some amazing guests. So we started with Zoe Liu. She is, of course, a senior fellow for China Studies at the Council on Foreign Relations. And we had her with Jordan Schneider of the China Talk podcast. We've spoken to both of them before, but we had a great conversation about what's going on in China right now and what could possibly happen with U.S.-China trade. Right. And then where this particular episode will pick up, then we had a conversation with Neil Dutta of Renaissance macro research, Skanda Amernath, executive director at Employer America, and we had a special guest that we kind of have to explain here for a second because otherwise

some of the conversation might not make any sense. We had Zvi Moshvitz, and he is a prediction market's better. He's a writer. He's a legendary designer of Magic the Gathering decks. He's an advisor to Polymarket. He used to be a Jane Street trader. We're going to have to have them on some time, Tracy, just for a totally separate thing. He was great.

I just want to talk to him about deck construction. Deck construction and Jane Street. Let's do like that episode. Okay, but Zvi, in addition to all those things, set up a betting pool on Manifold for which podcast he would actually appear on in 2024. And one of those options was Otlots. Right. He set it up at the beginning of the year.

And so there's all these different possibilities, which podcast will Zvi appear on? And just again, to sort of set the stage, we never announced that Zvi was going to be part of this. He was our mystery guest. He was our mystery guest. But we flashed the market onto the screen behind us while we are at caveat, the place where we recorded the episode. And then during the conversation, we watched as the market slowly repriced. It was very... Repriced up and down.

It was very strange. My belief in efficient markets has been completely debunked. No, you know what it was. This is actually really interesting. There was someone in the audience who was using free manifold tokens to bring the probability down

even as V was actually on stage. So a live experiment in how prediction markets work. How they actually work. Right. Well, actually, one of the things you'll hear is V talks a lot about one of the constraints in prediction markets being a capital constraints among traders.

Yeah. So here is a guy who apparently had no capital constraints because he had free tokens. And you see how much of that destroys that. So we started off that conversation, to about all things, markets, finance, what to watch for. Polling, what to watch for in tonight's election. Yep. And then our headliner of the evening was Brad Setser. He is, of course, a senior fellow at the Council on Foreign Relations. One of our favorite guests we've had him on. I can't even remember how many times now. Nine times now, probably.

Yeah. He was also a, uh, Trade Advisor to USTR's Catherine Tye under the Biden administration. So someone who definitely knows what's up when it comes to, I guess, the sausage making of trade policy. So a fantastic group, a great evening. Big thanks to everyone who came. And if you weren't able to make it in person, we hope you enjoy this version. Right. So start off. Check out our first, our conversation with Skonda, Neil and Zvi. We have some great guests coming up. And Now's your chance to make money. Now is your chance you could place a bit.

Get on manifold. We have a one of the people, I'm not going to say who it is, but one of the people that we will be having on the show is an avid prediction markets trader, expert in this area. And I'm not going to say who it is, but. It's a mystery, truly. It's a mystery guest. So let's bring to the stage in no particular order.

We have Neil Duda of Renaissance Macro Research. frequent odd lots guests. And we have Skonda Amernath of Employ America, another frequent odd lots guest. And we have Zvi Moshevitz. He's a writer, trader, into prediction markets and stuff. And currently on manifold markets, there's a 20% chance that he appears on odd lots in the year 2024. So we're doing a little test of prediction markets, or sorry, efficient markets right here live on stage. So, uh, thank you. you so much. He's ready to insider trade. He hasn't insider traded on his own market yet. But it's just sitting there. We'll see if the odds move. We'll see if the odds move.

They should be at 100%. So, hmm. Yeah. Well, I guess prediction markets are debunked if they don't immediately move to 100%. Actually, Zvi, let's start with you. When you look at any prediction markets, and you're also advisor to polymarket? Yes, I'm an advisor to polymarket. So you're a trader prediction market guy. Oh, there it is. It moved up to 44%. It's still not high enough. Like, it's still... I mean, someone's not sure, right? He's literally on stage.

Folks, he's literally on stage right now. Like, how do you know to bet yes, but you don't think you should take it farther? Yeah, man. It's up to four. Okay, whatever. Maybe if someone, oh, there it is.

There we go. Someone tweet this out. There's still 14% gains to be made. The IRR of 14% in like 30 seconds is incredible. Anyway, When we see these odds, not for this market apparently, but when we see these polymarket and calshy odds, et cetera, they say whatever, how seriously should we take them? I take them at least as seriously as any other data point or source of information that we have

available. They are the best thing we have. It's up to 94%. There's still a chance that you're not appearing on this stage right now. Yeah. Wait, why do you, they're the best thing we have. like please explain in the context of this still being stuck at 94%. Well, if you're on the internet, what other source do you have other than the actual broadcast? Like obviously if you're looking at the poll, not just the polls, but like the actual ballots and you're like, oh, I guess we know who won, then that's better than a prediction market. But anything short of that that we have is going to be incorporated into the prediction market. So like the polls, the aggregations, the projections, all of that gets worked into

how we trade the prediction markets. So because prediction markets to be wrong, there has to be a systematic mistake, and those mistakes do happen, and you can, in fact, profit from them, but they tend not to be very large. Neil, what about real markets? And you know, you're always watching what's happening,

well, I said real markets, the ticker DJT, what's happening in rates, maybe regional banks. What are you, like, seeing over the last few days and what are you going to be sort of watching in terms of the real markets and how they trade? Well, I mean, my work suggests that the sort of Trump trade, particularly with respect to fixed income markets, wasn't so much Trump, I mean, as it was just stronger economic news.

I mean, you have to remember that the increasing probability, at least up until recently, that, you know, Trump would, you know, sweep into the White House. That was coinciding at a time of, you know, meaningful data surprises to the upside. We had a strong jobs number, strong retail sales, jobless clean. have been low. So I think it's less about politics and a lot more just about the data as it's been coming out. I mean, in terms of what I'm going to be watching in particular, my sense is that people will just replay the 2016 playbook if that's what happens. And if you get the alternative, in which case I think it's likely that, you know, a vice president Harris wins, you probably get a Republican Senate. you probably see, you know, a rally in fixed income. Skanda, what are you watching?

Because with polls, so obviously there's a lot of, you know, people have strong opinions about the usefulness of polls. I kind of think, like, who is answering the phone anymore? If someone, an unidentified number is calling them, it feels like there's a bias towards a certain demographic that's actually picking up the phone. But what are you watching? Yeah, I mean, I think there's a clear,

limit on what polls are going to be able to tell you beyond a certain point. I think that itself just kind of tells you it's close. It's probably 50-50. Your ability to discern whether it's 50-50 or 60-40 is pretty limited even. Like you could make a case for 60-40 for either side. But beyond this, like we don't have a lot of information that polls tell us polls are scammier now. What do you mean by that? There are some establishments that seem a little less scrupulous. That's, do a good job of gaming the rating systems. So I guess like to give the finance analogy,

so passive versus active, like the idea of just like, okay, just trust the aggregation more so than individual poles. But now we have like a weird set of partisan or quasi-partisan pollsters that come in, less transparent methodologies, and the attempts to make process to better understand who's better, who's worse, it's not great.

So we actually have like aggregators that I don't pay as much attention to relative to just like, like, okay, if there's a good poll from, whether it's a Republican establishment or Democratic establishment, there are some good ones on either side. I think that's got more information in it. But even then, it's like very limited. There's a ceiling. I mean, I'd be more curious to see about the geographic distribution. So obviously the swing states come out 7 p.m. onwards. We get some early states that report early but are red. So just seeing the geographic distribution is going to be kind of interesting because that's actually the polarizing thing I see, which is

urban versus more democratic trending suburban versus rural. And it's like ultimately about the margins and how those shift relative to 2020. That's like still not really clear about how many new Trump voters can come out of the woodwork. There were a lot in 2020. And how much will a lot of those suburbs swing further to the left? Yeah, these are all kind of open questions. And I don't think we have great ways of benchmarking probability beyond a certain point. Zvi and Scanda maybe.

Can you explain the hurting controversy? I've been seeing a lot of tweets like, oh, pollsters are hurting. And what's that? And then I don't know. How do you heard exactly like, what is that all about? Like, what are they doing? So the idea is if you have a poll and you come up with the same result as every other pollster and so everyone is saying Harris plus one or Trump plus one, you come out with Harris plus one or Trump plus one or zero,

then no matter what happens in the election, this is not your fault, right? You didn't screw up. But if you were to say Harris plus four and then Trump wins that state, then suddenly everyone looks at you and goes, you're terrible, your career is over, you're an idiot. And to lesser extent, if it's Trump plus four. So what a lot of these pollsters are very creatively doing from statistical analysis to the polls is they are cooking their books, putting their fingers on the scale to make sure that their number comes back very close to what everyone else is saying. And there are only a few, like New York Times Morning Consult that are clearly not doing that. And often they'll also do this thing where they'll take a poll and they'll see the result is way off and then maybe they just won't release it or they'll find a way to adjust it or whatever they have to do. And Nate Silver posted recently on Twitter, the chance of all these polls coming in this close, even if the race was actually tied on the order of $1 and $9 trillion.

So it's clearly just not a coincidence. So what actually happens on prediction markets on election night? I imagine like things are going to be moving quite a bit. But also, when does the actual payout occur for Trump versus Harris? So the payout depends on the exact terms of the contract. So four years ago, we had a lot of very interesting discussions going on behind the scenes and a lot of very public yelling as different sites proposed to pay out based on the fact that Biden had actually won the election.

And other people are very much disputing that Biden hadn't won the election and, in fact, buying Trump long after Biden had won the election. That was weird. Yeah, I made some money on it. that. That was kind of awesome. And so, I mean, like the bets before election day, they did okay. I won them, but I should have held my money. The bets after were so much better. But the way it works is there's an technical rule for when the bet pays out, and this can vary based on where you bet. So one of the ways to do it is you say, okay, if the networks call the

election, then that count because they're being very conservative these days, and then we pay out immediately, no matter what happens. And that way you don't have to hold it for weeks and weeks, including if there's another dispute, which we all hope there isn't, but you never know. Sure. That could have a way happen. It occurred to me, so you're now at 96% chance of appearing on odd lots. It occurred to me there may be some ambiguity of the rules because this, this audio could, I don't want to jinx it, but maybe it never comes to see the light of day. And so maybe just the same way people are wondering the technical rules of your contract here and whether interviewing you on the stage is the same as appearing on the podcast. Let's get to a little macro.

Neil, monetary policy, have you been contacted about being either the next Fed share or being on the FOMC in the event of a Trump victory? What are you trying to say? I'm not saying anything. I'm simply asking whether the transition team has reached out to a role. I have not been contacted and I wouldn't expect you, though I know people that are that traffic in those circles. Okay. Do you, what do you, like, when you think about the medium-term trajectory of monetary policy under a theoretical Trump administration or a Harris administration, does tomorrow night sort of change your outlook on that type of policy? Not really. I mean, I think in terms of what I typically do, as you know, I don't let political outcomes really affect my kind of near-term decision-making in terms of what my monetary policy call is going to be. I think the next few rate cuts are really just baked, I mean, regardless of who wins. And that's because I think the underlying dynamics in the economy are still kind of pointing to

slower growth, benign inflation, and probably ongoing monetary policy recalibration. So I don't think that's going to change, you know, before the first quarter of next year. So I think they'll keep cutting. It's really just about how much they will. Skonda, I'd be curious to get your take on this as well. like what kind of economy or how would you characterize the economy that either Harris or Trump will inherit? So, I mean, all things considered, like employment's still very high. Inflation is generally falling.

I mean, each month is there are bumps. That's not a bad hand to be given. Productivity growth looks like it's picking up a gear, at least for the time being. All these things are pretty good. At the same time, to Neil's point, there are going to be some, we're seeing signs that growth will be slower in Q4 and probably Q1. And for that reason, like, we're kind of seeing some bumps in the road. I don't think that policy is going to be changing on a dime. Even if, like, Trump goes for really aggressive tariffs,

these are not things that will be done overnight. And so that's, like, the kind of friction in the system. Everyone likes to talk about politics and how it's relevant to markets. And there will be some election reaction. But it's like, as 2016 kind of told you, right, whatever correlation structure was their pre-election, doesn't have to be their post-election. and I do think that's like something

is to be mindful of as far as like policy will take more time to change. I think it's pretty clear that if it's a Harris administration it's probably with the Republican Senate, there's like some compromise on tax policy. You're not going to get big things done, but I don't think there's even like a huge appetite within the Democratic Party to do big things.

That's a little different in terms of like they've already passed a law of legislation, right? But in terms of Republicans, they actually have a good shot at trifecto, right? If that happens, then the box opens up, they might cut corporate taxes more, but there's also more discretion on like trade and immigration that Trump could wield. Well, I was just going to say, I mean, if you go back to 2017, remember that discussion around

monetary offset. We were all talking about monetary offset because the idea was, well, you know, Trump is going to be this sort of inflationary demon and, you know, the Fed has to do all do all this sort of rate hikes to offset it. And in hindsight, there wasn't really a monetary offset. They ended up doing more or less what they were planning to do. So, you know, you. I just think it's important to kind of try to separate these things out and just sort of take the world as it comes to you. I think that's as opposed to trying to forecast and front run sort of potential fiscal outcomes. I mean, if you're the Fed. Zvi, do you see anyone, whoa, you're backed out to 50%.

How did that happen? You've fallen. Someone hit the cell and apparently the order book must not be. They're like, all right, I'm going to take my profits at 96%. And I guess the order book was pretty thin. because whoever just sold you really got a bad price on that. So you shouldn't have sold

whoever that was. Okay, there you go. Yeah, we got to get some liquidity here. Is anyone doing like, do you see people in your world trading cross between the prediction markets and the real markets? I don't know what to call them.

You know, do you see much of that Whereas like, you know, this level of confidence in Trump is not consistent with this thing we're seeing in, I don't know, Bitcoin or something like that. Are you seeing much of that? So you earlier asked what happens on election night. And what happens on election night is that the odds will move dramatically and they will respond very quickly to every piece of news. And there's both the reaction that happens when the news is available to those who are paying attention. So like if the counties file their numbers online, there are some people who are downloading the information from the counties and they have their spreadsheet. ready and they're analyzing all the details and they're trying to stay ahead of the game.

And then there's the people who are watching the news and they're like, oh, they've network called Wisconsin and then they suddenly, you know, the money comes in. But of course, it's kind of embarrassing, isn't it? Like I remember that last time. Like the people I was following on Twitter clearly new stuff before the official calls. And yet the market seemed to react to the calls in many cases. That's right. So if you know what the calls are going to be, you can clearly make some money by doing something before the market moves. But this is often true of that there's one set of people who have one set of information. And those set of people who have a different set of information, which is coming to them slower, right? They're more square action. They're more, less sophisticated.

And they still help make the market more accurate in general, but they're often predictable somewhat in advance. But there are transaction costs. Neil, I know one of your... People only have so much capital. Like all the major players on election night are going to be somewhat capital constrained in the prediction markets because they're often going to see there's some sort of systematic mispricing or some sort of opportunity and they're going to have to watch their bank rolls and make sure they don't spend too much. Right. Right.

So in a situation where everyone's looking for these big mispricings, but then like you have these different waves and then one of the things that you notice is the early movement on the prediction markets is often actually ahead of the financial market movements and things like currencies and things that are open. And you can in fact make money for real. if you are watching about this because the beta thing is real. Right? So like you go into election, not you say okay, what is going to be the Trump you know, beta for everything in the world, right?

Every currency exchange, every index that's still trading, whatever you can get. And if it was going on during market hours, it would be so much more fun. Wait, who's actually trading on the prediction markets? Like walk us through the typical person who's doing this and whether or not that introduces some bias into the probabilities because I imagine, You know, for something like Polymarket, you have to have a VPN. You have to be somewhat crypto literate. Fluent, yeah.

Yeah. So, like, does that influence some of the numbers that we're seeing? So you could be a French multimillionaire. You could be a Scottish teen, is the other traditional joke. But the answer is, you know, all types of people all around the world are getting into it. But, yes, because it's Polymarket, you see a difference between Polymarket and, say, you know, Kalshi or, you know, these other sources predict it. that are allowing Americans in and that aren't crypto because there's absolutely a bias in who has

easier access to polymarket who wants to get involved in polymarket who's eager to do that and that bias is favoring Trump this year Trump is much more for crypto you see these associations in various different ways so polymarket has been several points stronger for Trump than other similar prediction markets and you could also of course argue that like no it's polymarket that's fine and then everyone else is biased. And, like, you know, who is really to say? You're up to 98.6 now. Skonda, tell us more about what specifically you're going to be watching.

You mentioned the rural urban splits that even in the red areas, we may get signal from some of these things. Are there Bellwether counties that are useful to watch, Waukesha County, Wisconsin is like a long-time, crucial Waukesha County. Now you're down to 58%. Is there anything like that? Talk more about how you're going to be consuming the information. information tomorrow. Yeah, Delaware counties are basically fake, right? So like what matters,

like you can have, we've had it 2020 and 2016 where it's like pee hacking, isn't it? Because you can always find some county that always vote for the winner, but it doesn't necessarily mean anything. I mean, we have, every county is moving somewhere at the margin, right? And every marginal vote counts. So if like, let's say Harris is really well at just trimming Trump's margins in rural counties. That's like a big deal. In the same way that Trump's ability to amplify them in 2020 was very underrated by the polls, by general expectations among forecasters, that he was able to scale rural turnout, even the percent margins, which people obsess about, percentage margins in a lot of deep red counties did narrow in 2020, but just because turnout was ramped up even further,

Trump got more margin. And so a lot of states were a lot closer than what the polls predicted. You find your ways to cluster the counties, whether it's urban, suburban, suburban, next urban, rural, whatever way you want to swing it. That cluster, every single one matters, right? Every part of it, like there's going to be some movement among the urban counties, those that are trending blue, and every vote counts on all of them. So it doesn't really make a lot of sense to, like, obsess about a particular county where if it slips from red to blue, that can happen at the exact same time,

a bunch of red counties that are deep red become even redder. And that's like what happened in Florida, for example. So we had a like Pinellas County was highlighted as that chooses the winner. It wasn't. In 2016, it was Hillsborough County and that wasn't. Right. So these flip blue and it didn't really matter. And it's just, that's a good warning for a lot of this election night coverage.

Neil, I know one of your favorite things to do is to tear apart the ISM manufacturing survey. What happened to the vibes, like the soft data post-the-euvre? election. And how should we measure it, I guess? Not the ISM, clearly. Well, I mean, you mean when, right now? No, after the election. Next week. I mean, I think you would, I would expect to see a pretty meaningful increase in consumer confidence and small business sentiment, primarily because, you know, small business sentiment. I mean, that survey really skews, you know, I mean, think about who's putting it out.

It's the NFIB. What do they do? They're a lobbying organization on behalf of, you know, sort of right-wing causes. So my sense is that the small business sentiment number would go up a lot. Consumer confidence would probably go up a lot too. Whether that actually translates into real consumer spending, I have my doubts, but that's kind of what you saw after the 2016 period, right? And similarly, you saw a big decline in sentiment after the 2020 election. But again, that didn't really translate into what people were actually doing. So, you know, I think 2016 was an interesting. interesting case because things like the ISM, which you mentioned, I mean, Trump was coming into office at that time at the front edge of sort of a global manufacturing recovery. So the so-called

sort of Trump boom. I mean, that was, it was an Abe boom and it was a, you know, you saw that in a Macron boom. I mean, everyone was kind of feeling it at the time. So it wasn't just U.S. specific. This time round, I mean, manufacturing, frankly, looks a little sluggish. I mean, there hasn't really been much. There's been a lot of construction of manufacturing facilities. And I know Scanda has been pointing that out quite a bit. But if you look at actual manufacturing production, you know, it hasn't really been great shakes. Is election uncertainty? And you see this like in the anecdotal comments on some of these surveys, whether it's the ISM or the Dallas Fed, which always has very colorful anecdotal aspects. Is election uncertainty real? Or is that

just a code word for people who prefer Trump hoping that that's the outcome and then that may be changing their outcome, their outlook? I'm sure it's probably both. I think there's like some level. Like, although really deal's not happening, it's like I don't, we don't know who's going to be present. I think like I'm serious. Well, think about all the enacted legislation, right? So if you say there's like, if let's say IRA, maybe parts of chips that have come up under scrutiny or parts of the infrastructure, these are all things that are cast as, these were all left-wing items that Biden passed. And if it's like depends on whether Trump's going to be an office or not, if you perceive it as like, well, it's a 50-50 proposition. If Harris is in place, then it's

going to stick. If Trump's in place, it may or may not stick. Then I can actually see like a case for like if you have any business attached to a government contract or a government subsidy, that might actually be genuine. I think that I think there's also some partisanship. I think generally speaking in my career, I mean, you talk about these sort of formal measures of policy uncertainty, like the one from Nicholas Bloom, that's widely cited. My experience is that when that index is high, it's usually a time to go long equities. So when policy uncertainty is high, it's usually a time to dip your toe into the market. It's a buying opportunity for stocks, historically.

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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. Can we go down in the line and talk about what everyone's day is actually going to look like tomorrow? Like how are you spending the election? Let's start with Neil.

So like I said, I mean, the election. is actually a very small part of what I try to do on a day-to-day basis. I'll probably, I mean, just a front-runner, I'll probably be spending some of my spare hours working on this piece that I was talking to you about. Thank you. We have a new Daily Odd Lodge newsletter, and Neil has promised to be one of the contributors, and so we have a piece coming from him.

So it just sort of gives me an opportunity to kind of take a step back, because I have no edge. I don't try to pretend to have an edge on political stuff. And, you know, one of the things I've been thinking about is just the sort of, you know, this neutral interest rate. I mean, you know, the Fed's talking about it all the time. And just exploring the idea is there like a dual neutral rate. I mean, for example, the neutral rate for housing, I mean, whatever it is that, it's not working. I mean, housing is not working with mortgage rates here. So the neutral rate for housing is clearly a lot lower than maybe it is

for, say, the housing, I mean, the labor market. I don't know. I mean, so did, and so if, if you sort of buy into that, I mean, it would imply that the Fed needs to do. do a bit more to get certain areas of the economy going. And if the feds lost the ability to stimulate housing, I think that that's a potential problem. So I'll probably be focusing more of my time on that, as opposed to checking out the returns in, I don't know, what is it, Cuyahoga County or something?

Yeah. I too am working on a piece for your law's coverage. So that's sort of forthcoming as well on productivity. But, look, elections are, people like numbers changing and like following them, which is probably most of you, I'm gonna guess, on some level if you're interested in finance and markets.

Yeah, it's just a fun exercise of like seeing how margins shift. I have some spreadsheets prepared for myself just to kind of track things if the New York Times needle isn't up and running. And yeah, I'll probably take it easy in the day, but maybe I'll catch a nap and then I will probably be up till at least 3 a.m. So, as a writer,

I want people to read what I'm writing and I want them to think about it and pay attention to it and learn from it and I want to influence them. So this past week has been a case of if I write about something, no one's going to pay much attention to it because they're going to be focused on the election. And so I kind of take this time off because I'm not going to try and put anything up except for my weekly update until after the election is settled. So instead, I have had a chance to like program some tools that are going to help me write over the long. long term. I might go see a movie, have a nice long lunch, you know, relax. And then, of course, in the evening, I'm going to absolutely be following. I'll have the prediction markets up in various windows and various devices. How many screens do you have? I have three 30 inch screens. So I have one horizontal and two vertical on the two sides. Yeah. As a trainer, you have six. But now that

I'm trying to stay away from that, like I think that three is about right. And so, you know, about one of them will probably be various prediction markets, especially polymarket in various different markets within them. So you need a lot of space. And then, you know, you're watching the television like everybody else and you're watching Twitter and, you know, you're just trying to get through it and process it because you know that like even if you don't really want to pay close attention, like what else are you going to do tonight? That's right. What else is anyone going to be doing? Wait, real quickly, why is there not, why has the spread on some of these markets between, say, Kelshi and Pauly Market not been armed away? What is the constraint? It's a free money.

The constraint is liquidity and access to the market and the capital costs of committing the capital to multiple places, moving the money in and out. Everyone's kind of a little bit terrified every time they initiate any crypto transaction that somehow money is going to vanish or something wrong is going to happen. I mean, it's very, very unlikely any given transaction it's going to happen. But I definitely have an opinion, by the way. I want to be clear. When I say, like, who knows which one is wrong, I very strongly believe that the polymarket line is the one that is by a market line is the one that is by. in the situation due to the access issues, whereas I think that the line at the other markets is much more effective of what the line kind of showed in some air quote sense be.

Actually, real quickly, Skanda, since you mentioned productivity, and I know you have some thoughts on productivity, and in fact you just mentioned coding up some tools to make your life as a writing easier. I think you both have some different. You think we're going to have like 50% GDP growth in the coming year on year because of AI or something like that? No, not 50% this year. No, but, no, to come, like, you what's your, give us the short, the short synopsis of what you think is coming for productivity growth. I think that the skeptical line on productivity growth is we're talking about, you know,

percents per year, every year on the course of 10 to 20 years. And I think that's sort of the ultimate bear case for AI just doesn't do what we want it or expect it or hope it would do. And the bull case? Singularity. intelligence, we're all completely transformed. Great. Scanda, what's the gist of the productivity? And then also, Neil, but what's the gist of your productivity piece that you have coming for the Odd Lodge Daily newsletter?

Yeah, so just speaking in terms of the realized data, and I try to start from how's the data measured, what are we actually capturing, which may not be indicative of sort of conceptually what we associate productivity, but productivity growth is actually outperformed post-pandemic in a pretty meaningful sense relative to what we were seeing. pre-pandemic. So pre-pendemic was roughly 1.4% if you take sort of longer lookbacks. And we've been done in a post-pandemic period, something like 2%. Maybe it's 1.9, maybe it's 2. But that's like on an annualized basis. That's pretty meaningful deviation. And there are like a lot of reasons why, but I think that it all kind of has to come back to, like the measured set of

transactions, inflation adjusted, divided by total hours worked. That is basically our most measurable version of productivity. It comes with lots of flaws. For example, Google Maps that everyone uses on a day-to-day basis, right? It's ad-supported, right? It's not supported by a final expenditure. It should filter in somehow into our productivity statistics, but we don't have a great way of saying how and estimating that's actually really hard. So, for example, there's a lot of things that probably AI can make our lives very efficient. And the same way, the Internet's made our lives very efficient, but it didn't necessarily lead to a lot of transactions. And that's kind of the open question that's like for a lot of AI breakthroughs, how that leads to, it may improve a lot

of welfare, but the actual nuts and bolts of how it leads to more people spending in ways that are reflecting real things and not price increases, that is like actually a big part of the ballgame. Neil? Neil? Any thoughts on productivity? I mean, I agree with Scanda. The measured data is what the measured data is or the data are. I mean, it's over, it's, you know, 2%. That's very strong. I think for what that means for me is that basically this is one reason why we should not worry about inflation. And that should give the Fed, you know, plenty of cover. This is something we talked about earlier in the year, right,

is that it's one thing to just see the inflation data that's going up without having like a rational framework for why it's going to keep doing that. And, you know, the fact that productivity has been fairly robust over the last year, I think it means a couple things. Number one, we should sort of resist the temptation to kind of buy into the stagflation store. You can't really have stagflation if productivity is doing what it's doing. But it also makes the likelihood of like some inflation reacceleration highly unlikely as well. Like where is it coming from? Unit labor cost growth over the last year is basically zero. So, you know, for a for a Fed that has a very labor market centric view of how the inflationary process works, the robust growth and productivity that we've

see and I think is an important kind of, you know, uh, story in terms of mitigating inflation risk. Um, if you had to choose, what would you say is the biggest constraint for Trump and Harris both? Like, is it political, you know, maybe like Harris gets in and doesn't have a trifecta like maybe the Republicans would have? Is it something like the deficit? Choose one for each. Well, I mean, personally, I think that it's going to be, I mean, the markets have been sort of like, the unified GOP, but I mean, even if Trump, even if it was to be a unified GOP government, the margins in the House would still be very, very thin. It's not like they can just steamroll whatever the hell he wants, you know, next year. But I would, I would probably say the bond

market's the constraint. I mean, you have to be worried about how, what's the appetite going to be in the fixed income market to fund a huge sort of deficit, you know, spending plan. Skanda? I go back to the politics. I think, like, American government. government makes it very hard to pass things in general. In the wisdom of that, where everyone wants to debate, it's just even under a unified government, to Neil's point, like Lisa Murkowski still has a lot of leverage, Susan Collins has a lot of leverage.

They probably will pass some things. It's easier to pass things under a unified government than under a divided government. But that's probably still binding constraint. It was the constraint on Biden in 2021 and 2022. I mean, even though interest rates are going up, the real question was, was Joe Manchin willing to say yes to? And so even if, like, we can debate how much, what's the nature of public finance constraints? Oftentimes they are reduced

ultimately to like the hardball legislative politics. I've alluded to this before and I don't want to like let it shade my view, but I would like mortgage rates to come down in the next two years. Do we need to get, do we need to like, do we need a spending crackdown? Do we need to go into austerity mode to get mortgage rates back to roughly somewhere on the ballpark of the 2010s. I mean, I would say to the extent you can free of real resources, right? I mean, to the extent that you're actually reducing inflation or getting the Fed to be more confident about the willingness to lower interest rates, that would probably be the main mechanism. I won't let my mortgage affect how I assess the economy, but I'm just saying.

Yeah, but I think that's like a tricky thing. You can do a lot of deficits. reduction that doesn't necessarily move the needle on inflation or the Fed's reaction function. But like healthcare costs, for example, right? Healthcare costs in general need to be constrained. They do have a pretty direct role in inflation outcomes. And because of those two things, that's a pretty strong nexus for if we could reduce health care inflation by half a percentage point each year, that would be a very big deal for what the Fed will ultimately get to the last mile of whatever the Fed's trying to achieve.

Zvi. Can you say a little bit more like about the spreadsheet set up that, um, And, and you, Scott, do you mention your spreadsheets, too, as that data is coming in tomorrow. I mean, this is what we really care about, right? Like, the numbers start to come in. They get posted on what, secondary of state websites, et cetera. Like, how are the traders ingesting that in that process to be ahead of like when the networks are they called Wisconsin? So it's going to vary a lot from trader to trader from house to house.

And, you know, a remarkably large number of people just don't do this. And that's clear by because you look at the financial markets over time. I haven't followed the most recent lectures like 2020 that carefully in terms of the reactions. But you definitely see these delays. And like if there was a lot of participants in the market who were keeping close eyes and incorporating that money, that information instantly, that wouldn't happen. So the right ways to do it involve things like setting up automatic interfaces with these websites to just pull things into your spreadsheets. So you have your Excel spreadsheets that contain all of the county by county data from all of the returns. And then, ideally, you want to figure out what that implies about the results,

and the technically correct way to do that is a Bayesian calculation. It takes into account all the information because you don't know which pieces of information you're going to get, so you need to know how to feed them into your calculation. And then that should then output a range of distributions with various probabilities of various different outcomes, and you price that into your beta on various things based on those elements, and you figure out what the prices are supposed to be, and then you make the good traits. Sveit, weren't you at Jane Street before? What was election night like there?

Well, I mean, all hands on deck, right? So everyone's there. It's a working night. And you use what tools you have and you, you know, you use what instruments are available for you to trade because it's the middle of the night. So, like, you know, obviously if the U.S. stock market was open, everything would be dramatically different. But you are somewhat limited. I have one last question. As an AI productivity optimist, like I don't know anything about how to code.

a system that will ingest all the data and set up a Bayesian model. In your vision of what AI could do, can I, in a couple years, could I go to ChadGPT and say, like, write the code that will pull this in and then build some kind of model? You can do that now. All right. All right. Zvi, Skonda, and Neil, thank you so much.

I feel prepared. Zvi is at 91%. So there's still some ambiguity about whether he was on stage. People are still unsure. I'm Francine Lacquois, an award-winning journalist, and I've got a new podcast, Leaders with Francine Laquois from Bloomberg Podcasts. I've interviewed everyone from Heads of State to fashion icons about the news of the moment. But I've always been curious, who are these people as leaders? I don't think there's one right way to be a leader.

Make decisions. A poor decision is always better than no decision. Listen to new episodes every other Monday. Follow leaders with Francine Lacroix, wherever you get your president. 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. All right, the final stretch here with Brad Setser, senior fellow at the Council for Foreign Relations. Who better to tie up all the disparate things we've been talking about in the previous two sessions,

and then Brad. We always enjoy speaking with you because we can basically throw anything at you. You see the record holder? It's close. Yeah, I'm pretty sure you might be close to the top for a number of odd lots appearances. But why don't we start with something really specific? Because you published a paper recently all about globalization.

The title is The Surprising Resilience of Globalization and Examination of Claims of Economic Fragmentation. And your conclusion was basically that we are still globalizing. And to some extent since 2016, we've globalized even more. Walk us through how you come to that. Well, first, thanks for inviting me and thanks for asking me about my recent paper. You are the first person who actually seems to have read the whole title. I promise I did actually read it. I read it earlier today, but I'm impressed.

And then thanks to everyone for sticking around. Appreciate it. So most papers or many of my papers originate out of a sense that a narrative has taken hold and that narrative is sort of perpetuated itself, even when that narrative isn't fully backed by all of the detailed data. And there have been two narratives that have been, you know, they're closely related narratives that have been very prevalent and prevalent at the IMF, prevalent at Davos,

prevalent in the financial media, prevalence on Bloomberg. One is that the world is de-globalizing. And the other, which is related, but not quite the same as the world is fragmenting, different political blocks or interaction. acting less economically. That thesis seemed at odds with a couple of things. One, I spend a lot of time, don't ask why, looking at trade in pharmaceuticals.

No, it's just an interesting subsector of the global economy. It's a hobby. It's a hobby. Yeah, I mean, I'm certainly not paid for my odd take on the pharmaceutical industry. And the pharmaceutical industry has continued to globalize. U.S. imports of pharmaceuticals have doubled since 2016. The U.S. imports from low tax jurisdictions, which is a big part of pharmaceutical trade. It's not with low cost jurisdictions. It's low tax jurisdictions. About half of our imports are from five tax hubs. They've doubled. One quarter of

those imports come from the great country of Ireland. So that's not a story of de-globalization. That is a story of continuity. It's a story of globalization continuing because there's a tax advantage still to globalization. But then the other component of the argument is the one that sort of irritates people. I looked at the data. Everybody tries to look at the data.

And, you know, if you look at the data for China, biggest economy and the biggest potential source of fragmentation. I mean, you can fragment with Russia, which has happened, but fragmenting with China would be big. And I didn't really see the evidence. So China's exports to the world are up by about, of manufacturers, are up by about a trillion dollars since 2019. So since the peak of the trade war since the pandemic.

China's imports are up, manufacturers up 200 billion. China's surplus of manufacturer goods is up 800 billion. And I'm pretty confident because I have some sense of magnitudes is that's not all trade with Russia. There's a little bit which is trade with Russia, but it is mostly because trade deficits amongst democracies have risen. So the classic offsets to China's surplus are the deficits in the UK, the U.S., and India, not geopolitically aligned with China, but the global counterpart. So my overarching thesis is the world has continued to globalize, but in unhealthy ways. Unhealthy because there's still a lot of tax-driven globalization.

and unhealthy because this increase in China's exports is a reflection of deep weaknesses, which have already been discussed in China's domestic economy, which make China incapable of growing at the pace at once without relying more, not less, on exports. So that's the theme. A lot to chew on, and that's what we're going to do. But the trade war that started in 2018, does it show up in the data in any meaningful sense? Like when you look at the data now versus some counterfactual where tariffs hadn't put in place, do you see fingerprints of it? Yes.

The most obvious is that, you know, the U.S. is the one country that currently doesn't import any cars from China. Since the trade war, China's become the world's biggest auto exporter, and the U.S. market is effectively for now walled off. if you look at the bilateral trade data between the U.S. and China, the first thing to note is they no longer agree. In the bilateral data from the U.S. side, we think our trade with China has gone down. And significantly, if you look at that same data from the Chinese side, China thinks its exports to the U.S. are broadly unchanged. Now, you can still say there's an impact because China's exports to Europe, the obvious counterfactual have gone up. So there's some evidence of bilateral decoupling. There is a lot of evidence of tariff avoidance. And then at a global level, there's no real evidence of a serious decoupling or fragmentation.

Because a serious fragmentation, in my view, at least, is one where China runs a smaller surplus with democracies, where China trades balances amongst the axis of autocracies. That clearly hasn't happened. You mentioned earlier tax incentives to globalization. And I'm trying to think how to frame this question. But like, why are we so obsessed with tariffs if, you know, the ultimate cost of a product is not the only thing driving decisions about where it's made and where it's going? I mean, in all honesty, I think it's because Donald Trump won the 2016 election. And Donald Trump believes tariffs matter.

Donald Trump is a tariff man. He really is. The other one is, look, there is absolutely no lobby, powerful lobby, that is pushing back against importing more pharmaceuticals from Ireland. And there's a very powerful lobby that wants this current pattern to remain. By producing outside the United States and moving intellectual property outside the United States, the American pharmaceutical industry has reduced its effective tax rate to roughly 10%. Why wouldn't you want to maintain that? The opposite side, the loser side is mostly the taxpayer. There's not a lot of jobs at stake, although there's

some. So a couple of shocking to me little nuggets. The U.S. pharmaceutical industry, top six companies roughly made $60 to $70 billion in 2023, top six companies. Those top six companies paid collectively, some of a little bit of offsets, zero in tax to the U.S. federal government. they reported losing money on their U.S. operations, even though the U.S. has well-known much higher pharmaceutical prices than the rest of the world. And they report making all of their profit and paying all of their tax in other jurisdictions. So everyone except the U.S. taxpayer seems to win. What was the effect, if any? So one of the things, regardless of who wins tomorrow's vote, At some point, there's going to be the tax cut and jobs act is going to come up.

Though I think the corporate side is permanent. That part is going to be less controversial or not going to be a thing. But what was the effect of the tax cut and jobs act? Because there was some impulse at least claimed that, oh, this will encourage companies to recognize their revenues in the United States and crack down on that to some extent. At least in the realm of pharmaceuticals, as you've described, that hasn't happened. what was the intent and what was the effect of that bill? Look, first of all, you broke my heart by saying there's nothing that's going to happen on the corporate tax code next year.

Is there? It is obviously going to be part of a negotiation. Okay, yeah, that's right. It is the great chance that we have to correct some of the flaws in my view in the tax cuts. The corporate side doesn't expire automatically the way some of the personal does. So, you know, how much detail do you want to go into? The 21% does not expire. The 10.5% low guilty rate, which is for your global intangibles income, which is...

I don't know anything about this stuff, clearly. It goes up to 13.125, which, of course, some people care about. And the foreign derived intangibles income tax, or Fitty, goes up to the god-awful high rate of 16%. So there are some ratchet-ups. So what happened with the Tax Cust and Jobs Act? First of all, the corporate side was a total revolution. Before the Tax Cuts and Jobs Act, the U.S. had a system called deferment, a deferral, where profits earned abroad, in theory, were taxed at the U.S. headline tax rate of 35, but only if the profit was returned to the United States. Profits were never returned to the U.S. companies borrowed against their offshore profits, and that was essentially a system that sort of worked, but it meant that U.S. companies had on the U.S. side of the U. their balance sheet a lot of debt. And on the foreign side of their balance sheet, a lot of assets, it wasn't great. So the main thing the Tax Cuts and Jobs Act did was it got rid of deferral.

You pay tax as you go. Once you pay your U.S. tax, you're free to move your money wherever you want. That was supposed to bring a lot of money back. It obviously lowered the headline tax rate from 35 to 21. It created this new global minimum on intangibles, which is sort of a strange, concept, but essentially intellectual property, that everyone pays on their global income. So in theory, it's now territorial, but it's not entirely. And then it created a separate low tax rate, the foreign derived intangibles income tax rate, for companies that move their intellectual property back to the U.S. and used it to export. Pharmaceutical companies make most of their profit, although they don't say it, on their U.S. sales. They preferred to

keep their intellectual property in production abroad and remain in the 10.5% guilty bucket. So no change there. Apple, same thing. Microsoft, broadly the same thing. But some companies did adjust. Facebook and Google return their intellectual property to the U.S. You see this very clearly in their corporate returns and now sell their intellectual property to their Irish subsidiary where they book most of their ad revenue globally. Qualcomm has also adjusted as global tax washer. So it's not a story of no change, but it is a story of mixed. change. And it is a story where, at least in my view, the six biggest pharmaceutical companies clearly pay less to the U.S. government after the Tax Cuts and Jobs Act than they did before, because they actually had to bring some money back from their offshore tax subsidiaries at their 35 percent to cover their ongoing cost. And Apple now, mostly for even more complex reasons,

but Apple books more of its profit in Ireland than in the United States. And Apple is now paying roughly as much in tax to Ireland as is paying to the United States. That's why Ireland has a sovereign wealth fund. So there are still changes that could be put in place that broadly speaking wouldn't significantly increase the corporate tax burden, but would increase the amount that the biggest and most successful U.S. companies pay in the U.S. So hence you broke my heart. You said there's nothing to be done. It was just me being ignorant. It was just me being ignorant. I realize I should have said this intro but in addition to writing and researching and tweeting about all these issues you also have real-life experience when it comes to trade policy you were an

advisor to US trade representative Catherine Tai who has also been on the show maybe you can't get into specifics here but like give us a sense of what the most surprising thing was when you were actually in that advisor role when it comes to the construction the rail politic I guess of making trade policy I guess one surprise, and it's just a cultural thing about USDR, as I previously worked at the U.S. Treasury, is that financial markets, which are the obsession of this town, presumably this crowd, are weighted at about zero in USCR internal decision making. People do not get a report on what happened in the market at the start of a significant meeting at USCR, whereas that would be kind of the norm at the U.S. Treasury.

So culturally, it's not driven by the market. Culturally, U.S. trade policy is driven by lawyers, and lawyers care a lot about process. So I think what surprised me the most is the weight that is given to following the procedural niceties of the various different trade laws, which I think are actually quite relevant if Trump were to win, which I personally certainly do not hope is the case. But those procedural niceties become constraints on how quickly he can restart various trade wars.

You mentioned in the beginning that globalization continues despite all the memes and despite all the narrative. But you described it as an unhealthy form of globalization. Was there a point where it was healthy in your view? And is there a turning point where the globalization? process went from healthy to unhealthy? So in general, I think globalization in the 1990s had a different impact on the U.S. economy than globalization after the 1990s. If you look at trade patterns in the 1990s, and there's a significant interruption in the Asian financial crisis. And I think most people in Asia would say globalization went wrong in the 1990s. But during that period, broadly speaking,

exports and imports were both expanding symmetrically. And you didn't have an expansion and explosion of the offshore balance sheets of big banks and their special investment vehicles, like the obsession of Wall Street in the pre-global financial crisis period. So to me, that was a healthier form of globalization. What went wrong? Well, a technical thing, check the box, made it really easy for U.S. companies to shift intellectual property offshore.

that unleashed a wave of tax-driven globalization that we have not yet, in my view, been able to rein in. It created incentives, wherever broadening sectors of the U.S. economy. So one of the things I point out in the Aspen Economic Strategy paper is that semiconductor equipment manufacturing, actually a pretty strategically important industry, has between 2005 and 23, 24, moved a lot of its manufacturing. and in all of its profits to Southeast Asia. Why we thought that was in our strategic interest is beyond me. But it wasn't just a one-off. It's been a continuous process.

And then obviously China enters the WTO or the Chinese surplus explodes. And I think that generated a period of unhealthy globalization as well. And so that's why I'm a little worried right now that the increase in China's surplus judged on a global basis, not on the bilateral basis against the U.S., is on a magnitude comparable as a share of world GDP to that scene immediately after WTO entry. You can get the news whenever you want it with Bloomberg News Now. I'm Amy Morris. And I'm Karen Moscow here to tell you about our new on-demand news report delivered right

to your podcast feed. Bloomberg News Now is a short five-minute audio report on the day's top stories. Episodes are published throughout the day with the latest information and data to keep you informed. Yes, there are other products like this from a variety of news organizations, but they usually rerun their radio newscasts throughout the day. That's not what we do. We create customized episodes that can only be heard on Bloomberg News Now. And we don't wait an hour to publish breaking news. When news breaks, we'll have an episode up in your podcast feed within minutes, so you're always getting the latest stories and developments.

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There seems to be some consensus about diagnosing the problems in the Chinese economy, so not enough domestic consumption, too high savings, etc. And yet, it still seems relatively committed to the export-driven model. Why is that? The pithy answer would be that there can be no consensus in China that doesn't include President Xi. So actually, I don't think there is consensus because I think President Xi doesn't share this diagnosis. I think President Xi generally speaking views support for households as unproductive, and they views investment, particularly investment in high-tech sectors, as productive.

the intellectual leap that giving checks to households, taking less from households, lets households spend more and therefore supports investments, not just consumption, but it supports investment throughout the economy, is not one that President Xi obviously shares. So, yeah, I don't think there is yet consensus. One of the things that people love to talk about is just forever for as long as is the future of the dollar. And, you know, it's just one of those things. People just love to talk about it.

I've noticed. Yeah. When you look at this... It is not a topic that I prefer to talk about, but I will talk about it. Is not? No. We don't have to talk about it. He didn't talk about it. All right.

Tracy, when she introduced, she said, we can ask Brad anything. So this is on my mind. When you look at unhealthy globalization, do you see any strains on the existing the dollar regime or any reasons to think that there's... there is going to be a meaningful change in the trajectory of dollar usage, either within the trade for goods and services globally or the use of dollar in financial transactions global. Not really.

So there has been one obviously important and significant change, which is the sanctions on Russia. You know, Russia is one of the top 10 global economies, produces a lot of oil and the world wants oil. We, mean, in this case, the U.S. the EU, the sanctioning coalition, the G10 countries have generally not actually sanctioned dollar in euro payment. But even though we have not sanctioned dollar in euro payment, Russia obviously is very concerned that we could, particularly because we've frozen all the central bank's assets,

and that was a pretty big step. Russia, to be fair, was the country that did the most before 2020, the invasion, to reduce dollar usage. Didn't get rid of it. But Russia had moved almost all its reserves out of the dollar. It had certainly removed all of its reserves out of visible dollars, stuff that the U.S. can see in this normal data reporting. And it had migrated to basically using the euro for most of its oil and gas transactions. Now, you could say that's just logical.

Russia traded mostly with Europe before the, the invasion, but it was using the euro to denominate trade with China. Not the yuan, not the dollar. And I think the main lesson of the sanctions has been that if you want to diversify out of the dollar and you want protection against sanctions, which is the one thing that you get with diversification out of the dollar, diversifying out of the euro isn't diversifying far enough. So you essentially have to diversify into using the yuan. Now, the yuan has a bunch of disadvantages. The yuan is not accepted globally. If you're an African country and you get yuan for selling something to China, you can't use the yuan to buy stuff from your neighbor. It's not that

kind of global currency yet, the dollar and euro are. And in general, holding financial assets in yuan means you've been holding a depreciating currency with lower yields than in the dollar. And then by the way, China uses its geopolitical and mostly it's been over its trade, leverage pretty aggressively. And you would have to assume if you have a lot of your financial assets in yuan or your trade is denominated in yuan, that you are potentially subject to Chinese financial pressure. So you get a little bit of defense against U.S. and European sanctions, but at a pretty significant cost. And you just don't see it. So one anecdote, you know, because, you know, It goes a little interesting.

It was sort of striking to me because I hadn't been to China for quite some time. I was a little nervous about it, to be honest, and heard a bank treasurer from a big Chinese bank talk about how they were thinking about the world and what that Chinese bank was worried about. I was worried about the fact that yuan lending rates were being forced down. And that was squeezing yuan net interest margins and fair things. that's what all banks tend to worry about, although it was striking to me that this bank treasurer was more or less saying, you know, the official lending rate, which the Chinese had been deemphasizing, was actually really important.

The other thing he was complaining about is, well, there's all these lending quotas. Like, again, I was like, ah, I thought you'd reformed your commercial bank's. You weren't doing quotas. No, no, no. Quotas for manufacturing. Quotas for lending to innovation. The treasurer obviously was sort of implying quotas that required us to lend to companies that were going to generate losses in the future.

So what was the great hope? Well, they looked at the Japanese banking system and discovered that the Japanese banks do this great dollar business that generates half their interest income. And they looked at that with envy. You could choose your own interest margin in dollars, and you weren't forced to lend to loss-making companies in dollars.

So just as an anecdote, you see growth in the dollar business, offshore dollar business of Chinese state banks, which completely runs against the de-dollarization narrative, and is very much a function of China's own domestic weakness. So I think that, to me, that was telling. You had a great line in the paper, just going back to the lending quota point, but you said free markets appear to favor a country that hasn't freed its own market, i.e. China has probably benefited the most from the trade liberalization of the 19th.

90s and early 2000s. Why is that? Well, again, Tracy, thanks for really closely reading my paper. I try. I actually thought that was a good line. You were the first person who's noticed it. I throw in, like, hopefully, like, some witty quips in a 40-page paper just to test to see if anyone actually reads. I passed. You did. Look, I am not the first to make this observation. I I think it's an observation that has influenced politics and policy in the United States and in Europe. China does not have a full market economy. The government runs the banking system. The banking system still dominates the distribution of credit within the Chinese economy.

It favors some sectors over others. The Chinese state, in its many layers at the central government level, but also at the provincial level, provides a lot of equity investment for Chinese companies. And so you can argue that China doesn't just have one industrial policy, kind of has 20, because all the different provinces have their own industrial policy trying to build up provincial champions that become national champions. And in the process, they get cheap capital, very cheap capital. There isn't a, I mean, the private equity industry in China exists, but it's not demanding you lever up to get a 15% internal rate of return. it exists to provide a bit of a veneer of private capital for investments in strategic sectors.

There's a lot of patient capital that has gone in to sectors that are quite capital intensive and that are willing to accept high risk and low rates of return, in part because it is state capital. And as a result, in those sectors where this internal competitive hot house generates globally competitive products, production migrates to China. So that is the trend that was famously exhibited in the solar industry. Joe loves excavators. It's a slightly different story. But, you know, 20 years ago, China was importing a lot of excavators actually from the United States. Then Caterpillar sets up shop in China. Then a bunch of Chinese companies with state capital backing them, they're not all state owned, get into the excavator business. Then Chinese demand for excavator goes

ballistic with the property market, then the property market tanks and guess who's exporting excavators to the world? China. So, and obviously everyone's petrified that this is the same pattern will replicate itself in electric cars and potentially legacy semiconductors and potentially cutting edge chips, but that's a little, there's a little tech war going on to stop that. If Trump wins tomorrow, look, it seems very plausible that we could get some sort of radically different approach to everything, certainly on the trade front. So let's just sort of accept that that's, you know, again, per the models and the aggregators a 50% chance. If Harris wins, as you see it, what are the priorities when looking at unhealthy globalization? Not like

necessarily what she's thinking, but from your perspective, what are the priorities towards addressing this unhealthy version of globalization that you describe? Look, I would start. Well, I would start. to some degree with some of the points that Secretary Yellen and Leil Braynard have made about China's own unbalanced economy

and fundamentally the U.S. has, in my view, an interest in a more balanced Chinese economy and we have an interest in convincing our allies and partners who also join us and put in pressure to get a more balanced Chinese economy. That's a long, hard slog. It depends a bit on choices China

makes. So one interesting example, least I mind it interesting. You know, Trump talks a lot about replacing the income tax with tariffs. That's been one of his ideas. It's not unclear if he's actually going to do it, but it's an idea. China currently collects more revenue from tariffs than from its personal income tax. It already has achieved this, partially because it still has somewhat significant tariffs, and partially because it only collects 1% of GDP in personal income tax, which is a very low number. We collect eight. So that, to me, is necessary.

It's a part of the broader policy package that generates a more balanced Chinese economy, but it is not something that the U.S. Congress can change. So the other component for addressing unhealthy globalization is something the U.S. Congress can change, which is the U.S. tax law. So my immediate priority, if I were given advice to hopefully President Harris, would be, look, there is a budget negotiation. Washington, D.C. will be consumed with the expiration of the tax cuts, 2025 is a fiscal year. It is a year which is set up in D.C. to debate the structure of taxation.

And Republicans, and this is conventional wisdom, have an incentive to come to the table because if nothing happens, we have a cliff and all of Trump's personal income tax cuts expire. Republicans don't go to Washington to raise people's tax. So they have an incentive to bargain, and my hope would be as part of that bargain, some of the remaining incentives in the corporate tax code that have clearly encouraged or not discourage the migration of intellectual property and production outside the United States get addressed. That would be where I'd start. I also think one of the tensions, you know, one of the tensions in Trump's trade policy was that bilateral tariffs are way less effective than he thinks. You can get a

around them really easily. You put 95% Chinese content, a few screws in Southeast Asia, you go to a zero tariff rate. It's trivial to get around with a little bit of work. So bilateral tariffs don't really work, but Trump loves them. One of the tensions in Biden administration views on trade, and again, widely accepted, is that the Biden administration talked a big game about friend-shoring, working with allies, and then, you know, thanks to Joe Manchin, your friend, very important U.S. Senator, thanks to Joe Manchin, we have an Inflation Reduction Act. And thanks to Joe Manchin, that Inflation Reduction Act didn't treat our friends very nicely. So I think there's a lot to do to kind of harmonize our industrial policies with our allies,

and they have to make some changes too. I think the Europeans are reded, ridiculously obsessed with following a super strict interpretation of what the WTO allows, which means that they won't do buy Europe on their EV subsidies inside Europe. Even though China clearly did buy China on its EV subsidies inside China, they just didn't write it into the law. They just never qualified a foreign-made car. Actually, initially never qualified a battery made in China by a foreign company. That only happened after the Chinese companies, which now dominate global batteries, got a good foothold. China has been super restrictive, and I think Europe should be symmetric, do a kind of buy Europe deal. And my idea is that, like, yay, we have buy U.S., you have buy Europe.

We will, you know, this is what I learned at USCR. You can deem European or allied goods to be American for purposes of qualifying for U.S. subsidies. And we would offer to do that if Europe would. deem American goods to be European for qualifying for European subsidies. So we kind of each create an open market towards each other while being pretty restrictive towards China. So those are, I think, to me, the cutting edge of policy in the Harris administration. Would you be open to a potential position in a Harris administration? I had a suspicion, you might ask. I have never turned down an opportunity to serve my country.

So that was our live recording of the podcast at Kaffaiet in New York. I can't believe after all that that it's actually Election Day now. Wait, did we find out last night who was going to win? I forget. Did anyone, I think that's the one question we forgot to ask. We should have. Put everyone on the spot. Yeah. Maybe not. But we hope if you came to the show that you enjoyed it, we are hoping to do more of these events in the future. So if you liked it, please let us know. And in the meantime, a big. Big thank you to everyone who worked to make this possible. Notably, Carmen Rodriguez, our producer, and Kate Seaberry at the Bloomberg Events team, as well as the entire crew at Caviott. Thank you so much. And again, we'll do it again in four years. But other things in the meantime.

Shall we leave it there? Let's leave it there. This has been another episode of the All Thoughts podcast. I'm Tracy Alloway. You can follow me at Tracy Alloway. I'm Jill Wisenthal. You can follow me at the stalwart. Follow all of the guests that we had last night.

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