Bloomberg Audio Studios, podcasts, radio news. Joe, it's 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 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 Eddie still hears his truth social.
Yeah.
It kind of a slap in the face to Elon Musk. I guess.
I did a deadlift one two, Jimmy Okay, barges. This isn't 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 US.
Where's the best with imposta?
These are the important question? Is that robots taking over the world.
No. I think that like in a couple of years, the AI will do a really good job of making the Odd Lots podcast and people today. I don't really need to listen to Joe and Tracy anymore. We do have touching the perfect 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 ten percent tariffs on goods from China and twenty five percent tariffs on goods from Mexico and Canada for some reason.
By the way, we're recording this November twenty sixth, Tuesday, And he specifically tied those tariff threats to Mexico in 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 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're saying 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 Herris. It is really to do what I describe, actually Donnie Roderick of Harvard University described as a political traleum of global economy. You cannot have globalization and economic integration, nation states, and democracy all
at the same time. You can pick up two 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 war deregulating global financial system followed by Bill Clinton in nineteen ninety four, and NAFTA followed by China entering WTO in two thousand and one, have created environment where people feel, justifiably or not, but they feel that their jobs, their livelihoods somehow were stalled 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 the inflation. And so the question is when you start imposing those terrors, you have to remember that up to half of all US imports are intermediate goods. So if you actually impose terrorts, you're taxing your own manufacturers and your 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 do you avoid a world on fire? World on fire sounds kind of great 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 apolarization was really in nineteen thirties. And back then there was three system on the menu. You could choose communism, you could choose fascism, or you could choose constrained democracy. It wasn't a choice between freedom and liberty. It was just a question how much freedom do we need to sacrifice in order to
lower the tensions and define 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 the childther was China, Russia run Us trying to redefine what it is. Europe
is trying to redefine what it is. And we in this period which might last up to a decade, where ultimately we will find a compromise. Ultimately there will be a consensus that will be established. And the only question the book asked, do we need to go through the world of five of nineteen forties? O? Can we just go straight into the nineteen fifties and forget the nineteen forties.
I'd sign up for the nineteen fifty and 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 states specifically, and when you contrasting that against globalization, it sounds like there is Yes, there's an economic impulse, anxiety, security, et cetera, 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 US specifically, is the re exercise of sovereignty across a number of different dimensions.
Totally totally. I mean, if you think off I usually describe it as three eyes inflation, inequality, immigration. If you're think up those three elements, if you combine them, that pretty much explains almost everything you need to know. So, if inflation was much lower in the sense of absolute prices have come down to a level that people regard
as acceptable. If inequalities, whether it's wells or income, were much better managed, if immigration was not a 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 it to 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, chacter supply rolled back its DEI initiatives. There was the bud Light boycott, and then Core's light.
I think Walmart just last night, all really, yep, this was a big news. Just last night, Walmart becomes I'm reading an MPR headline, Walmart becomes latest and biggest company to roll back DEI policies.
I think that's you, 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 late nineteen seventies early in nineteen eighties really died around the global financial crisis around twenty ten. Over the last decade of fifteen years, we'll all be trying to find, as I said, what is a new societal consensus, How important a corporate's private
sector public sect, 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 twenty nineteen, when US Business Council already redefine 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 outgross of societies.
There in I think one of the things I mentioned in the book, if society has 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 extremes. However, as I said early on, five ten years from now, and I keep looking in this book into millennium and Z generations and what those generations actually want to have as they become the dominant voting block, because today they only round thirty percent of the votes. When they become a dominant voting bloc, they will identify exactly the frontier as the boatons, how far you can go? Where should you go? And at that
point in time the corporates could actually solidify. But right now day in the flocks, they're reflecting purely societal flocks.
It feels to me like when Trump won in twenty sixteen, 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 a 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 call now in line with changing regulations. You see the Walmart News three weeks afterwards. I want to get in 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 that 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 have 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 where accumulating significant deficits. So once saying American people probably don't realize that they can 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, Geman, and Japan have to run the surpluses.
But just on the immigration component as well. How much does the US 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. We had the 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 it would it be very 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 that's right, But you also have to separate politics, optical illusion, what you're trying to do, and the reality. If you're remember well you don't remember, but anyway, Eisenhower in operation I think it was called Webpack Operation which is a horrible name. But anyway, asenhow expelled one point one million Mexicans in nineteen fifties, only to see they're more 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 guard rails in a system in the US to prevent probably the worst outcomes that potentially could have happened. Now. The first, clearly guardrail is 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 twelve months everybody will be in a 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 in 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 hash 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 premia, in mortga trades and interest rates or anything like that, they will
have to peddle 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. Any 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 eighty percent of the money and 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 the majority in the Congress. So there is constant tension. Now that tension will create volatilities. Inevitably, they're going to create currency volatilities, they're going to create
equity volatilities, interest rate volatilities. So that's inevitable. But the hope is that the guard rails, between electoral cycles, tiny majority in the Congress, between corporate interest, the capital markets, stickness of institutions. Remember, you can't just unscramble a lot of the commitments that the United States have, whether it's a do WTO, whether it's NATA, 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 twenty percent. They will increase from three to four to maybe six, seven, eight, but they're not going to twenty. You're going to not be expelling millions of people. Labor force increase will shrink, but probably no more than twenty five thirty percent rather than much more robus numbers that could have occurred, and that should moderate some of the inflationary outcomes and economic outcomes.
You said earlier that the nineteen thirties were your preferred historical analogy to our current time period. And one thing that happened in the nineteen thirties was also tariffs and the Smooth Holly Act, and then we had retaliation.
Expulsion ful the illegals. To oh, oh so it happened, You asked us was doing six times expulsions in nineteen thirties, and they were doing in nineteen twenties.
Oh wow, So it happened. There was a big wave in the nineteen thirties and the nineteen fifties.
That's right, that's right.
America has a long history of expelling immigrants.
But not just the US was expelling in nineteen thirties. So was Germany, so was many other countries. So desire to close the borders, the desire to expel foreigners, the desire to established terrors protect locally interested was all prevalent in nineteen thirties.
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 US. Everyone is focused on what Trump is doing, but he is not the only actor here.
No, it is not. And that's one of the issues that and I think he probably understands it. 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 US 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 as think you started from, I think comes
in that. I do think that the US side understands that you have to find a compromise, and that compromise optically should look better for the United States. Like if you're singer of renegotiation of NAFTA back in two thy seventeen, twenty eighteen, 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 middle ground. If you don't, if you actually do become aggressive as it happened in nineteen thirties, 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 mad enough to burn down the house, Whereas in nineteen thirties they were really mad. In other words, they were accessible primarily because degree of suffering that actually people encountered in nineteen
thirties were significantly worse than anything we're experiencing. So people are not happy, but they don't want to burn down the house yet. That maybe 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 town, 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, etc. And you know, in the dream society of peace, no one has to spend too much on military. How inflationary is that? If if you know, there's this perception that the US is going to pull back the security umbrella, so to speak.
If there's this trade pressure to 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 US. Maybe the US 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 nineteen fifties and sixties, there was no inflation. In fact, inflation didn't pick up until sixty eight sixty nine, and then much more into nineteen seventies. At the time, military spending globally we're about five six percent of GDP, some countries way up to seven percent. Today.
Global military spending already up to about two point two two point three percent, So in other words, we're spending more on defense than R and D. For example, on the global basis, already in the US we're up to about three point five three point six percent of GDP. If all we're going to do is go up to maybe five and Europeans made go up to about three. There will be no inflationary impact at all. But if you have a much hotter conflicts, that's where military spending
goes up to fifteen, twenty, thirty, forty percent of GDP. So, for example, in the World War One, US was spending fifteen percent of GDP. In World War Two, at the peak in nineteen forty four, US was spending forty percent of GDP on defense. If you're thinking of countries like Britain or Japan, they were spending up to eighty percent of GDP on defense. So when you get to that level, normal economy just collapses. It just war economy. That's all
you're dealing with. So long as we're staying around the area of the Cold War of nineteen fifties nineteen sixties, that is, we're spending maybe five percent of GDP on defense, I don't know 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 nineteen forties, 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 nineteen forties, right when that twelve.
Forties, I have to retire in the nineteen fifties. When you're when you're a retirement portfolio gets eaten away.
Yeah, Like why the twenty forties specifically? And then like, what causes you to be optimistic given everything that's going on? Made me feel better?
Well, the way I look at it, a human history is very convoluted and very complex, quite often contradictory. I like Kevin drom phrase that I can keep using constantly in the book He's a blogger from California, when he said humans are just overclocked primates that beneaths very thin layer of civilization lies five million years of primate evolution, and therefore we are still bound.
By you're supposed to say something comforting.
We have, were tribal, we have, 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 arises, over time, output increases, healthcare improves, you know, longevity improves. And there is no reason why at all to believe that this period will not be followed by this nirvana at some point in time. Why twenty years from now.
To me, that's a process that the time you need in order to achieve two sayings number one, a sustainable increase in productivity. So in other words, it's not just one country gross productivity because they're eating demand from other countries and other country 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 jobs, probably many of us will not be even working, but the productivity probably will be four or five percent six percent perennum instead of something closer to one percent we have right now. So it's a 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 served 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 of state or the environment will always be there. It's like the aa of breeze. You don't think about it.
But the younger generation, those who are today thirty years old, thirty five years old, twenty five years old, twenty 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 staff not at the level that people who are growing up in this the thirties and forties stare, 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 appointing to much more state driven world, a much more community driven world. Even if you're sing a Republican Party today or Democratic party. Republican Party today is not Ronald Reagan's Republicans. They're not
Eisenhower Republicans. They accept that liberal 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 are 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 twenty 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, twenty 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 twenty years.
I love, so we're going to 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, actually really shared.
You know what I'm actually still really upset about is the politicization of cheap beer, because I like both cores Light and bub Light, and you know, I don't want to make a political statement when I go to a bar.
Miller High Life is uh.
Oh yeah, is the way for the neutral alternative, that's right.
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