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Hello and welcome to another episode of the Odd Lots Podcast. I'm Jill Wisenthal.
And I'm Tracy Alloway.
Tracy, you know what I'm proud of.
Oh, I don't you know.
I look, I'm not a trader or anything like that. I don't like try to make a lot of calls or oh look at you.
Know, I'm not even a pundit.
It gets things right that big said. You know what I thinically did well. I think we took the prospect of a serious change in the US trading relationship with the rest of the world is a serious possibility.
Trump both seriously and literally.
We definitely Yeah, I think we took it pretty literally when he was talking on the campaign trail and in the early days after the election, when the markets were lying because all they were talking about was tax cuts and the regulation. I think we were giving serious airtime and writing time to the aspects of trump Ism that might not be so market friendly.
I think that's right. Also, in our newsletter just a couple of weeks ago, we were talking about how weird the markets actually were because we weren't seeing that much risk priced in, right, like spreads on credits still pretty low. FX volatility at the time was pretty low. Just lots of weird stuff going on in the markets. And there's someone else who noticed this.
Well, that's right, So I'm looking at a edition of the Odd Lots newsletter. Everyone should google Odd Lots Newsletter and sign up for it. And we had a guest contributor. He wrote a piece for us on November twenty seventh, twenty twenty four, when markets were surging, and he said, this time really is different.
And he's a.
Frequent odd Laws guest and he has been very in tune with the big changes going on in the world in major turning points. Some thrilled to have him back. We are speaking, of course, with the one and only Victor Schwetz, head of Global Desk Strategy at McCrory Capital, who said, this time is different, and I think it turned out to be different.
Huh, yes, yes it did.
Yes, not to be different?
Why, okay, let's just go back. What were you thinking?
On Wednesday, April second Liberation Day, the chart came out, massive tariffs announced on the rest of the world. Virtually every country, friend, foe, et cetera.
Even small islands even small.
Islands, depopulated islands, tariff levels that are like higher than smooth holly or whatever. What went through your mind?
The question I keep asking myself what is this administration trying to do?
So?
In other words, what is the objective? Is objective to raise revenue in order to partly pay for tex Scotts? Is objective to reshape America into some form? Is it to bring manufacturing back? Is easy to change the flow of savings and investments on a global basis. What is this administration trying to do? And my answer consistently is they want to remake America. They want to make it different to what it was before. But you can't remake America unless you remad the world at the same time.
So it's a revolutionary movement rather than just a little bit of a bypassing it through problems, navigating a few bumps on the road, it's much much deeper. The only question that I keep coming back is what is a pain threshold and what are the sort of breaks on the system? Because most of the breaks we've been discussing for the last four or five months have either disappeared or were in some form co opted by the system.
So there is only very few breaks left, and so one of the breaks is really the pain threshold, at which stage people will feel that their lives have gone much worse than they used to be. And the other break, of course, is everything to do with electoral cycle associated with it. And so to me, that's the only question. It's not that there is any consistent economic theory behind
what this administration is trying to do. Every time I listen, it's very clear that they don't fully understand sexual balances. They don't fully understand that you can't have declining deficits and rising capital influence at the same time. So it's clearly not guided by some conventional economics. It's sort of guided by by a desire, as I said, to change America, and different parts of administration of different views. So there is a technocratic part, which is Ellen Musk and recent
Peter Teel. They have very different views. They're much more global, they want technology to progress, they open to immigration, there's all range of things. Then there is a populist wing, probably Jed Events is the most obvious example of that, which are completely opposite. Returning America back to nineteen fifties
or maybe even late nineteenth century closing the borders. Then there's a little bit more technocratic wing saying that what Bernaki and Greenspin were discussing in the past, which is making sure that savings an investment on a global basis actually balance us at some point in time somewhere. And
so all of those wings are in conflict. If they are in conflict, expect irrational moves, quick shifts, but do not expect that suddenly tariffs are going to go away, suddenly restructuring of capital flows will just go away and normality will return.
Okay, So you mentioned capital inflows, and this to me seems to be the big hole in the Trump administration strategy, such as it is, and it's we want to build a bunch of stuff in America. Ostensibly we want to boost manufacturing. Maybe that goal sits alongside a bunch of other goals. As you just mentioned, that's really expensive and when I look at the markets right now, it's very unclear to me where that money is actually going to come from.
Yeah, I agree. One of the ways you can try to handle basically deglobalization of capital, because so far we've been talking mostly about the globalization of goods. We have not yet spoken about diglobalization of services. But with goods and services comes capital. And so when we start talking about diglobalization and fracturing of capital, that's where Welsh funds come in. That's where various superinnuation and pension funds come in. Now a lot of countries already either started that or
significantly increase the size of those funds. For example, Korea will start much higher contribution to their pension funds. So if you sing of Austria, Australia already done it, Singapoore has done it, Norway has done it. More and more countries are talking about creating some form of pool of capital within those countries. But once again, is it efficient allocation of capital? Not? Not necessarily. Is it looking after
the interest of pensioners that they're supposed to service. Not necessarily, But that could be one way that you actually will accumulate some capital of a time in order to fund it.
I want to go back to your point about the revolutionary element within trump Ism. Do we need to start looking at lenin the Russian Revolution maould say tongue to get it or China to get a better understanding of what the sort of like Zeitgeist or impulsary.
Can I just say, can you imagine asking that question like a year ago?
Yeah?
Well I change.
I got into my you know, I got into my twentieth century history, have it like right at the right times?
I read a bunch of Middle eight.
And what I'm trying to really ask Victor is I want him to validate my choice to take up a twentieth century revolutionary history hobby, am I was I right to go back and study. I'll start reading all those books.
As you do, and you can go to nineteenth century as well. Basically anything that resembles more or less the modern times and the way various breaks in the system. Now, remember US, I keep highlighting, is not a nation of laws or rules. It's a nation of habits. It's a nation of norms. Usually laws in the US are designed very sloppily, and the idea is that we need to compromise. Eventually is a judiciary branch will figure out where exactly
the limits are. And so founding fathers never knew whether they want to have monarchy or whether they want to have democracy. Like initially George Washington was supposed to be an addressed as his majesty. It was George Washington who insisted on being called mister President rather, So they were never quite sure what to do, so they never delienated the power. What is an executive power, what is the state power? What is a federal power? What is legislative?
Was judicial? And so the result is US is a nation of norms, whereas Europe is a nation of rules or the nations of rules. And so the result is in the US, it's actually relatively easy to smash those norms if anybody wants to. That's what Andrew Jackson tried to do. That's what Abraham Lincoln did, That's what Theodore Roosevelt did, that's what FDR did, that's what Richard Nixon did.
And so what you're seeing is every time those changes occurred, there is a reason why Andrew Jackson or FDR behaved the way they did, and there was a reason why they were pushing executive branch as aggressively. And so the reason for that is some kind of a displacement within those countries. And so you can't necessarily compare to cultural revolution because some of the drivers were different necessarily compared to Bolsheviks in Russia. But the essence is the same.
In every one of those cases, there was a dislocation, and one of the answers during dislocation is some form of populist approach, because the right wing usually does it better than a left wing, because the right wing essentially saying in many ways, cultural revolution was the right wing. They essentially saying, blame blame the foreigners, blame the elite, blame cosmopolitanism. We must go back to tradition, whereas left tends to be dominated by more complex social and economic issues.
So I understand the analogy with other countries and their history, but can you talk about the parallel that you see in US history? What time period is you know, twenty twenty five most similar.
To well, if you go back through a relatively short US history, probably the times of Andrew Jackson, probably the times of Abraham Lincoln. And I would argue that times of Fdr. Franklin Delana Roosevelt probably will be the most similar periods. You can add Richard Nixon, but that was very different in my view. The same with Theodore Roosewold,
who also was smashing quite a few things. I sing, it was different, but those three I sing in my view, which is the beginning of the US with the first populist wave in eighteen twenty s eighteen thirties, the Civil War in the nineteen thirties was FDR.
Why FDR though, because it seems like, you know, the Trump administration is backing away from a lot of fiscal spending.
Yeah. Well, the idea is not whether you're fiscally spent or not. The idea essentially is what is executive branch allowed and not allowed to do?
Oh, I see it.
And the other idea is the government penetrates more and more of your life. So, on the one hand, Republican Party says we're going to deregulate some of the regulations. On the other hand, they're telling companies what their margins should be, and what their prices should be, and what policies they should pursue internally, whether culturally or otherwise. So is Republican Party deregulating party? Well, the answer is no,
it isn't. It's actually penetrating government much deeper. And that's very much what I've did through a variety of programs that you tried through nineteen thirties.
You know, I would obviously love to just sit here and talk history and political theory with you too. But I know also you know, in your day job, you go around the world and you talk to people and they ask you questions, etc. One of the things that we've been talking about is this sort of like, you know, the end of American exceptionalism, which has been at least probably long but in some sense at least a fifteen year story. In markets, the only game in town is
the US. Global diversification is for suckers and losers, et cetera. Now suddenly you get these little impulses of change when you're around the world talking to people, do you sense that there is a real opportunity for a meaningful shift in terms of allocations of discretionary investment capital.
Yes, there is no doubt that the last three months was a incredible shift away from American exceptionalism. The view, essentially if you go too late last year was, yes, there will be a lot of stuff going in the social and cultural areas, there will be a lot of stuff going on and other stuff in other things, But from an economic point of view, US will continue to pursue a relatively rational policy. So as soon as you're sort of undermined that pillar, then people start asking question,
what is exceptionalism of the United States? Why US has been growing faster than other countries over the last fifteen to twenty years. What were the drivers? Do you are you undermining those pillars? Are you undermining those drivers? Now? Other countries are not necessarily exceptional. So if you think of Europe, they're suffering from access capital unlike the United States,
they have slower growth rates. They're mostly mercantilists. But on the other hand, if Europe is shifting, the growth rates will improve, utilization of capital will improve, and they will not be as dependent on trade as you go forward. So if you think of US equities, adjusting for inflation risk premia did go up from two and a half to three and a half percent. But if you think of Europe, or if you think of China, for example, you're looking at about six to nine percent inflation adjusted
risk premia. So should that risk premia come down? In other words, if u AS is not such so distinctly different to Europe or China, why should be trading at twenty times when Chinese trading at eleven times? And so increasingly those questions are asked when you tell people, but you know US might have an existential problem, but Europe and China have a massive structural problems. You do understand that China is an liquidity trap that they will not be able to get out very easily unless there is
a paradigm shift. You understand that Europe also have a structural problem than need to overcome. And so there is a limitation. The way I describe it, we gradually go into the world that no one is exceptional, and therefore it becomes much more tradeable opportunity between the markets. Rather than saying, as you correctly said, Joe, over the last
fifteen years, you never bet against the US. And by the way, if you think of that phrase, never bet against the US, if you said it in nineteen thirties, it would not have resonated. If you said it in nineteen seventies, it would not have resonated with people that you don't bet against the United States. So we kind of going into this period a largely, I must say, for self inflicted reasons. But nevertheless, I think you're right there will be more cross flow capital into other markets.
So, speaking of risk premia, one of the things, just one of the things that has happened in recent days is we saw a spike in US treasure yields, and I think again we're recording this on April eighth, yesterday, Monday, April seventh, we saw the yield on the benchmark ten year ago from like just below four percent up to I think around four point two percent. And everyone's kind of scratching their heads because normally you would see treasure
yields go down because people buy bonds as a safe haven. Right, what's your explanation for yields going up?
Well, to me, there are two explanations. The same applies to you as dollar because normally you would argue that when uncertainty is high, a risk is high, people go into U as dollars and into US treasuries. But now they do not. They go into other places. There is even discussion that a European bonds or Japanese bonds might be a better place to be. So there are two things. One is US exceptionalism that we've just discussed with Joe.
The other one is potentially liquidation of positions that is occurring because remember, an average American is probably if you include the currency, ten fifteen percent wars off than what they were all poorer than what they were say on January first, and so there is some liquidation that is actually occurring as well.
So sell what you cannot, necessarily what you want, sell what you can.
So to me, there are two answers. One answer is the sunsetting of US exceptionalism, and the other answer is liquidations. However, coming back to that historical perspectives, you know, Roman Empire survived many anomalies and many poor administrators, so to speak, and the reason was the underlying strengths of Roman society
in Roman economy. And so the question is whether the underlying strengths of the US, which it can contribute less capital, it's growing multi factor productivity, it's got the best balance of tangible and intangible assets, it's got a tremendous geopolitical position. Whether those positives ultimately will reassert themselves or at the very least reduce the degree of drag that otherwise would have occurred. And to me, I'm still hopeful that that is the answer.
By the way, we're recording this April late right now, it's nine to twenty am. President Trump posting to his truth social account. I just had a great call with the acting President of South Korea, it says that people on the plane right now, they're clearly in the mode now where they're like over like trying to try this is ideal because there was another I mean, yesterday, for example, there was an FT column from Peter Navarro say this
isn't about deal making. So even the question of is this about negotiations or deal making is fluid, and there's probably, if we're being honest, some sensitivity.
To the market going. I mean, I mean, there are plenty of inconsistent stuff, but the question you're raising, would the market react positively when we get more and more announced when the countries are negotiating. Absolutely. You have to remember small countries have no leverage whatsoever. So whether you're Sri Lanka, Malaysia, talent, whatever you are, you have no leverage, nothing to offer. Well, well, the thing is, the thing is that at least Korea does have some domestic market.
To ask a country like Sri Lanka to who is poorer and relatively small, to run a balanced trade with the United States is impossible. So the only countries that are capable of a pushbag is Canada, UK, European Union, China, in Japan. Now UK and Japan decided not to do it. Uh, And so the question comes down to Canada, European Union and China and extent to which they're going to play
a hard ball. But to have fifty countries or sixty countries or whatever the number is coming in trying to negotiate, that's an easy part. Now the market will react to it, but it's just temporary. It's not saying more than that.
By the way, Tracy Trump says he's also waiting for a call from China, and he says China really wants a deal. So I'm just.
Yeah, I have this image in my head of Trump like sitting by the phone in the Oval office, just.
Like hearing me.
Yeah, exactly. Okay, So is it okay to text twice?
I texted?
I feel man like, Oh, he doesn't ever reading, doesn't ever read receipts on I have no idea. That's where I keep going.
That's right, Okay. So we mentioned in the intro that up until recently, markets had been like pretty quiet, pretty complacent, you might say, given what's happened over the past week or so. Now that we've seen the big crash in stocks, we've seen spreads on high yield investment grades start to go up. It's not a blowout necessarily, but it is up significantly. Is risks sufficiently priced it, at least for the short term.
Nobody knows, because it depends what the policies will be. If the policies are not changed, then the risk is nowhere near priced. And in fact, if the high yields, say triple c which are now ten eleven percent spreads, if they go up to fifteen, the world will freeze. If the average spreads, which are now more like four and a half, go to six, both global economy and the US economy will freeze. So there are some breaks. As I said, on the system, at the end of
the day, you can't freeze it. We saw what happened in Pennsylvania and Wisconsin and Florida. At the end of this year, you're going to have Virginia and New Jersey coming up. Then you have, of course, you have a mid terms, so that there has to be if certain taxes. Senators are coming out and saying that that there's going to be a blood buss in midterm if this continues, is absolutely right. So there are checks and balances still
in a system. But one of the sayings to remember that even if you, even if we pass the high point of terrors, we might not have passed the high point of other things that are going to come through. And so the question is over the next several years, are you going to continue seeing it? And I think the answer the answer is yes. We didn't talk about geopolitics, for example, an extent to which that could shift as well, so it's not just terrorfs.
So speaking of breaks and checks and balances you mentioned earlier, this idea of a pain threshold for Americans. Talk to us a little bit more about that, like where do you sense the pain threshold actually is and what matters most to potential voters.
Well, I think the way I look at it, there is a very soul part of the population which actually bought into the idea that you must burn down the house in order to build a bright future. And I don't know whether it's a thirty percent of the population Ontade, but there is a very large constituency which fully accepted that. So when Scott Beason talks about dtalks, this is the audience that accept that whatever you want to build requires
pain in between. But on the back of that community, you can't really have political capital, because there are other people who switched for a variety of other reasons, primarily inflation, inequalities, immigration, and so that could constitute as march as twenty percent of your audience. And to those people, I think the pain is already there, and that is why at some point in time, and I agree with Jamie Diamond. I think he said something, we need to wrap it up
reasonably quickly. I think I would agree. Is it not just because of economic concerntinty and investment uncertainty, not just because forward soft data which continues to show and enormous collapses occurring, but also because the pain is going to spread much much wider and a hard data. We'll start backing it up very very quickly. Some of the pain companies, some of the collecting companies already seeing that, You're already seeing the mortgage market that so you need to wrap
it up. And I think that's what the market is looking for now. Federal Reserve, of course in a difficult position because even if we assume average tariffs go down from say twenty five percent to fifteen, that still implies an inflationary spike, which could be as much as one hundred basis points or more, so you'll start looking at the PC probably three and a half percent or more
as you progress through the year. On the other hand, economy will be slowing, So the question is with a fat will take it as a transitory And the other question that we keep raising is that we're seeing elimination of independent institutions across the United States. It doesn't matter Security in Change Commission, EPA, whatever, that is what is actually protecting Federal Reserve? And the answer, as I said earlier, US is not a nation of laws and rules. It's
an emanation of conventions and norms. So there is actually not a great deal of protection legally that Federal Reserve has. So the next step on this journey if in fact Federal Reserve is caught between rising inflation and slowing gross rates otherwise known as deflation. If they're actually caught in that, the question is weather Federal Reserve will be able to extend of independence that they have been enjoying certainly over the last several decades.
Yeah, we did a really great episode last week, I think with eleven of nine and exactly this question and how in the end, just the norms and if the norms change. That's it, Victor Schwetz, thank you so much for coming back on outlass.
Always a thrill to catch up with it.
Thank you, Thank you.
Joe, Thanks so much, Tracy.
I love Victor's characterization of the US as a country of norms in Europe as.
A country of rules, because I always.
Think, like I've said that, joked about every time I'm in Europe and it's like you're with a group of people and you try to get like five, squeeze five people into a cab, you know, like, no, it's impossible, it's impossible, and then they eventually like, okay, you can like squeeze one, and they love saying that. Over there. I've been observing this all No, it's impossible.
How often are you squeezing into.
Cabs drinking or something or whatever, like with friends and no, it's impossible, it's impossible. Oh can we get one more person? Can we wait?
And anyway, well, okay, I think at the.
Point I just want to go on this rant about this impulse in Europe to always say everything's against the rules.
I mean, it's right, it's yeah, okay, all right. I do think the norms point is really important and We've been bringing it up on the podcast quite a lot, Like so much of the US is based on habits, and I guess a sense of shared values or a sense of this is the way things have always been done, and we're just going to be polite and keep to
the guardrails that exist. Well, they don't really exist, they're not codified necessarily in the law, but we're going to keep them because if we don't, that would be bad. That's gone for sure. And I think this is feeding into some of the risk premium that we're seeing around US assets dollars in US treasuries. As Victor pointed out, like we're kind of getting a denormalization discount on US assets.
Yeah, it feels like it certainly does. And like again, you know, the most simple norm is that policy Bakers wants ducks to go up.
Yeah, and they were.
Now I think maybe right now the middle of this week, we're seeing a little change because I think there is this a little bit of whoa, Like, Okay, maybe we left our hand on this dove a little bit too long. You can't just have multiple days of meltdown that or as intense as March twenty twenty or nineteen eighty seven.
So you get these headlines about deals and there was a report about Scott Bessen, but like you know, it's very it's very chaotic, but it does feel like maybe there's some sort of sensitivity going on to what's going on in the market. But this was a great point of Victor's like, what are the thresholds that kick in? The soft data has been absolutely terrible. It seems like only a matter of time before that spills into hard data. We'll see.
Uh. Well, the other thing I would say is the administration has set up many different goalposts and it kind of switches between them. So Trump will talk about how much stocks went up in his first term. Yeah, but then there's also this narrative that if stocks go down, you know, lots of people who were shut out of the market are going to get their chance to buy.
The same with housing. So I don't know, they can kind of spin it either way, like if stocks go down a lot, that's successful for them, and if stocks go up that's successful. It's weird. Yeah, all right, shall we leave it there.
Let's leave it there.
This has been another episode of the aud Loots podcast. I'm Tracy Alloway. You can follow me at Tracy Alloway.
And I'm Joe wisan Thal. You can follow me at the Starwort. Check out Victor Schwetz is writing. Just google Victor Schwetz Odd Lots Newsletter and you can see all of the things he's written for us. Follow our producers Carmen Rodriguez at Carmen armand dash Ol Bennett at Dashbot
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