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

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0:45In addition to all that variety, EasyCater also gives you full visibility of your organization's food spend with invoicing, centralized reporting, and seamless integration with expense management systems, all on one platform. Easy Cater, your business tool for food. To learn more, visit easycater.com slash podcast. Bloomberg Audio Studios. Podcasts, radio, news. Joe, it started. It started. It's what, like two, three weeks later? Yeah, so we had, yeah, three weeks basically since the election and the trade war, at least to some extent. Maybe a trade skirmish. We don't really know what's going to happen.

1:27It's kind of begun. It started last night. Yeah, so Trump, he didn't tweet. He said on Truth Social. Is that what it's called? And by the way, I respect that he still uses Truth Social. Yeah, kind of a slap in the face to Elon Musk, I guess. I did a deadlift. One, two, three. Hegemony. Okay, good. Hegemony. Barges. This is an after-school special, except... I've decided I'm going to base my entire personality going forward on campaigning for a strategic pork reserve in the U.S. Where's the best squid ink pasta? These are the important questions. Is it 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.

2:10And people will say, I don't really need to listen to Joe and Tracy anymore. We do have... Cha-ching. The perfect guest. Welcome to Lots More, where we catch up with friends about what's going on right now. Because even when Odd Lots is over, there's always lots more. And we really do have the perfect guest. But he said he's thinking about or he's going to impose 10 percent tariffs on goods from China and 25 percent tariffs on goods from Mexico and Canada for some reason. By the way, we're recording this November 26th, Tuesday, and he specifically tied those tariff threats to Mexico and Canada to which various conditions that theoretically can be met related to immigration crackdowns and the flow of drugs across the border.

3:02Yeah. 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 think what drives it and why the likes of Bernie Sanders and the likes of Donald Trump read the mood of American people much more than institutionalized people like Biden or Harris is really to do what I describe, actually, Danny Roderick of Harvard University described as a political trilemma of global economy.

3:43You cannot have globalization and economic integration, nation states and democracy all at the same time. You can pick up two out of the three, but you can't have all three and you can't have all at the same time. So if you think of domestic and international pressures, I think Trump is reflecting both of them. If you go back in time, it's really Paul Walker deregulating global financial system, followed by Bill Clinton in 1994 NAFTA, followed by China entering WTO in 2001, have created an environment where people feel, justifiably or not, but they feel that their jobs, their livelihoods somehow were stolen by other people.

4:28And 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 understands, or he must fully understand, that the principal reason why Biden lost was inflation. And so the question is, when you start imposing those tariffs, you have to remember that up to half of all U.S. imports are intermediate goods. So if you actually impose tariffs, you're taxing your own manufacturers and your own exporters. So there is an element of domestic and international. We are here with Viktor Schvets.

5:08He is, of course, a global strategist and author of the new book, The Twilight Before the Storm, How to Avoid a World on Fire. World on fire sounds kind of ominous. Yeah. Well, since you mentioned the tensions in the neoliberal order or what remains of it, What do you see on the horizon? Like what political system are we actually on course for? Well, that's a great question. One of the things my new book explores is that the last time we had the same degree of disequilibrium or polarization was really in 1930s. And back then there were three systems on the menu. You could choose communism, you could choose fascism, or you could choose constrained democracy.

5:53It wasn't a choice between freedom or liberty. It was just a question, how much freedom do we need to sacrifice in order to lower the tensions and defang the extremes? So today, in a very similar position, the world as a whole does not agree on what is the right social policies, political system, economic systems, business systems. And if we don't agree what is the right thing to do, alternatives proliferate. So today, there are various alternatives competing against each other, whether it's China, Russia, Iran, the U.S. trying to redefine what it is. Europe is trying to redefine what it is. And we're in this period, which might last up to a decade, where ultimately we will find a compromise.

6:36Ultimately, there will be a consensus that will be established. And the only question the book asks, do we need to go through the world of fire of 1940s? Or can we just go straight into the 1950s and forget the 1940s? I'd sign up for the 1950s. Yeah, I'd choose the latter path. When you presented your trilemma, so just globalization, the nation state as we know it, and democracy, and you mentioned that candidates like Bernie Sanders and Donald Trump, both to some extent, for better or worse, correctly or incorrectly, there is the economic vulnerability that perhaps people feel. But it also sounds when you say nation state specifically and when you contrasting that against globalization, it sounds like there is, yes, there is an economic impulse, anxiety, security, et cetera, but also this notion of legitimate sovereignty of a nation.

7:28A nation has the right to control its borders to some degree and to modulate and turn the dial on who can get in or out. It has the right. We see this in the war in Ukraine, the legitimate right to have a military and a precondition to having a military is some sort of domestic manufacturing capacity to build weapons. It feels like there's a big element of what's being debated now in the U.S. specifically is the re-exercise of sovereignty across a number of different dimensions. Totally, totally. I mean, if you think of, I usually describe it as three I's, inflation, inequalities, immigration.

8:06If you think of those three elements, if you combine them, that pretty much explains almost everything you need to know. So if inflation was much lower, in a sense, absolute prices have come down to a level that people regard as acceptable. If inequalities, whether it's wealth or income, were much better managed, if immigration was not a major issue, 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 you to a certain conclusion.

8:56Speaking of the culture wars, one thing I wanted to ask you from an investment perspective is we have also seen them kind of creep in to the corporate sector where companies basically are forced into choosing a side. So, for instance, Tractor Supply rolled back its DEI initiatives. There was the Bud Light boycott and then Coors Light, I think. Walmart just last night. Oh, really? Yep. This was a big news just last night. Walmart becomes, I'm reading an NPR headline, Walmart becomes latest and biggest company to roll back DEI policies. I think that's huge. Yeah, that's massive. How do investors handle 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?

9:42Yeah, that's exactly what my book discusses, that the idea, neoliberal philosophy that really become embedded in the late 1970s, early 1980s, really died around the global financial crisis around 2010. Over the last decade or 15 years, we'll all be trying to find, as I said, what is a new societal consensus? How important are corporates, private sector, public sector? What responsibilities do they have? So the idea of Milton Friedman, that the primary objective of a corporate is to generate returns to shareholders, actually died around 2019 when U.S. Business Council already redefined objectives.

10:21But right now, societies still don't agree what is right, what is wrong. And so corporates are trying to be careful because corporates are nothing more than an outgrowth of societies therein. I think one of the things I mentioned in the book, if societies decided that burning witches is the right thing to do, we probably who 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, 10 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're only around 30 % of the votes.

11:08When they become a dominant voting block, they will identify exactly the frontiers, the borders, how far you can go, where should you go. And at that point in time, the corporates could actually solidify. But right now they're in a flux. They're reflecting purely societal flux. It feels to me like when Trump won in 2016, corporations in a way they're like, you know what, the election happened, but we're going to continue on. This doesn't change our commitments to net zero. This doesn't change our commitments to diversity. This doesn't change our commitments to gender equality and so forth. It feels like they're following the mood of the election much more this time.

11:46I was really struck by a utility company the day after the election saying, yeah, we're probably going to burn more coal now. In line with changing regulations, you see the Walmart news three weeks afterwards. I want to get at something else about the three I's. 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 the sort of like comfortable middle class to upper middle class life here?

12:27Totally. One thing, whenever Donald Trump discusses current account deficits, I'm not sure he fully realizes it's an accounting identity. The deficit 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 have been accumulating significant surpluses. Other countries were accumulating significant deficits.

13:05So one thing American people probably don't realize, that they can't just maintain consumption at the current level and still not run the deficits. At the same time, if Americans run the deficits, by definition, China, Germany, Japan have to run the surpluses. But just on the immigration component as well, how much does the U.S. standard of living as we know it and our service sector labor restaurants? I mean, I'm thinking back to the immediate post-pandemic period when we had this fairly modest labor market tightening and people went ballistic about the quality of service they were getting in restaurants because workers didn't immediately go back to their jobs at the pace.

13:44It would 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 right. But you also have to separate politics, optical illusion, what you're trying to do, and the reality. If you remember, well, you don't remember, but anyway, Eisenhower in operation, I think it was called Wetback Operation, which is a horrible name. But anyway, Eisenhower expelled 1.1 million Mexicans in 1950s, only to see them all trickling back into the country in a matter of months and years.

14:23So you have to separate politics, what you're trying to do, optical illusion you're trying to create, and the reality of what is actually being achieved. My view is that there is sufficient guardrails in a system in the US to prevent probably the worst outcomes that potentially could have happened. Now, the first clearly guardrail is electoral process. US is one of those countries that elections never end. I mean, they just carry on all the time. So if you think of inauguration in January, within 12 months, everybody will be in a midterm mode. Everybody will be discussing what's going to happen to midterm.

14:59So if you're not careful and you're causing significant frictions in the labor market, significant tightening, some inflation coming back, you have to roll back your policies. But there are other areas. Capital markets is a classic example. That's why you get your treasury secretary a hedge fund manager, because at the end of the day, markets are bigger than individuals, and they're bigger even than the underlying economies. So any distress that you're going to see in risk premia, in mortgage rates, in interest rates, or anything like that, they will have to pedal back a lot. So what that basically implies there is a friction here between political objectives, what you're trying to do, what you genuinely believe, and I think Trump probably does believe it's a good idea to expel those people out of the country, and economic reality, inflationary reality that you're going to face.

15:48Don't also forget commercial and corporate interests, like he's talking about getting rid of CHIPS Act or IRA Act. Over 80 % of the money in those acts went into the red districts, which are represented in Congress, which has a tiny majority. You're really looking at only four or five seats they're going to have in a majority in the Congress. So there is constant tension. Now, that tension will create volatilities inevitably. They're going to create currency volatilities. They're going to create equity volatilities, interest rate volatilities. So that's inevitable. But the hope is that the guardrails between electoral cycles, tiny majority in a Congress, between corporate interest, the capital markets, stickiness of institutions.

16:32Remember, you can't just unscramble a lot of the commitments that the United States have, whether it's a WTO, whether it's NATO, whether it's UN, whether it's NAFTA, you can't really do that. There is enough there that, as I said, tariffs are not going to go up to 20%. They will increase from three, four to maybe six, seven, eight, but they're not going to 20. you're going to not be expelling millions of people. Labor force increase will shrink, but probably no more than 25, 30 percent rather than a much more robust numbers that could have occurred. And that should moderate some of the inflationary outcomes and economic outcomes.

17:21your best restaurant location gets five-star reviews how do you make every location like your best location your best paper mill has been operating at peak productivity how do you make every mill like your best mill your best data center has optimized every drop of water. How do you make every data center like your best data center? The answer is Ecolab. Better performance, better outcomes, better impact. Ecolab. Now every location is your best location. How many vendors does it take to meet all your organization's food needs? Just one. EasyCater, the workplace food platform that lets teams order from a huge variety of restaurants, over 100 ,000 nationwide, all through a single vendor.

18:07In addition to all that variety, Easy Cater also gives you full visibility of your organization's food spend with invoicing, centralized reporting, and seamless integration with expense management systems, all on one platform. Easy Cater, your business tool for food. To learn more, visit easycater.com slash podcast. You said earlier that the 1930s were your preferred historical analogy to our current time period. And one thing that happened in the 1930s was also tariffs and the Smoot-Hawley Act. And then we had retaliation. And expulsion of all the illegals, too. Oh, oh. So it happened. The U.S.

18:46was doing six times expulsions in 1930s than they were doing in 1920s. Oh, wow. So it happened. There was a big wave in the 1930s and the 1950s. That's right. America has a long history of expelling immigrants. But not just the U.S. was expelling in 1930s. So was Germany. So was many other countries. So desire to close the borders, the desire to expel foreigners, the desire to establish terrorists, protect local interests, it was all prevalent in the 1930s. But what I was going to ask is, how worried are you or what's the potential for retaliation by other countries? Because we've obviously been focused on the U.S.

19:26Everyone is focused on what Trump is doing, but he is not the only actor here. No, he is not. And that's one of the issues that, and I think he probably understands 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 U.S. domestic market. But you can't push them too far. You have to find that middle ground. And that's where discussion of negotiating tactics that I think you've started from, I think comes in. I do think that the US side understands that you have to find a compromise.

20:05And that compromise optically should look better for the United States. It's like if you're seeing a renegotiation of NAFTA back in 2017, 2018, it hasn't actually changed a lot. But optically, it was presented as a much better case for the United States going forward. So you need to find that sort of a middle ground. If you don't, if you actually do become aggressive, as it happened in 1930s, yes, you could have retaliatory actions very quickly. That's one of the things I keep highlighting that today, people are angry, people are polarized, but they're not yet mad enough to burn down the house.

20:46Whereas in 1930s, they were really mad. In other words, they were exacerbating primarily because degree of suffering that actually people encountered in 1930s 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 may be another war, another pandemic, and people will be really angry, but that is not today. So if people are not angry, they're pulling back the politicians within their countries. Also because people are not angry, geopolitical tensions are kept under some degree of control. It's only when people magnify extremes that both geopolitical tensions and domestic tensions get out of control.

21:29And I don't think we're at that point yet. I said we might be at some point in time, but not today. One of the things, and it came up during the first Trump administration significantly, and it's almost certainly going to come up now. And I mentioned sovereignty and an element of sovereignty is having a military and an element of having a military is having a domestic weapons manufacturing economy. Trump has put a lot of pressure on the Europeans allies specifically to spend more on defense, very angry at their military budgets, their lack of military budgets, et cetera. And, you know, in the dream society of peace, no one has to spend too much on military.

22:09How inflationary is that if ever if, you know, there's this perception that the U.S. is going to pull back the security umbrella, so to speak, if there's this trade pressure 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 U.S. 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?

22:41It depends on the extent. Because one of the things I discussed in the book in 1950s and 60s, there was no inflation. In fact, inflation didn't pick up until 68, 69, and then much more into 1970s. At the time, military spending globally were about 5%, 6 % of GDP. Some countries were up to 7%. Today, global military spending already up to about 2.2, 2.3%. So in other words, we're spending more on defense and R &D, for example, on a global basis already. In the US, we're up to about 3.5, 3.6 % of GDP. If all we're going to do is go up to maybe five, and Europeans may go up to about three, there will be no inflationary impact at all.

23:27But if you have a much hotter conflicts, That's where military spending goes up to 15, 20, 30, 40 % of GDP. So for example, in the World War I, US was spending 15 % of GDP. In World War II, at the peak in 1944, US was spending 40 % of GDP on defense. If you think of countries like Britain or Japan, they were spending up to 80 % of GDP on defense. So when you get to that level, normal economy just collapses. It's just war economy. That's all you're dealing with. So long as we're staying around the area of the Cold War of 1950s, 1960s, that is, we're spending maybe 5 % of GDP on defense, I do not believe there will be any significant inflationary impact.

24:14Despite all the scary things that we're talking about and the fact that you mentioned the world on fire as part of your book title, you kind of end the book on an optimistic note and you talk about things maybe getting better, specifically in the 1940s. Maybe we'll get a big productivity boost and our social values will change and, you know, we could have a three day work week or something like that. Of course, the irony is that I'll be retired by the 1940s right when that comes. 2040s. Oh, sorry. Then you're going to have to un-retire in the 1950s when your retirement portfolio gets eaten away.

24:51Yeah. Like, why the 2040s specifically? And then, like, what causes you to be optimistic given everything that's going on? Make me feel better. Well, the way I look at it, human history is very convoluted and very complex, quite often contradictory. I like Kevin Drumm phrase that I keep using constantly in the book. He's a blogger from California when he said humans are just overclocked primates. That beneath a very thin layer of civilization lies five million years of primate evolution. And therefore, we are still bound by it. You were supposed to say something comforting. We are tribal. We are subject to dominance displays and all the rest of it.

25:35And so human history is very complex. But one thing we've learned that over time, we overcome those challenges. Over time, productivity rises. Over time, output increases. Healthcare improves. You know, longevity improves. And there is no reason at all to believe that this period will not be followed by this nirvana at some point in time. Why 20 years from now? To me, that's a process that the time you need in order to achieve two things. Number one, a sustainable increase in productivity. So in other words, it's not just one country grows productivity because they're eating demand from other countries and other countries are stagnating.

26:12But 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 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 jobs. Probably many of us will not be even working. But the productivity probably will be 4 % or 5%, 6 % per annum, instead of something closer to 1 % we have right now. So that's the first area.

26:48The second area is generational change. Because there is a reason why baby boomers and X generation behave as they do. You know, give me freedom. Give me the rope. And I can either hang myself or succeed. give me an opportunity without determining outcomes. And the reason why that is so, because they no longer have a fear. They've never seen chaos. They've never seen bad stuff. And therefore, they assume that institutions of state or the environment will always be there. It's like the air you breathe. You don't think about it. But the younger generation, those who are today 30 years old, 35 years old, 25 years old, 20 years old, They actually have seen quite a lot of bad stuff occurring from global financial crisis to never ending wars to pandemics.

27:35They've seen a lot of bad stuff, not at the level that people who are growing up in the 30s and 40s saw, but nevertheless, quite a lot of bad stuff. And so the question is, when these younger people become an electoral majority across most developed countries, what sort of world would they like to have? And to me, all the servers are pointing to much more state-driven world, much more community-driven world. Even if you think of Republican Party today or Democratic Party, Republican Party today is not Ronald Reagan's Republicans. They're not Eisenhower Republicans. They accept that neoliberal framework is incorrect.