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

25:32And I think 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 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. Like, 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.

26:12It'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 I think 2016 was an 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.

26:57So 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 US specific. This time around, 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 Skanda has been pointing that out quite a bit. But if you look at actual manufacturing production, it hasn't really been great shakes. Is election uncertainty, and you see this 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?

27:43or is that just a code word for people who prefer Trump hoping that that's the outcome and then that may be changing 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 president. I think there's, 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.

28:13and if it's like depends on whether Trump's gonna be in office or not if you perceive it as like well it's a 50-50 proposition if Harris is in place then it's gonna stick if 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, right?

28:49So 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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29:58In 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. EasyCater, your business tool for food. To learn more, visit easycater.com slash podcast. Can we go down the line and talk about like 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.

30:36I'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 lots newsletter and neil has promised to be one of the contributors and so we have a piece coming from him so um 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 on political stuff um 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.

31:07I 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, and so if you sort of buy into that, I mean, it would imply that the Fed needs to do a bit more to get, you know, 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?

31:50I too am working on a piece for your all last coverage, so that's sort of forthcoming as well on productivity. But look, elections are, for people who like numbers changing and like following them, which is probably most of you, I'm going to guess, on some level if you're interested in finance and markets. Yeah, it's just a fun exercise of 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.

32:25So 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've had a chance to like program some tools that are going to help me write over the long term. I might go see a movie, have a nice long lunch, you know, relax.

33:02And 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 and various different markets within them, so you need a lot of space. and then you're watching the television like everybody else and you're watching Twitter and you're just trying to get through it and process it because you know that even if you don't really want to pay close attention, what else are you going to do tonight?

33:41That's right. What else is anyone going to be doing? Wait, real quickly, why has the spread on some of these markets between, say, Kelsey and Polymarket not been arbed away? What is the constraint to free money? The constraint is liquidity and access to the market and their 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 their money's going to vanish or something wrong is going to happen. I mean, it's very, very unlikely in any given transaction it's going to happen.

34:14But I definitely have an opinion, by the way. I want to be clear. When I say who knows which one is wrong, I very strongly believe that the polymarket line is the one that is biased 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 should in some air quotes sense be. Actually, real quickly, Skanda, since you mentioned productivity and I know you have some thoughts on productivity, in fact, you just mentioned coding up some tools to make your life as a writing easier. I think you both have some difference.

34:49You 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 give us 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 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 that doesn't do what we want or expect it or hope it would do. And the bull case? Singularity, super intelligence, world completely transformed. Great. Skanda, what's the gist of the productivity?

35:31And then also Neil, but what's the gist of your productivity piece that you have coming for the Odd Lots daily newsletter? Just speaking in terms of the realized data, and I try to start from how is the data measured? What are we actually capturing? Which may not be indicative of sort of conceptually what we associate with productivity, but productivity growth has actually outperformed post-pandemic in a pretty meaningful sense relative to what we were seeing pre-pandemic. So pre-pandemic was roughly 1.4 % if you take sort of longer lookbacks. And we've been down in a post-pandemic period something like 2%.

36:03Maybe 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.

36:39And 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?

37:10I 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. OK. And that and that should give the Fed, you know, plenty of cover. Right. And 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 of things.

37:47Number one, we should sort of resist the temptation to kind of buy into the stagflation story. You can't really have stagflation if productivity is doing what it's doing. But it also makes the likelihood of some inflation reacceleration highly unlikely as well. Where is it coming from? Unit labor cost growth over the last year is basically zero. So 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 seen, I think, is an important kind of story in terms of mitigating inflation risk. If you had to choose, what would you say is the biggest constraint for Trump and Harris both?

38:29Like, 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, oh, 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 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.

39:11Skanda? I go back to the politics. I think American government makes it very hard to pass things in general. And the wisdom of that, if 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 the 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?

39:47And 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 in the ballpark of the 2010s? I mean, I would say to the extent you can free up real resources, right? Yeah. 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.

40:29I 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 deficit reduction that doesn't necessarily move the needle on inflation or the Fed's reaction function. But like health care costs, for example, right? Health care 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 do.

41:01You probably get to the last mile of whatever the Fed's trying to achieve. Zvi, can you say a little bit more about the spreadsheet set up? Skonda, you mentioned your spreadsheets too. As that data is coming in tomorrow night, I mean, this is what we really care about, right? The numbers start to come in. They get posted on what? Secondary of State websites, et cetera. How are the traders ingesting that in that process to be ahead of when the networks are in? They call Wisconsin. So it's going to vary a lot from trader to trader, from house to house. And a remarkably large number of people just don't do this.

41:39And that's clear because you look at the financial markets over time. I haven't followed the most recent lectures like 2022 that carefully in terms of the reactions. But you definitely see these delays. And if there was a lot of participants in the market who were keeping close eyes and incorporating 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, right? So you have your Excel spreadsheets that contain all of the county-by-county data from all of the returns.

42:08And 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 that 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 trades.

42:34Svi, 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 use what instruments are available for you to trade because it's the middle of the night. So 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, 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?

43:23You can do that now. All right. All right. Zvi, Skanda, and Neil, thank you so much. I feel prepared.

43:33Zvi is at 91%. So there's still some ambiguity about whether he was on stage or not. People are still unsure.

43:46Thank you.

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45:37Who better to tie up all the disparate things we've been talking about in the previous two sessions than Brad? We always enjoy speaking with you because we can basically throw anything at 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, An 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.

46:20Walk 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 read the whole thing. 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 has 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.

47:16One is that the world is deglobalizing. And the other, which is related, but not quite the same as the world is fragmenting. Different political blocks are interacting 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, it's 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.

48:06U.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 deglobalization. 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.

48:44And, 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 manufactured goods is up 800 billion. And I'm pretty confident because I have some sense of magnitudes that that's not all trade with Russia.

49:26There'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 US, 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 it wants without relying more, not less, on exports.

50:12So 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 been put in place, do you see fingerprints of it? Yes. The most obvious is that the U.S. is the one country that currently doesn't import any cars from China. Since the trade war, China has 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.

50:58In 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 a 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.

51:48That 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.

52:29And 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, so a little bit of offsets, zero in tax to the U.S.

53:18federal 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.

54:00But 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 a great chance that we have to correct some of the flaws, in my view, in the tax cuts.

54:43The corporate side doesn't expire automatically the way some of the personal does. So 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. Keep going. It goes up to 13.125, which of course some people care about. And the foreign derived intangibles income tax, or FIDI, goes up to the god awful high rate of 16%. So there are some ratchet ups. So what happened with the Tax Cuts and Jobs Act? First of all, the corporate side was a total revolution. Before the Tax Cuts and Jobs Act, the U.S.

55:21had a system called deferment, or 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 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.

55:58Once 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 moved 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.

56:38sales. They prefer to keep their intellectual property and 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 returned their intellectual property to the US. 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 its global tax roster. 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.

57:23government 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 % 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.

58:05companies 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 in the 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 U.S. Trade Representative Catherine Tai, who has also been on the show. So maybe you can't get into specifics here, but 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.

58:44I 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 USDR internal decision making. People do not get a report on what happened in the market at the start of a significant meeting at USTR, whereas that would be kind of the norm at the US Treasury. So culturally, it's not driven by the market. Culturally, US 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.

59:44But 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 US economy than globalization after the 1990s. If you look at trade patterns in the 1990s, And, you know, there's a significant interruption in the Asian financial crisis.

1:00:32And 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, an 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.

1:01:18It 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 2023, 2024, moved a lot of its manufacturing and 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, the Chinese surplus explodes. And I think that generated a period of unhealthy globalization as well.

1:02:03And 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 a bilateral basis against the U.S., is on a magnitude comparable as a share of world GDP to that seen immediately after WTO entry.

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1:03:57Point is, your presentation will look great. You'll look great. Everybody will look great. And isn't that what you're after? There's a reason 95 % of Fortune 500 companies use Canva. Canva lets you bring your ideas to life as fast as you can think of them. Put imagination to work at Canva.com. There seems to be some consensus about diagnosing the problems in the Chinese economies. So not enough domestic consumption, too high savings, et cetera. 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.

1:04:40So 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 he 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. this?

1:05:24One 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 it, it is not a topic that I prefer to talk about, but I will talk about it. No, you don't have to talk about it. You 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 dollar regime or any reasons to think that 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 globally?

1:06:10Not really. So there has been one obviously important and significant change, which is the sanctions on Russia. Russia is one of the top 10 global economies, produces a lot of oil, and the world wants oil. We, meaning in this case, the US, the EU, the sanctioning coalition, the G10 countries, have generally not actually sanctioned dollar and euro payment. But even though we have not sanctioned dollar and 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 2022, the invasion, to reduce dollar usage.

1:07:00It 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 US can see in its 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 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.

1:07:48So 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 that 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.

1:08:36So you get a little bit of defense against US and European sanctions, but at a pretty significant cost. And you just don't see it. So one anecdote, because it's 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. Well, 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 is 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 de-emphasizing, was actually really important.

1:09:30Other 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 banks. 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.

1:10:04You 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 1990s and early 2000s.

1:10:49Why is that? well again Tracy thanks for really closely reading my paper I try I actually thought that was a good line you're the first person who's noticed it I throw in hopefully 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 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.

1:11:40It 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, it 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.

1:12:19It 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 hothouse 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.

1:13:06Then 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. And obviously everyone's petrified that this same pattern will replicate itself in electric cars and potentially legacy semiconductors and potentially cutting-edge chips, but that'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.

1:13:49So 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 described? Look, well, I would start to some degree with some of the points that Secretary Yellen and Lael Brainard 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.

1:14:31and 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, at least I find it interesting, you know, Trump talks a lot about replacing the income tax with tariffs. That's been one of his ideas. It's 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.

1:15:12We 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's 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.

1:15:55And 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 discouraged the migration of intellectual property and production outside the United States get addressed. That'd 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.

1:16:42You can get around them really easily. You put, you know, 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, again, widely accepted, is that the Biden administration talked a big game about Frenchoring, working with allies. And then, you know, thanks to Joe Manchin, your friend, a 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.

1:17:26So 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 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, they 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.

1:18:10China has been super restrictive. And I think Europe should be symmetric, do a kind of buy Europe deal. And my idea is that like, hey, we have buy US, 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 US 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.

1:18:51Would 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.

1:19:17So that was our live recording of the podcast at Caveat 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. Okay. 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 thank you to everyone who worked to make this possible. Notably, Carmen Rodriguez, our producer, and Kate Seabury at the Bloomberg Events team, as well as the entire crew at Caveat.

1:19:58Thank 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 Wiesenthal. You can follow me at The Stalwart. Follow all of the guests that we had last night. Follow Zoe Liu. She's at Zongwen Zoe Liu. Follow Jordan Schneider. He's at JordanSCHNYC. Follow Zvi Moshvitz. He's at the Zvi. Follow Neil Detta at RenMac LLC. Follow Skanda Amarnath at Irving Swisher. And follow Brad Setzer at Brad underscore Setzer.

1:20:36Follow our producers, Carmen Rodriguez at Carmen Herman, Dashiell Bennett at Dashbot, and Kale Brooks at Kale Brooks. Thank you to our producer, Moses Andam. For more OddLots content, go to Bloomberg.com slash OddLots, where we have transcripts, a blog, and a newsletter. And you can chat about all of these topics, including the election 24-7 in our Discord, discord.gg slash oddlots. And if you enjoy Oddlots, if you like it when we record live episodes and then bring them to you in not quite record time, but very efficient time, then please leave us a positive review on your favorite podcast platform.

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