Viktor Shvets on Trump's Historical, Revolutionary Moves

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1:19Hello and welcome to another episode of the Odd Lots podcast. I'm Jill Weisenthal. And I'm Tracy Alloway. Tracy, you know what I'm proud of? Oh. I don't, you know, look, I'm not a traitor 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 being said, you know what I think we did well? I think we took the prospect of a serious change in the U.S. trading relationship with the rest of the world as a serious possibility. We took Trump both seriously and literally? We definitely, yeah, I think we took him pretty literally.

1:56When he was talking on the campaign trail and in the early days after the election, when the markets were flying because all they were talking about was tax cuts and deregulation, I think we were giving serious airtime and writing time to the aspects of Trumpism 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 credit, still pretty low. FX volatility at the time was pretty low. Just lots of weird stuff going on in the markets.

2:33And 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 27th, 2024, when markets were surging and he said, this time really is different. And he's a frequent odd loss guest and he has been very in tune with the big changes going on in the world and major turning points. So I'm thrilled to have him back. We are speaking, of course, with the one and only Victor Schwetz, head of global desk strategy at Macquarie Capital, who said this time is different.

3:14And I think it turned out to be different, huh? Yes. Yes, it did. It turned out to be different. Why? Okay, let's just go back. What were you thinking on Wednesday, April 2nd, Liberation Day? The chart came out, massive tariffs announced on the rest of the world, virtually every country, friend, foe, etc. Even small islands. Even small islands, depopulated islands, tariff levels that are like higher than Smoot Holly or whatever. Right. What went through your mind? The question I keep asking myself, what is this administration trying to do? Yeah. So in other words, what is the objective? Is objective to raise revenue in order to partly pay for tax cuts?

3:55Is objective to reshape America into some form? Is it to bring manufacturing back? Is it 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 remade the world at the same time. So it's a revolutionary movement rather than just a little bit of a bypassing it for 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?

4:44Because 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 sectoral balances.

5:29They don't fully understand that you can't have declining deficits and rising capital inflows at the same time. So it's clearly not guided by some conventional economics. it's sort of guided 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 Elon Musk, Andreessen, Peter Thiel. They have very different views. They're much more global. They want technology to progress. They open to immigration. There is a whole range of things. Then there is a populist wing.

6:09Probably returning America back to 1950s or maybe even late 19th century, closing the borders. Then there is a little bit more technocratic wing saying that what Bernanke and Greenspan were discussing in the past, which is making sure that savings and investment on a global basis actually balances 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.

6:58And 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 deglobalization of goods. We have not yet spoken about deglobalization of services, but with goods and services comes capital. And so when we start talking about deglobalization and fracturing of capital, that's where wealth funds come in.

7:45That's where various superannuation and pension funds come in. Now, a lot of countries already either started that or significantly increased the size of those funds. For example, Korea will start much higher contribution to their pension funds. So if you think of Australia, Australia already done it. Singapore 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 necessarily. Is it looking after the interest of pensioners that they're supposed to service?

8:22Not necessarily. But that could be one way that you actually will accumulate some capital over time in order to fund it. I want to go back to your point about the revolutionary element within Trumpism. Do we need to start looking at Lenin, the Russian revolution, Mao Zedong, or China to get a better understanding of what the sort of like zeitgeist or impulses behind it? Can I just say, can you imagine asking that question like a year ago? Yeah. Well, I have changed. I got into my, you know, I got into my 20th century history habit, like right at the right times. I read a bunch of books. That's right.

9:01Your middle age destiny. And what I'm trying to really ask Victor is I want him to validate my choice to take up a 20th century revolutionary history hobby. Am I, was I right to go back and study all, start reading all those books as I got into my mid-40s? You do. And you can go to 19th century as well, basically anything that resembles more or less the modern times. And there were various breaks in the system. Now, remember, U.S., 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 U.S. are designed very sloppily. And the idea is that we need to compromise.

9:42Eventually, the 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 addressed as his majesty. It was George Washington who insisted on being called Mr. President. So they were never quite sure what to do. So they never delineated the power. What is an executive power? What is a state power? What is a federal power? What is legislative? What's judicial? And so the result is U.S. is a nation of norms. whereas Europe is a nation of rules or the nations of rules.

10:20And 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 occur, 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.

11:01You can't necessarily compare 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 the left wing, because the right wing essentially saying, and in many ways, cultural revolution was the right wing. They essentially saying, 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. Thank you.

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12:50EasyCater, your business tool for food. To learn more, visit easycater.com slash podcast. So I understand the analogy with other countries and their history, but can you talk about the parallel that you see in U.S. history? What time period is 2025 most similar to? Well, if you go back through a relatively short U.S. history, probably the times of Andrew Jackson, probably the times of Abraham Lincoln, and I would argue the times of FDR, Franklin Delano Rizal, probably will be the most similar periods. You can add Richard Nixon, but that was very different in my view. The same with Theodore Roosevelt, who also was smashing quite a few things.

13:38I think it was different. But those three, I think in my view, which is the beginning of the U.S. with the first populist wave in 1820s, 1830s, the Civil War, and the 1930s was FDR. Why FDR, though? Because it seems like the Trump administration is backing away from a lot of fiscal spending. Yeah, well, the idea is not whether you're fiscally spanned or not. The idea essentially is what is the executive branch allowed and not allowed to do? Oh, I see. 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.

14:20On 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 FDR did through a variety of programs that he tried through the 1930s. 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, et cetera.

14:56One 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 longer, but in some sense, at least a 15-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 an incredible shift away from American exceptionalism.

15:36The view essentially, if you go to 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 in other stuff, in other things. But from an economic point of view, U.S. will continue to pursue a relatively rational policy. So as soon as you sort of undermine that pillar, then people start asking questions. What is exceptionalism of the United States? Why U.S. has been growing faster than other countries over the last 15, 20 years? What were the drivers? Are you undermining those pillars? Are you undermining those drivers?

16:10Now, other countries are not necessarily exceptional. So if you think of Europe, they're suffering from excess capital, unlike the United States. They have slower gross rates. They're mostly mercantilist. But on the other hand, if Europe is shifting, the gross 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 U.S. equities adjusting for inflation, risk premium did go up from 2.5 % to 3.5%. But if you think of Europe or if you think of China, for example, you're looking at about 6 % to 9 % inflation adjusted risk premium.

16:48So should that risk premium come down? In other words, if U.S. is not so distinctly different to Europe or China, why should it be trading at 20 times when China is trading at 11 times? And so increasingly, those questions are asked. When you tell people, but you know, U.S. might have an existential problem, but Europe and China have massive structural problems, you do understand that China is a 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 problems they need to overcome. And so there is a limitation.

17:26The way I describe it, we gradually go into the world that no one is exceptional. And therefore, it becomes much more a tradable opportunity between the markets rather than saying, as you correctly said, Joe, over the last 15 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 1930s, it would not have resonated. If you said it in 1970s, it would not have resonated with people that you don't bet against the United States. So we're kind of going into this period, largely, I must say, for self-inflicted reasons. But nevertheless, I think you're right.

18:03There will be more cross-flow of 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 Treasury yields. And I think, again, we're recording this on April 8th. Yesterday, Monday, April 7th, we saw the yield on the benchmark 10-year go from just below 4 % up to, I think, around 4.2%. And everyone's kind of scratching their heads because normally you would see Treasury 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.

18:46The same applies to US dollar, because normally you would argue that when uncertainty is high, risk is high, people go into US dollars and into US treasuries. But now they do not. They go into other places. There is even discussion that European bonds or Japanese bonds might be a better place to be. So there are two things. One is U.S. exceptionalism that we've just discussed with Joe. The other one is potentially a liquidation of positions that is occurring. Because remember, an average American is probably, if you include the currency, 10, 15 % worse off than what they were, or poorer than what they were, say, on January 1st.

19:26And so there is some liquidation that is actually occurring as well. So sell what you can, not necessarily what you want. Sell what you can. So to me, there are two answers. One answer is a sun setting of US exceptionalism. And the other answer is liquidations. However, coming back to that historical perspective, Roman Empire survived many anomalies and many poor administrators, so to speak. And the reason was the underlying strengths of Roman society and Roman economy. And so the question is whether the underlying strengths of the U.S., which it can contribute labor, capital, its 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.

20:24And to me, I'm still hopeful that that is the answer.

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22:43Because there have been other – I mean yesterday, for example, there was an FT column from Peter Navarro saying this isn't about dealmaking. So even the question of is this about negotiations or dealmaking is fluid and there's probably, if we're being honest, some sensitivity to the market going on. 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 announcement that the countries are negotiating? Absolutely. You have to remember, small countries have no leverage whatsoever. So whether you're Sri Lanka, Malaysia, Thailand, whatever you are, you have no leverage.

23:17But they have nothing to offer. Well, the thing is that at least Korea does have some domestic market. To ask a country like Sri Lanka 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 pushback is Canada, UK, European Union, China, and Japan. Now, UK and Japan decided not to do it. And so the question comes down to Canada, European Union, and China and the extent to which they're going to play a hardball. But to have 50 countries or 60 countries or whatever the number is coming in trying to negotiate, that's an easy part.

24:03Now, the market will react to it, but it's just temporary. It's nothing 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 putting it out there. I have this image in my head of Trump sitting by the phone in the Oval Office just twiddling his thumbs. Won't hear me. Won't hear me. Yeah, exactly. Okay, so— Is it okay to text twice? I texted and I feel bad. Like, oh, he doesn't have read. Xi Jinping doesn't have read receipts on. I have no idea. Keep going. That's right. OK, 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.

24:45Now 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 risk sufficiently priced in, 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, CCC, which are now 10%, 11 % spreads, if they go up to 15%, the world will freeze. If the average spreads, which are now more like 4.5%, go to 6%, both global and economy and the U.S. economy will freeze.

25:25So 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 midterms. So there has to be, if certain Texas senators are coming out and saying that there's going to be a bloodbath in midterm if this continues, He's absolutely right. So there are checks and balances still in the system. But one of the things to remember that even if we pass the high point of tariffs, we might not have passed the high point of other things that are going to come through.

26:09And so the question is, over the next several years, are you going to continue seeing it? And I think the answer is yes. We didn't talk about geopolitics, for example, and the extent to which that could shift as well. So it's not just tariffs. 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. 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 solid part of the population which actually bought into the idea that you must burn down the house in order to build a bright future.

26:52And I don't know whether it's a 30 % of the population, one third, but there is a very large constituency which fully accepted that. So when Scott Basson talks about detox, 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 switch for a variety of other reasons, primarily inflation, inequalities, immigration. And so that could constitute as much as 20 % 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 Dimon, I think he said something like, we need to wrap it up reasonably quickly.