Viktor Shvets on Trump's Historical, Revolutionary Moves
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Hello and welcome to another episode of the Odd Lots podcast. I'm Joe Weisenthal. And I'm Tracy Alloway. Tracy, you know what I'm proud of? Oh. I don't, you know, I look, I'm not a 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 and get 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. When 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. And there's someone else who noticed this. Well, that's right. So I'm looking at a edition of the Odd Lots newsletter. Everyone should Google Odd Lots newsletter and sign up for it. And we had a guest contributor,

He wrote a piece for us on November 27th, 2024, when markets were surging. And he said, this time really is different. And he's a frequent Odd Laws guest. And he has been very in tune with the big changes going on in the world 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 Group.

who said this time is different. And 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, et cetera. Even small islands. Even small islands, depopulated islands, tariff levels that are like higher than Smoot-Hawley or whatever. Right. What went through your mind?

The question I keep asking myself, what is this administration trying to do? So in other words, what is the objective? Is objective to raise revenue in order to partly pay for tax cuts? Is 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 remake 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? Because most of the breaks we've been discussing for the last four or five months have either disappeared or were in some form co-opted by the system. So there is only very few breaks left. And so one of the breaks is really the pain threshold at which stage

people will feel that their lives have gone much worse than they used to be. And the other break, of course, is everything to do with electoral cycle associated with it. And so to me, that's the only question. It's not that there is any consistent economic theory behind what this administration is trying to do. Every time I listen, it's very clear that they don't fully understand sectoral balances.

They 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 have 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're open to immigration. There is a whole range of things. Then there is a populist wing. Probably J.D. Vance is the most obvious example of that, which are completely opposite.

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.

And 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 our wealth funds come in.

That'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? Not 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.

Things have changed. I got into my 20th century history habit right at the right time. I read a bunch of books. That's right. Your middle-aged 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. Was I right to go back and 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 US are designed very sloppily, and the idea is that we need to compromise. Eventually, 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. Initially, George Washington was supposed to be an address as his majesty.

It was George Washington who insisted on being called Mr. President, rather. 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. And so the result is in the US, it's actually relatively easy to smash those norms if anybody wants to. That's what Andrew Jackson tried to do. That's what Abraham Lincoln did. That's what Theodore Roosevelt did. That's what FDR did. That's what Richard Nixon did. And so what you're seeing is every time those changes 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. You 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.

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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, you know, 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 Roosevelt, probably will be the most similar periods.

You can add Richard Nixon, but that was very different in my view. The same with Theodore Roosevelt, who also was smashing quite a few things. I think it was different. But those three, I think in my view, which is the beginning of the US 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.

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. On the other hand, they're telling companies what their margins should be and what their prices should be.

and what policies they should pursue internally, whether culturally or otherwise. So is Republican Party deregulating party? Well, the answer is no, it isn't. It's actually penetrating government much deeper. And that's very much what FDR did through a variety of programs that he tried through 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, etc. One of the things that we've been talking about is this sort of like, you know, the end of American exceptionalism, which has been at least.

Probably longer, but in some sense, at least a 15-year story in markets. The only game in town is the U.S. 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, yes.

There is no doubt that the last three months was an incredible shift away from American exceptionalism. The 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 question. What is exceptionalism of the United States? Why US 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?

Now, 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 growth rates. They're mostly mercantilist. But on the other hand, if Europe is shifting, the growth rates will improve, utilization of capital will improve, and they will not be as dependent on trade as you go forward.

So if you think of U.S. equities adjusting for inflation, risk premier 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 adjust at risk premier. So should that risk premier 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,

US might have an existential problem, but Europe and China have a massive structural problems. You do understand that China is in 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. The 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 U.S. And by the way, if you think of that phrase, never bet against the U.S., if you said it in the 1930s, it would not have resonated.

If you said it in the 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. There will be more crossflow of capital into other markets.

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 like 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. The 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.

or poorer than what they were, say, on January 1st.

And 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 sunsetting 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, it's growing multi-factor productivity, it's got the best balance of tangible and intangible assets, it's got a tremendous geopolitical position, whether those positives ultimately will reassert themselves or at the very least...

reduce the degree of drag that otherwise would have occurred. And to me, I'm still hopeful that that is the answer. KPMG makes the difference by creating value, like developing strategic insights that help drive M&A success and embedding AI solutions into your business to sustain competitive advantage or deploying tech-enabled audits to deliver more accurate and transparent insights.

Learn more at www.kpmg.us slash insights.

When your company has a position to fill, are you really seeing the best professional candidates? Sure, you get plenty of resumes, but you may be missing an untapped resource. Ideal candidates not currently job searching. People not actively looking, but who may be open to the right opportunity. It can be the difference between a good hire and a great hire.

Specialized Recruiting Group is ready to find the talent you need. Go to srgpros.com and see how the recruiters, with a deep understanding of the experience and expertise you need, can find the right fit for your business. After all, you deserve to see the best candidates, both active and passive. Whether you're looking for a long-term or project-based professional,

Specialized Recruiting Group is ready to find the talent you need. Go to srgpros.com right now to get started. That's srgpros.com. Specialized Recruiting Group, a tailored approach to professional hiring. By the way, we're recording this April 8th. Right now it's 9.20 a.m. President Trump posting to his Truth Social account today.

I just had a great call with the acting president of South Korea. He says they have people on the plane right now. They're clearly in the mode now where they're like, oh, we're trying to – this is not deals. Because 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 deal-making 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...

They have no leverage. But 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 market

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 extent to which they're going to play a hard ball. But to have 50 countries or 60 countries or whatever the number is coming in trying to negotiate, that's an easy part. Now, the market will react to it, but it's just temporary. It's 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...

I have this image in my head of Trump sitting by the phone in the Oval Office, just twiddling his thumbs. Will he ring me? Won't he ring me? Yeah, exactly. Is it okay to text twice? I texted and I feel mad. Xi Jinping doesn't have read receipts on. I have no idea. That's right. Keep going. That's right. Okay, so we mentioned in the intro that up until recently, markets had been like,

Pretty quiet, pretty complacent, you might say, given what's happened over the past week or so. Now that we've seen the big crash in stocks, we've seen spreads on high yield investment grades start to go up. It's not a blowout necessarily, but it is up significantly.

Is 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 were, say, triple C, 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 economy and the US economy will freeze. So there are some breaks, as I said, on the system. At the end of the day, you can't freeze it. We saw what happened in Pennsylvania and Wisconsin and Florida. At the end of this year, you're going to have Virginia and New Jersey coming up. Then you have, of course, you have midterms.

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. And 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.

And 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 switched 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. I think I would agree with you, not just because of economic uncertainty and investment uncertainty.

not just because forward soft data, which continues to show enormous collapses occurring, but also because the pain is going to spread much, much wider. And the hard data will start backing it up very, very quickly. Some of the paying companies, some of the collecting companies are already seeing that. You're already seeing the mortgage market there. So you need to wrap it up. And I think that's what the market is looking for. Now, Federal Reserve, of course, is in a difficult position.

Because even if we assume average tariffs go down from, say, 25% to 15%, that still implies an inflationary spike, which could be as much as 100 basis points or more. So you'll start looking at the PCE at probably 3.5% or more as you progress through the year. On the other hand, economy will be slowing. So the question is whether Fed will take it as a transitory.

And the other question that we keep raising is that we're seeing elimination of independent institutions across the United States. It doesn't matter, Security and Exchange Commission, EPA, whatever that is. What is actually protecting Federal Reserve? And the answer, as I said earlier, U.S. is not a nation of laws and rules. It's a nation of conventions and norms.

So there is actually not a great deal of protection legally that Federal Reserve has. So the next step on this journey, if in fact Federal Reserve is caught between rising inflation and slowing growth rates,

otherwise known as stagflation, if they're actually caught in that, the question is whether Federal Reserve will be able to extend of independence that they have been enjoying, certainly over the last several decades. Yeah, we did a really great episode last week, I think, with Lev Minot on exactly this question and how in the end, just the norms and if the norms change, that's it. Victor Schwetz, thank you so much for coming back on Odd Lots. Always a thrill to catch up with you. Thank you. Thank you, Joe. Thanks so much, Victor. Thank you.

Tracy, I love Victor's characterization of the U.S. as a country of norms and Europe as a country of rules. Because I always think, like, I've said that, joked about every time I'm in Europe and it's like you're with a group of people and you try to get like five, squeeze five people into a cab, you know, and they're like, no, it's impossible. It's impossible. And then they eventually like, OK, you can like squeeze one in. They love saying that over there. I

there. I've been observing this all. No, it's impossible. How often are you squeezing into cabs with five Europeans? Like drinking or something or whatever, like with friends. And no, it's impossible. It's impossible. Oh, can we get one more person? Can we wait? And anyway. Well, OK. That's not the point. I just want to go on this rant about this impulse in Europe to always say everything's against the rules. I mean, it's right.

It's yeah. OK. All right. I do think the norms point is really important. And we've been bringing it up on the podcast quite a lot. Like so much of the U.S. is based on habits and I guess a sense of shared values or a sense of this is the way things have always been done. And we're just going to be polite and keep to the guardrails that exist.

well, they don't really exist. They're not codified necessarily in the law, but we're going to keep them because if we don't, that would be bad. That's gone for sure. And I think this is feeding into some of the risk premium that we're seeing around U.S. assets, dollars in U.S. treasuries, as Victor pointed out. We're kind of getting a denormalization discount on U.S. assets. Yeah, it feels like it. It certainly does. And again,

You know, the most simple norm is that...

But policymakers want stocks to go up. Yeah. And they were cool with their- And that's in doubt. Now, I think maybe right now, the middle of this week, we're seeing a little change because I think there is this little bit of, whoa, like, okay, maybe we left our hand on the stove a little bit too long. You can't just have multiple days of meltdown that are as intense as March 2020 or 1987. So you get these headlines about deals and there was a report about Scott Besant-

But like, you know, it's very chaotic, but it does feel like maybe there's some sort of sensitivity going on to what's going on in the market. But this was a great point of Victor's, like what are the thresholds that kick in? The soft data has been absolutely terrible. It seems like only a matter of time before that spills into hard data. We'll see.

Well, the other thing I would say is the administration has set up many different goalposts and it kind of switches between them. So Trump will talk about how much stocks went up in his first term. But then there's also this narrative that if stocks go down, you know, lots of people who were shut out of the market are going to get their chance to buy the same with housing. So I don't know. They can kind of spin it either way. Like if stocks go down a lot,

that's successful for them. And if stocks go up, that's successful. It's weird. Yeah.

Yeah. All right. 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. And I'm Joe Weisenthal. You can follow me at the stalwart. Check out Victor Schwetz's writing. Just Google Victor Schwetz, All Thoughts newsletter, and you can see all of the things he's written for us. Follow our producers, Carmen Rodriguez at Carmen Arman, Dashiell Bennett at Dashbot, and Cale Brooks at Cale Brooks.

For more Odd Lots content, go to Bloomberg.com slash Odd Lots, where we have all of our episodes and that daily newsletter you can subscribe to. And you can chat for free 24-7 in our Discord with fellow listeners. Go check it out, Discord.gg slash Odd Lots.

And if you enjoy OddLots, if you like it when we connect politics with what's going on in the markets and history like Victor Schwetz does, then please leave us a positive review on your favorite podcast platform. And remember, if you are a Bloomberg subscriber, you can listen to all of our episodes absolutely ad-free. All you need to do is find the Bloomberg channel on Apple Podcasts and follow the instructions there. Thanks for listening. There are presentations.

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