Are We Repeating the 1930s? A Global Warning from Victor Schwetz
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Hi everyone, I'm Raoul Pal, the CEO and co-founder of Real Vision. Here at Real Vision, we're committed to give you the best knowledge, tools, and network to help you succeed in your financial future. If you're enjoying this podcast, please take a moment to give it a five-star rating. It truly helps us continue to bring top-tier content. Thank you so much.

Welcome back to Real Vision. I'm Ash Bennington. Today, I have the pleasure of speaking to Victor Schwetz, global strategist and author of The Twilight Before the Storm, From the Fractured 1930s to Today's Crisis Culture, How to Avoid a World...

But before we get started, just a quick reminder, tickets for our upcoming in-person crypto gathering in Miami are now up for sale. Head over to realvision.com forward slash CG 2025 to get yours. That's realvision.com forward slash CG 2025. With that said, let's jump right into it with Victor. Victor, let's talk a little bit about your background. We teased it at the open. The title of the book probably says it all. Tell us a little bit about yourself.

your background and how you came to write this book. Well, thanks very much, first of all, for having me. Well, I've been in a global strategy as well as investment banking for more than three decades. I worked in Australia. I worked in Hong Kong, in London, in Moscow, in Russia. I worked in New York.

across a variety of investment banks. And I'm still a global strategist based in New York. So I do have kind of a wealth of experience, both across nations, across systems, economic, political systems, as well as across various asset classes.

And the reason I wrote this book was essentially to ask what sort of phase of life that we live in. Now, where should we compare to? What is a period most comparable to our current environment? As you know, after COVID,

it, everybody was comparing to 1970s. To me, that's an absolutely false comparison. It's really 1930s. In some ways, not as extreme, of course, as the 1930s. But nevertheless, similarities between our era and 1930s are so numerous that it can't be a coincidence.

And so what I basically ask is, what was disrupting 1930s? What is disrupting us today? What are the answers? How can we avoid the world on fire of 1940s? And instead of going through terrible stuff, just go through straight into 1950s.

perhaps less free, but nevertheless, a lot less violent. So that's very quickly my background, as well as why I wrote the book.

I think when people hear the 1930s metaphor, they probably have to catch their breath a little bit, as traumatic as the 1970s were. Not that I remember them very well, but as traumatic as they were, certainly it did not end with, as you say in the title, a world literally on fire, the worst conflict in human history. Let's talk a little bit for some of the

underpinnings of that metaphor, how you derived them, and why you believe that could potentially be a scenario that we may be headed for now. What's the base of evidence that you looked at to reach that conclusion?

Well, first of all, you can look at commonalities. What do we have in common with 1930s? First of all, extreme income and wealth inequalities. 1930s was very close to Gilded Age. We today are getting pretty much on a global basis very close to the Gilded Age as well. Remember, 1970s was one of the most equal distribution of income and wealth ever.

What else do we have in common? Both 1930s and today are disrupted by technological innovation, as well as a deep financialization and disruption of financial markets. There are a number of other commonalities. One of the most important one, in 1930s, people no longer believe in a certain business, economic, social, political models.

That's why alternatives were proliferating. Some people prefer communism, some were going for fascism, some going for New Deal economics, some were going for democracy. Today, again, we are in a position where

Essentially, we no longer trust the existing system. I argued in a book, our global financial crisis probably was a line of demarcation between the neoliberal world that prevailed from late 70s, early 80s until around 2010. After 2010, we no longer agreed what is the right economic, political, and social model.

That's why China is proliferating its own model. Russia does. Iran, US is trying to find a new model. So does Europe. So that's very similar to 1930s, where competing systems were competing against each other. If you think of 1970s, nobody really argued. Communism was already fading away. It was just how you fine tune existing system rather than do anything else. What are the commonalities? Well, in 1930s, people lost trust in every institution of state.

From judiciary to Congress to presidency to international institutions. That's why the League of Nations have collapsed in 1930s. Today, we are very similar. There is absolutely no trust in any of the institutions of the state. So when I look at it, I basically said there are so many commonalities that it cannot be just a coincidence.

However, what drives it? Well, essentially, what drives it is what I discussed as a Fujiwara effect. What's Fujiwara effect is sort of a fusion of or commingling of two or three very powerful hurricanes.

What are those hurricanes? Technological revolution, which is the information age, that become highly disruptive from late 1990s onwards. Number two, deep financialization, which started with a Paul Walker in early 1980s, but again, become very disruptive towards the end of 1990 onwards. And three, the legacy of three decades of neoliberal policies. Once again, if you look at 1930s, very similar elements.

we're actually driving the disruption as well.

Thank you.

With over 20 years of experience, Plus 500 is your gateway to the markets. Visit us.plus500.com to learn more. Trading in futures involves the risk of loss and is not suitable for everyone. Not all applicants will qualify. Plus 500. It's trading with a plus. Future, let me ask you about the title of that effect. Is that a reference to feudal Japan? What's that? The... Fujiwara effect. Fujiwara.

Ah, Fujiwara. Well, no, Fujiwara effect is basically climatic effect. It's when one or two hurricanes, occasionally, they merge into one larger hurricane. They have to be within roughly 1,000 miles of each other. But when they do, they significantly strengthen the hurricane that you see. Now, it doesn't happen terribly often. And that's why I'm saying the period we're experiencing right now is actually quite unique.

It happened in 1930s, what can debate whether it happened in the 1860s, 1870s, 1880s as well. So those periods only occur maybe once in 50 to 100 years. And I said, that's what we're experiencing. The same applies to hurricanes. If you live in Florida, you're aware that sometimes those hurricanes can actually combine into one much larger hurricane.

Yeah. So it's this idea of the perfect storm coming. You know, it's interesting. I love these conversations about the broad currents of history. You know, for people like me who came of age during this period between the fall of the Berlin Wall in 1989 and 9-11 in 2001, there was this period, and you sort of talked about this, this idea that the rise of the technocrat that we'd

We'd figured out the broad contours of history. Francis Fukuyama famously called this period the end of history. History came roaring back rather ferociously to deny that its end had been anywhere near reached. And now we have this period, almost this interregnum period, as you point out, between the 2008-2009 era and where we are today as this equilibrium gets pushed back and forth as we try and see the directionality that this is going in.

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You talk about this idea, and it's a fascinating one, that you have these hurricanes colliding. Talk about what some of those hurricanes are in your view and how you see them.

Yeah, well, the first and the most important one is really technology. The information age, and I think McKinsey Global Institute was correct to emphasize that, that the impact of information age is probably at least 3,000 times the impact of industrial revolutions that preceded it.

Either Industrial Revolution number one or Industrial Revolution number two. In other words, what McKinsey is saying that information age has at least 300 times the waterfront. It's not just affecting one industry or two industries or three industries. It's affecting everything you do, including social interactions.

Secondly, McKinsey argued that it's progressing about 10 times faster than industrial revolutions have. The impact is around 3,000 times. What I've argued in the book, it basically what it does, it alters.

the functioning and role of labor and capital. What do you do? How do you do it? How you get compensated? What is your social responsibility? What is your respect that you get from the society? In other words, how does labor function is changing. How capital is functioning is also changing.

And that's your role of tangible versus intangible capital. How important are the intangible assets that we are accumulating? And how do they change functioning of tangible capital? So whenever you have that period that both functioning and role of labor and capital changes, that creates enormous amount of social dislocation. Essentially, people within the countries start moving at different speeds in different directions.

That is a reason for domestic polarization. And then the countries themselves start moving in different speeds and different directions. That's your recipe for geopolitical dislocation. So to me, information age is the essence. We've already gone through a couple of waves. Wave number one was through 1990s, which was essentially computer-based. We've gone through the second wave over the last 15, 20 years, which is essentially disintermediation of digits.

It's things like news, reporting, journalism, trading on New York Stock Exchange, entertainment, anything that is digital or based on digits. What we're going through right now

is the next era, which is basically disintermediating atoms or physical matter. That's basically a combination of artificial intelligence, 3D printing, cloud computing, all coming together. Now, that's going to disintermediate manufacturing workers. It's going to disintermediate logistics. It goes into automations, robotics, biotech.

And the final fourth stage will be singularity, which is at least 20 years away, but that's where you won't be able to differentiate human and non-human contribution. So that's the most powerful force. But there is another force called financialization.

Prior to 1980s, financial assets relative to real assets were roughly one-to-one. So in other words, real economy was a dog and financial economy was a tail. Starting from Paul Walker in the early 1980s, we started to financialize in an increasingly faster pace.

If you go to Paul Walker, for example, financial assets, real assets, roughly one to one. By the time we get to Greenspan Put, which is Black Monday of 1987, that was about two to one. By the time we get to Bernanke, it was three to one. Today, it's at least six to one. In other words, we have at least six times as much financial assets as the underlying real assets.

Why is it important? Well, to begin with, it actually propelled our growth rates in the 1990s. But then eventually, financialization became toxic. One of the things that causes or aggravates is income and wealth inequalities. Anybody who was closest to the fountain of debt and digital assets and equities and securities become incredibly rich. Anybody who relied on wages

and household chattels became poor. So one of the things it does, it aggravates income and wealth inequalities. The other thing it does, it actually creates disinflation, not inflation, creating a problem in ability of economies to grow. So gradually it became toxic. But what it's doing, it's turbocharging. It's turbocharging technological revolution. Because remember, information age has anything

technological revolution is a human spirit. Humans were always invented. But the speed with which it progresses depends on availability and the cost of capital. What financialization has done is created access capital. One of the things I keep describing in the book, we no longer live in the world of constrained capital.

We live in a world of abundant capital. If you have too much capital, then essentially any idea will be tried. Any project can get off the ground much easier than before. So you have a fusion of financialization and technology, which promises much higher longer-term productivity, which promises nirvana of productivity.

tremendous goods and services available. But in the meantime, it actually deflates the economies. In the meantime, it actually creates income and wealth inequalities. In the meantime, it eliminates jobs. It eliminates professions. It changes how capital and labor functions.

And so my argument is that the end of this Fujiwara effect, which is a merger of information age and financialization, at the end of it, we're going to have productivity growing probably 5% per annum compared to, say, 1%, 1.5% now. We are going to have a much wealthier and better society, greater longevity, and everything else.

How do we get from today to tomorrow? That is 20 years away. What's going to happen in the next 10 to 20 years as we inflame polarization, as we inflame geopolitical pressures more and more as we progress across this line? And what policies should we be putting in place in order to reduce the degree of tensions, defund the extremes, and try to transit this 10 to 20 years?

without excessive violence. If I can add just one more thing, that one of the things that aggravates it is also neoliberal policies that we have pursued over the previous three decades. Most of those policies worked very well in the ivory tower of economics, but have proven to be much less workable in a real environment on the ground.

So much to talk about there, a rich framework for how we think about financialization and technology and the last 30 or 40 years of global history. So much to talk about there. Let's just dive in and talk about the technology. We can come to the financialization point. Let's try and separate out those two threads. You know, I'm reminded of

the work of my friend, Nouriel Roubini, who's said similar things about this. And I think his three-step framework is that technology has been labor-saving, skills-biased, and capital-intensive. And these problems exacerbate some of the underlying economic inequalities that you're talking about. You framed it up very elegantly talking about labor versus capital. And I think that the implication there was there was almost this Cantillian effect, where the closer you get, from a monetary economics perspective, the closer you get to the monetary spigot

the greater your ability to benefit. It's caused this disjunction between the income derived from labor and the income derived from investment or from capital. It seems to be a significant problem. We see this in the United States. On the left,

and the right, almost equally, very different views about what's causing the underlying problem. But the belief that the symptoms are the same seems to be a broad piece of agreement. I think Steve Bannon and AOC seem to see the world in very similar ways in terms of the challenges that we see in the United States in some senses. Obviously, they have very different solutions, very different prescriptions. Talk a little bit about some of those challenges, how we got to where we were, and what you think the

solution can be to bridge us from this period where we're in today to this potential singularity event that may come, you know, perhaps two decades in the future.

No, you're absolutely right. Everybody, Ash, is highlighting that we live in a world where there is a significant differentiation of returns on labor versus capital versus your investments versus your daily life. There are disappearances of jobs.

If you think of newsroom today, they're not newsrooms of 1980s and 1990s. If you think of entertainers today, they're not entertainers of 1980s, 90s. All the winnings go to the winner. The loser gets nothing. The same applies to equity returns. That's why we have such a high concentration of equity returns, because all the winnings goes to the winner. Nothing is going to the loser. Now, what that creates is disruption. People expect that as they continue to work,

they will do better. They expect that their children will have a better life. But increasingly, people realize that that is no longer true. The longer you sit in your chair, the lower your marginal benefit becomes, the lower your marginal returns get.

And you still have a job because technology progressed far enough to reduce your marginal pricing power, but not far enough to replace you completely. But you understand that you are on the last leg, so to speak. You also understand that you don't know what your children should do. When my sons were asking me what should they major in a college,

I had no clue what to say because it's not totally clear. Everybody says do computer science, but believe me, within five, six years, we will not need programmers. That will no longer be required. So something that looks very good thing to do today, within five, six years, might become completely irrelevant. When I was coming in college, it was clear that finance and management was the things to specialize in. Right now, it is not clear that that actually...

what one should be doing. So what that basically does, it raises a question, why we have that? My answer, as I said, is a fusion of technology and financialization. Two, what sort of policies can address it? Now, in terms of policies,

There are essentially two camps. One camp says that neoliberal policies could have worked, that were practiced over the last three decades, if they were appropriately applied. So in other words, policies that emphasize that public sectors are inherently inefficient, quite often they are unjust. Private sector inherently is much more efficient. Government should constrain what it does and how it does things.

and give me an opportunity without promising me the outcomes. Give me the rope, and I can either hang myself with it or I can succeed. That sort of mentality that dominated our world from late 1970s, early 1980s to 2010 is dead. And the reason it's dead is that baby boomers

who increasingly were supporting those policies are becoming smaller and smaller proportion of the population. And the younger generation, the millennium, the Z generations, they don't view the world the same way. Multiple surveys coming out, which basically say very similar to their grand grandparents in 1940s and 50s, they basically say we're seeing a lot of very bad stuff.

We have seen the wars forever. We have seen peace dividend era, which ended around 2010.

It was going on for about 20 years prior to that. That finished. We can see conflicts. We can see disintermediation of labor. We can see disappearance of jobs. We've just saw pandemic. We saw financial crisis. And so younger generations seem to be much more state-oriented. So in other words, they are asking state for help. They are asking community for help. They are asking for guardrails, whereas a baby boomer generation like me never wanted any guardrails.

And part of the reason we never wanted to have them is that we never saw the bad stuff. We mostly saw pretty good things happening through 1970s, to some extent, but certainly through 1980s, 1990s, and early 2000s. And so there are two solutions. Either we pursue the neoliberal policies we have done over the last 30 years and do it much more rigorously.

Alternatively, we accept that the future is state-oriented. In other words, industrial policies, something that was a complete taboo only 10, 20 years ago, today is proliferating all over the place. And that, by the way, applies to Republicans as it does to Democrats. Direct state interference, whether it's tariffs or anything else, again, is proliferating. If you think of...

government involvement in healthcare, government involvement in education. Wherever you look at, government is becoming much more prevalent. They're also becoming much more prevalent from a regulatory perspective, even though Republicans keep talking about deregulation. The reality is there is more regulation rather than deregulation. So to me, when I look at it, we all agree that it's a problem.

We all agree that capital and labor are getting disintermediated. We all agree that the role of intangible capital is rising, a role of tangible capital decreasing. We all agree that we must address the question of inequalities and inequities in the system. Where this agreement lies is that whether, in fact, neoliberal policies simply were not properly applied

over the last 30 years, and therefore we should really go back and reapply them appropriately, or whether in fact we would agree with the younger generation that just like in 1950s, the role of the state and the role of community will improve. Again, if you think of 1950s and 60s as my book highlights,

You can't argue that it's just because of war and reconstruction the US was doing better. That is not true. Because exports in those days were a tiny proportion of America's GDP. What you can argue, however, that this was a period where middle class was created.

This was a period where real wages were rising. This was a period where a combination of wages and household chattels were providing bulk of the wealth rather than being close to the fountain of capital and digital assets and investments as it is today. We had a much higher productivity growth rates from 1950s and 1960s. Inequalities were much lower.

and in fact declining through this period. And this was also a period where state was very actively involved. Tax rates were very high. Marginal tax rate were over 70%. Estate taxes were as high as 90% back in 1960s. So the government was interfering, the tax rates were high, but nevertheless productivity growth rates were high.

The middle class creation was high. And you look at it and you say, OK, theoretically, in neoliberal framework, that's not supposed to happen.

because that's totally opposite to most neoliberal ideas. But it worked in 50s and 60s. And it seemed to me that the younger generation, having gone through some difficult time, is looking back to 50s and 60s. And therefore, the future probably will be state-oriented. But because societies have not yet agreed on what the right model is, we'll be switching from one to the other. Because remember, if societies cannot agree

on what is the right economic business political model, politics cannot agree. Politics is just reflection of society. There is no dysfunctional Washington. There are dysfunctional people. And so when people finally agree, Washington will become a consensual institution solving the problem. But until people agree, politics cannot agree. And so what we have a period right now, and probably for the next 10 years at least,

that we're swinging from one extreme to another. And all of those swings are basically a knife edge. It's about 2% of the voters swinging one way or the other. But eventually, as I said, maybe 10 years from now, a new consensus will emerge, as it did in 1947.

As it did in 1979, 1980, the new consensus probably in late 2020s, early 2030s will emerge. And I say it will be much more state-oriented rather than neoliberal, no matter how much I like neoliberal because I am a baby boomer. But one has to face reality, what we're likely to see.

Victor, is your view then that the Washington consensus, the neoliberal consensus that existed that was very much at the beginning of the Reagan-Thatcher revolution, that it was simply improperly applied? Or, as your second suggestion was, is it that there's some aspect that is just inherent to the way that this digital economy is moving, that technology and financialization have pushed us to a point where state intervention was always de facto inevitable?

I think it was de facto inevitable for a couple of reasons. One is, as I said, technology and financialization. But the other reason is that I don't believe in equilibrating systems. The history tells us that--

The economists and societies as they evolve tend to gravitate towards a higher accumulation of power, higher accumulation of wealth, as Piketty, for example, was describing back in his books. Eventually, something else have to counterbalance it. Now, what can counterbalance this? Only state has a power to counterbalance this. In other words, either you destroy it in wars and destruction.

or you deploy the state to counterbalance it. It's either one or the other. Think of Teddy Roosevelt breaking up trusts in the 1910s and Woodrow Wilson continuing that in 1920s. That's a state stepping in and saying, private sector can only be efficient when it's competitive. If it is not competitive, it's not efficient. It's not necessarily better than what the state are

can provide. And he was absolutely-- and both of them were absolutely correct. And so do we have a great deal of monopolistic power developing? The answer is yes. Do we have sectors, whether it's health care or many other services sectors, that really are monopolistic sectors? And therefore, private sector is not really improving efficiency of the outcomes.

But actually making things worse? The answer is yes. So to me, because neoliberal framework assumes that there is perfect information, there is relatively low friction, and there is competitive environment. If you have that, it's actually going to work. But the problem is most of the time we don't have that.

Most of the time, we don't have perfect information. We have friction, and we have monopolistic powers that develop. Now, that precludes neoliberal thinking of working through. And so to me, there is an underlying flaw in the system of neoliberal thought. In other words, it's not socially, nor politically, nor economically viable.

As Karl Polanyi back in 1940s was arguing, that if people were prepared to take the pain, pain of unemployment,

pain of reduction in wages, pain of dislocation, that maybe the clearances of that system could have worked. But since 1930s, we really never had any dislocation of any magnitude. We really never had any clearances. So if you allow the system to work, it could work. But people politically will never accept it. And people then mobilize themselves to fight against it. And

And so the clearances that neoliberal system assumes just never occurs because it's against the nature how human societies actually work.

And so to me, I always looked at the government as a balancing actor. So in other words, someone that can make that system work better. Now, no question, government always exceeds its mandate. That's what happened in the late 60s and into 1970s when we had a stagflationary period. But not to have government balancing, it's even worse.

So it's not that, as I said earlier, it's not that you're choosing between the good and the bad. You're choosing between the bad and the very bad.

Well, you know, I'm reminded of the Andrew Mellon quote from the 1930s, where you talk about this, the pain that people are willing to bear. It's a great quote. And look it up. This was Herbert Hoover's secretary of treasury, I believe. Liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate. The capacity to tolerate that pain in a democratic system didn't exist in the 1930s. And it would seem with the rise of financialization that it

is less likely to exist right now. I know Julian Brigden on Real Vision has shown the correlation between the S&P 500 and the labor markets, the inverse correlation, obviously, as stocks. This is the risk that you just can't simply tolerate a sell-off in equities because the economy has become so totally financialized that when stocks drop, unemployment spikes dramatically. So if we didn't have the capacity to tolerate this

in the 1930s, is there any capacity to tolerate this now when people go to the polls every two years and throw out the rascals who are in office and set in another set of rascals? Zero, zero, zero chance and zero tolerance. But one of the things you correctly highlighted is that I've come to a conclusion over the last decade that we no longer have proper economic cycles. In other words, we're managing cycles so tightly that

that neither corporates, nor investors, nor individuals know whether the beginning of the cycle or the end of the cycle. It could be beginning on Monday morning at the end of Tuesday morning. It could be as fast as that. So we've been managing economic cycles very aggressively since FDR New Deal.

In fact, Peter Drucker, one of the founders of management science, he was questioning it in early 1990s, which was 30 years ago. He was saying, basically, what will be the cost of us managing weather rather than climate?

So in other words, his view was that prior to FDR, the way the government worked is that if it's really, really, really bad, the government will step in. But otherwise, they will allow the cycles more or less to go through.

What started to happen after FDR, we seem to be setting temperature like 75, 80 degrees Fahrenheit, no less, no more. Occasional cloud is perfectly OK, but certainly no thunder, no lightning. Occasional rain is fine, but no floods. And so one of the things he was questioning, what price would we ultimately pay?

for subjecting economic cycles to so much pressure? Well, the answer, we know now what it is. We don't have clearances. We're accumulating inefficiencies. We get shallow growth rates. We know what the answer is. But what we also started to do, Ash, as you've mentioned, starting from Alan Greenspan's put option in October 1987,

We started to manage capital market cycles. Remember, prior to disruption of Bretton Woods, there was no need to manage, really, capital market cycle. But from 1970s onwards, we started to manage it. And so we now reach position, as you correctly said, that we can't tolerate asset price volatility. That was the essence of a Greenspan put in 1987. And the reason we can't tolerate it, because today, financial economy is a dog, and

And the real economy is just the tail attached to it. That's all it is. And so the whole objective of central banks is to make sure that the dog never sits on the table. Because God forbid, you have six to 10 times more capital than the underlying economies are.

That excess capital, or what I call cloud of finance, has different rules to the underlying economies. If you allow volatility of those assets in a cloud of finance to increase, they're going to destroy this little underlying economy on the bottom incredibly fast. Because as you continue to financialize, both households and corporates become asset-addicted.

So in other words, they take asset prices as a cue for making decisions whether to save, to spend, to splurge, and corporates doing exactly the same thing. They're taking it as a cue whether to invest, to do share buybacks, or to do something else. So you've reached the stage that we no longer even have capital market cycles.

Now, U.S. losing money, that's perfectly OK for Federal Reserve. But nothing systemic can be allowed. This is what we saw with Silicon Valley Bank. Usually something bad happens on Thursday, but Monday is fixed.

That's what happened with the reverse repo crisis in 2019. That's what happened with European central banks and spreads between, say, German bunds and Italian paper. We will never have shortage of US dollars now because there are swap facilities that were established in 2008, 2009 with unlimited funds.

supply of US dollar if it ever becomes disruptive. So you no longer have economic cycles. You no longer have capital market cycles. And you also live in a world of excess capital. So now that we have too much capital. Now, that explains how you can tighten monetary policy and spreads on how yield bonds fall.

At the same time, or you can ease monetary policy and spreads might increase, not fall. So in other words, the rules of constrained capital, the rules that drive DCM, discounted cash flows, the rule that guides how you allocate capital in a world of constrained capital no longer apply.

Now, what that basically means, there is no DCF. There is no neutral rates. That's why Jerome Powell keeps talking about sailing under cloudy skies, he doesn't see the stars. That also implies that risk-free rates become incredibly unpredictable and volatile. And it also means that risk premium, which usually is based on economic and capital market cycles, no longer work.

because there are no cycles anymore. So you can't determine whether risk premium should be 1% or risk premium should be 5% or more. So it becomes a very, very different world. And are we to blame?

In some ways, we are. I don't think anybody made the decision deliberately that we're going to eliminate economic cycles. I don't think anybody deliberately made a decision that we're going to eliminate capital market cycles. I don't think anybody made a decision we're going to create such a surplus of capital that we no longer have signals like yield curves. We no longer have signals like spreads.

It's just we stumble along over the last 40, 50 years, but that's the final outcome.

So many interesting points there, but you're hard to know where to begin. I should say just some reference points where we can talk about this. Jim Carson, who's frequently on Real Vision, talks to me about the mathematics of this tail wagging the dog effect in terms of exactly what you said, actually, that the idea is that the tail has actually become the financial markets that's wagging the dog. Anyway, the point is that the

the financial markets are ultimately what's driving the economy, not the other way around. The reference point has essentially been inverted. I really enjoy those conversations with Jim when we talk about that. But let me ask you this. It's almost this idea, you try and come up with a metaphor that people can understand about how this management of financial cycles rather than economic cycles work. For me, in a sort of a simplistic way that I think about it is it's the effect of kind of a

culling the underbrush, uh, so that you don't have forest fires. And then when you do get one, it's absolutely massive. Uh, but with that said, and just trying to understand this and when that pivot point moment was, was it the Greenspan put in 87, uh, because you put, you mentioned the new deal as one of the markers, as you begin to start managing, uh, at least, uh, the climate, if not the weather, but us industrial production grew dramatically, uh,

after the New Deal, through Bretton Woods, indeed, through the Nixon shock and after. Talk a little bit about how you understand that framework and see where those pivot points are, where the shift is, where that potential inflection point is, and where you could potentially get a nonlinear effect in financial markets as well as the real economy.

Yeah, you're absolutely right. It is a very good metaphor that you've just used, Ash, that essentially is eliminating brush and then having massive, massive fires. That is why the government is becoming more and more proactive. If you think of, for example, Trump administration.

incoming administration. There is a lot of conflicting objectives in this and that administration. They are pro-industrial policies and anti-industrial policies. They are pro-free market and they're pro-tariffs. They're pro-unions and anti-unions. They're pro-technology platforms, anti-technology platforms. There is a variety of contradictory views coming through. But one thing is clear.

that Donald Trump fully understand that money matters. And that's why if you think of appointments that Donald Trump is making and was making in Trump 1.0, for example, Trump 1.0 never replaced treasury secretary.

But he replaced multiple secretaries of state and national security advisors and the rest of it. He only replaced one commerce secretary. You know, Federal Reserve was not touched. And even now, think of it, Jerome Powell disagreed with Donald Trump twice, and Donald Trump did not respond. How many times does that happen?

Not many times at all. And so when I look at it, basically, despite all the chaos of elections, whether it's in the UK, whether it's in France, whether it's in Canada, whether it's in the US, where disoriented masses keep moving from one direction to another, despite all this noise, it is apparent to me that at least Donald Trump understands that money is important.

Because money is important, you can't put incompetent ideologues in charge of money. And so most of the appointments that he's making are actually fairly conventional in many ways and quite solid. Now, that basically tells you

that Donald Trump and any other minister, Cinco brothers of Italy, for example, as an example, they all emerge as a relatively conventional economists.

They are quite unconventional, conservative or otherwise in cultural and other areas, but quite conventional in every other aspect. Now, the reason for that is very simple, that they also understand that at some point in time, there will be that flip from,

being very placid and nothing happens, spreads don't rise, bankruptcies don't rise, provisioning doesn't rise, to something horrible occurring very, very quickly. Because remember, the risks have not disappeared.

They've just been expelled out of conventional economics and capital market cycles. So when you look at the screen, you're not looking at real life. I usually tell to the clients, you're just playing computer games. None of it is real.

But now and again, real life interferes with your screen because the risks are not gone. You just don't see it on the screen. So where are those risks? Well, they've gone out of the system. They are in polarization, in political outcomes, electoral outcomes. They are in geopolitics. They are in healthcare. They are in climate. And so if you were to ask, what is a flip? Those will be the flips.

Most of the time when the real life interferes with your very placid screen, which doesn't show that yield curve, yield curve tells you nothing, doesn't show spreads, doesn't show any tensions, doesn't show anything. Now and again, the real life comes through and suddenly everything looks horrible. Now, can you restart your screens?

Now, a lot of real life interference is actually not that serious. And the policymakers through macro prudential controls, micro prudential controls, through communication policy can restore your screen very, very quickly. You know, you come on Monday morning, say, oh, my God, it's going to be a terrible day. By Monday lunchtime, oh, you know, it's OK. By Monday evening, let's go for dinner.

And the whole thing is just gone. So a lot of that life interference can be fixed quickly, but sometimes it cannot be.

And that's what one needs to prepare for. So when investors ask, OK, what should I be looking for? You should be looking outside the system, not into the system itself. Don't focus so much on the provisioning of bad debts. Don't worry so much about bankruptcy levels. Don't worry so much about the yield curves or spreads. Look outside the system. Because whether it's electoral outcomes--

whether as a result of those outcomes, massive policy shifts, whether it's geopolitical outcomes, whether it's a healthcare, whether it's a climate, something outside the system.

can massively intervene. And when it does, it might take central banks and treasury departments sometimes months, sometimes years to restore your screen to the placid form that you expect. That's what you should be looking at, something that disrupts you from outside the system, not from inside the system.

Yeah, there are decades when nothing happens and there are weeks when decades happen. I think I've quoted Lennon with an O, John, not Vladimir more often on this show. But that quote is one that sort of haunts my consciousness. And it's this idea that when these when these exogenous shocks occur.

happen outside the system, your ability to restore things on your screen with another screen diminishes. We saw that, obviously, with COVID pandemic and the impact to the real economy. Let me ask you this. And to some extent, Russia, Ukraine, war too.

So let me ask you this. When we talk about this, some people have called them black swans, Nicholas Nassim Taleb's line for it. What are some of the ways where investors can position themselves if they're reading these gauges or not reading these gauges to get a sense of where they can find shelter in the event that one of these exogenous shocks happens from outside the system?

Yeah. In extreme cases, of course, if we go into the world on fire of 1940s, your portfolio will be the least of your problems. So in extreme cases, it is not really that relevant. But assuming we don't go into the world on fire of 1940s and focus on a more manageable risk, my argument for some time was,

that if risks are everywhere, risk is nowhere.

We have now risk everywhere. So if you think of 2000.com, that was really one asset class going bad, which spread a little bit wider. If you think of 2008, it was really only one asset class going bad. And then again, it spread wider. Today, problems of mines are everywhere. So people ask me, are you worried about commercial real estate? No, I'm not.

Are you worried about private capital, both equities and debt? I mean, at the end of the day, private capital is just public capital, highly leveraged with delayed prices. That's all it is. So are you worried about it? Are you worried about it? No. Are you worried about the various digital assets, which God knows what the hell these are? Are you worried about the parity trades? Are you worried about basis trades? Anyway, there are so many things to worry about.

Are you worried about concentration of returns? And the answer, no, I'm not worried about any of that. Why is that? So long as we don't have massive exogenous shock, all of that will be taken care of.

There will be special policies for commercial real estate. There will be special policies for private capital. All of that will be taken care of. And so I'm not worried about any of that stuff going wrong. Now, the question that becomes, if that is the case, then risk is nowhere. If risk is nowhere, that's an encouragement to speculate.

Whether it's a $6 million bananas, whether it's Bitcoin, whatever that is, that's an encouragement because risk is everywhere, but the risk is nowhere to be seen. That's true. Can you moderate that? Well, the answer is yes. That's where your macro and micro prudential controls theoretically should come in and trying to manage that degree of speculation. But then as you said, exogenous shocks coming outside the system could displace it very, very quickly.

Now, my view on those shocks is to say, if you say take Trump administration coming in,

Do you have potential shocks coming from tariffs, deportation, immigration, fiscal pulse, et cetera? The answer is yes. Are there guardrails on the system that should preclude the most extreme outcomes? The answer to me is yes. So what you should be looking for is the guardrails. How do the guardrails work? Now, what are those guardrails?

Well, first of all, as I said earlier, my view of Trump is that he understands money is important. So one of the most important guardrails clearly is the capital market and how capital market functions. Number two, Republican Party didn't really win in any meaningful way. That's why they have virtually no majority in the Congress. They're far away from 60 senators they require. So do you have some legislative guardrail? I think the answer is yes.

Do you have judicial guardrail? Yes. Remember, very few cases go to US Supreme Court, usually no more than 1% or 5%. Almost everything is decided at the federal and the appellate level. And there you have more than three times more judges appointed by Obama and Biden than appointed by Trump. Do you have that sort of a guardrail? The answer is yes. In a conservative US Supreme Court, they always lean towards state rights, not federal.

federal government. Liberal Supreme Court goes the other way around. They tend to lean towards federal government rather than the state rights. Now, we have a highly conservative Supreme Court. So does it mean it's potentially a problem for Trump? It certainly was a problem for Biden. Well, the answer, if they're consistently conservative, is yes. Is that a guardrail?

There are international guardrails, there are international commitments guardrails. So there is a variety of guardrails in the system to say that whatever announcements are going to come through, which potentially could be incredibly disruptive for the currency market, it could be disruptive for equity markets, that you probably could look through this.

And assume that those guardrails that I've just mentioned are going to work. But you need to monitor those guardrails. So if you were to ask me one question with the incoming Trump administration, it's your guardrails and how well those guardrails are going to work in order to minimize the disruptive impact on your screen as you trade or you invest.

Now, if you go more broadly, you can also argue from a geopolitical point of view. The way I look at it, that people in most countries are disappointed, they are angry, but they're not yet mad. Now, what it basically means, in order to be allowed to govern

they ask you to defang, to get rid of your most extreme views and most extreme policies. If you think of Brothers of Italy today, they're not Brothers of Italy five, six years ago. If you think of RN in France today, they're not RN as it used to exist in the prior decades. If you think of Republican Party, they are mass movement of grievances, but some of the worst excesses are already not there. And I think that will be expelled.

as we go forward. So in other words, globally, people are displeased. They're not happy, whether it's inflation, whether it's immigration, whether it's inequality, social and economic, they're not happy, but they're not yet mad enough

to amplify those extremes. Now, what it means from a geopolitical point of view, that they're pulling back the leadership of the country to reduce geopolitical pressures. That's part of the reason China is not invading Taiwan, a part of the reason why Russia still has to make sure that they somehow find an answer. And you can look at it at Middle East the same way in other places. So long as people are not mad enough to magnify the extremes,

then our geopolitical pressures will be boiling, but they're not going to be disruptive.

So in other words, we're going back to the Cold War of 1950s, 60s, and 70s. We always had Hamas. We always had Houthis. We always had Hezbollahs. Beirut has always been burning. Damascus has always been burning in some form. But it did not displace the modern supply curves for goods, commodities, services, by and large for labor for decades. So it's a very bad outcome, an unfortunate outcome for people who happen to live

in some of those places. But from a global economy, it's actually manageable. In other words, if we have a Cold War scenario, then military spending will go up probably to 4% or 5% of GDP. But in a hot war, it's usually 20% to 40% of GDP. Now, in the peace dividend, it was between 1% and 2%.

If you're saying a death in conflict, in a hot war, it's usually 200 per 100,000 people. In a cold war, it's five or six. In a peace dividend, it was less than one. Do you have a little bit more destruction, a little bit more deaths? Do you have more fiscal spending associated with defense? Yes. But this is not at the level that actually will disrupt.

are either global economy or your screens. And so the question that becomes, if you think of geopolitics, is to say, do you think you're on the cusp

of going from a Cold War to a hot war. If that is the case, that's a fundamental shift of everything that you do. If, however, you just keep bubbling at that level without exceeding those thresholds, then degree of disruption, despite all the news flows, is going to be very, very limited. The same applies to climate.

Now, clearly, climate is changing, but we're really not doing anything about it. And the idea is that somehow, over a period of 30 or 40 years, we will find answers. And yes, maybe the weather will be in a climate where the temperature will be 1 and 1/2 degrees or more warmer. Maybe that's the case. But we're really not doing anything right now. So there's things to watch out.

is extent to which it forces us to act much more proactively. Because if we take 30-year view, then both private sector and public sector will adjust. We're not going to have more investment on existing investment. We're not going to have more spending on existing spending. But if we must adjust in a space of only 5 to 10 years,

There is no question that this will involve duplication of investment and spending, will be highly inflationary, will create all sorts of problems. So the fork in the road here on a climate is to say, do you think we can continue going on as we are without encountering such a major climatic disaster that we will be forced to recognize that the changes must occur?

in a much shorter period of time, and therefore displays, as I said, everything on your screen. And a final point I'll make, because the technology and financialization is such powerful forces, if you want to, and to take a longer-term view, you just play into them. So in other words, any company, any industry, any sector where productivity and circular drivers are strong,

So you can grow irrespective of what happens around you. That could be another way of doing it. As I said, basically saying, all of this stuff could happen. There is no way I have a visibility. I'm just going with underlying strong forces, which to me is the information age and to me is finance. Now, a lot of people say, does it mean technology? No, because technology is everywhere. I don't even know what technology is anymore. Everything is technology.

Victor, let me ask you this. I know we're talking about this at the broadest possible level from the framework of global macroeconomics. But when it comes to the three largest economies in the world, the EU, the United States and China, do you have a view as we talk about the structural impact?

implications, the guardrails, the way these economies are structured? Do you have a long-term view about which of the three are on a relative basis, how those three are likely to move in relation to each other? Okay. Yeah, I do. I've been a bull on the United States for a long time. And the reason was very simple.

US is the only major economy that is adding labor, capital, and growing multi-factor productivity all at the same time. It has a large domestic economy. It has a relatively low trade dependency, because if there is no global cycles, you don't want to depend on them, because there is no cycles to depend on. So you want to have as much domestic economy as possible, and that's what the United States has. It has the best blend of

tangible and intangible assets, which means you can guarantee faster growth rates longer term. It has no geopolitical problems. In a sense, US spent less than 1% of GDP on Russia, Ukraine, and they almost defeated Russia. If they spent 2%, Ukrainians probably would have defeated Russia. So there is no geopolitical problems. There is an extremely wide waterfront of assets to invest in.

The only negative in the US is social polarization. It's actually one of the highest in developed countries. And it's not even clear how you're going to reconcile it, because clearly the coastal areas and the major cities are predominantly democratic. Everything else is red. So people no longer live next to each other. They no longer befriend each other. They no longer marry each other. They have very different life experiences. They have different education. There are so many differences.

that it's not even clear how you're going to bridge it. So the only major problem is that, and that's why I always say only Americans can kill America, but nobody else can. And so longer term,

Those pluses I've highlighted explains why US corporate ROEs are at 20%. While in Europe, they're 10%. In China, they are 8% or 9%. It explains the cash flow generation. It also explains why you would pay 22 times forward in the price to earnings multiple for US. Now, China, in my view, is in a liquidity trap.

Essentially, they overinvested. They overcapitalized. Efficiency of capital utilization is very low. It's not even clear how they're going to get out of this. And it's reflected in everything from the rising leverage level to declining ROEs. It's reflected rising I-COR, incremental capital output ratios. It's reflected in diminishing cash flows. It's reflected in negative deflatus.

That's why nominal GDP is growing slower than the real GDP. China needs fundamental restructuring of the economy, as well as changes in politics and geopolitics to restart. Theoretically, China is below technology frontier and can continue to grow faster over a prolonged period of time.

but it requires a very substantial shift. In other words, far more consumption, far less investment, far less savings, far less reliance on export. You have to open up some free space between public and private sector, between state and non-state. You need to reduce geopolitical tension. There's a whole range of things that China needs to do. So it's a very complex environment. And European Monetary Union

doesn't really have a lot going for it. In a sense, it doesn't add labor. It adds wrong type of capital. It doesn't grow multi-factor productivity. Theoretically, they have a very large domestic market, but it's really split into 20 smaller markets.

It does have monetary sovereignty, just like the United States. But ECB is not connected to individual economies the way Federal Reserve, for example, or BOJ are connected to the US economy or the Japanese economy. Europe is a cauldron of all geopolitical and social tensions that you can possibly envisage.

They've got a wrong balance of tangible and intangible assets. And so you look at it and you say, OK, I understand why cash flows are low. I understand why they're struggling getting REs above 10%. And I'm not totally sure why I should be paying 15 times for this rather than 22 times for the United States. Now, the only thing to say, if you disagree with me on cyclicality,

And if you say, Victor, I think in 26, global economy is going to accelerate significantly, then you should buy European Monetary Union. Because remember, their trade dependency is four times the US level. They know the trade dependency of the US is 25% of GDP. They're almost 100% of GDP. So think of European Monetary Union as a mercantilist bloc.

that will prosper if, in fact, we return back.

too much faster growth rates. But as I said, I don't believe we will. I think we're stuck in a twilight with the global economy roughly growing 2.5% in market terms, not better than that. China will never again support global growth. It will never again support global commodity complex. There is nobody to step in into China's shoes today. So US effectively is sucking in all the growth globally into the United States.

because of those structural positives that I have just outlined. And as I said, the only thing that concerns me is a social polarization in the US. Yeah.

I think it concerns everyone, but on balance, as you say, first of all, there's never a perfect scenario for any economic area. And you talk about the balance of probabilities, the guardrails and the structure, a very, I think, bullish case that you've just highlighted in the longer term, but maybe that's just my bias as being someone who's a very pro-American, but

A fascinating conversation, Victor. I hope you can come back and join us again and continue to explore this framework that you have of viewing the world. I think our viewers are really going to enjoy it. We'd love to have you back on the show. I would love to. Thank you very much for having me. Victor, finer thoughts. Let me give you an opportunity here because we've covered so much ground to sum up what we've talked about here today. Final thoughts, key takeaways from this conversation.

Well, to me, the key takeaway, if you're an investor, don't get preoccupied with economic cycles. They don't exist. Don't get preoccupied with capital market cycles. They no longer exist. Assume that excess capital, abundant capital will continue. Look for risks outside the system. That's what potentially could make a difference. If you're more politically oriented,

The key takeaway should be that today we don't have a globally recognized social, economic, and business model. That's the essence of my book that I wrote, The Twilight Before the Storm, where we're basically saying equivalent to 1930s, we are in a stage of confusion.

That confusion would last, in my view, at least 10 years. And therefore, from a geopolitical and political perspective, expect continuing swings in

from one extreme to another as disoriented and dissatisfied people keep moving from one answer to the next without finding an answer that they are happy with. That probably will be, at least from my point of view, the key conclusions.

Victor, fascinating big picture conversation here. And once again, for people who are interested in learning more, the book is called The Twilight Before the Storm from the Fractured 1930s to Today's Crisis Culture, How to Avoid a World on Fire. Thanks for watching. Thanks for listening. Have a great afternoon, everybody.

So within this, we have parties. You can choose the VIP track and then you might be on a boat party and you're doing something else and going for a dinner there or meeting people in different venues and bars. So there's lots going on. It's like a mad treasure hunt. I like the idea of just hanging out with you guys, drinking a rum or a glass of champagne and putting the world to rights and just really celebrating you as our members and our community. And it's a thank you for that as well. It'll be an incredible event.

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