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- [00:00]
Victor Schwetz
Direct lending has been one of the most dynamic areas of the private alternative space these last few years, having grown massively as a source of capital for both corporate borrowers, but also financial sponsors that have kept going from strength to strength and have needed that private capital to foster the growth that they've been experiencing for leading alternative investing insights. Listen to Speaking of alternatives from pgim, Meta's open source AI models are available to all, not just the few.
- [00:31]
Joe Weisenthal
Because they're open source, small businesses, students.
- [00:34]
Victor Schwetz
And more can download and build with them at no cost. Learn more about the benefits@AI.meda.com Open.
- [00:43]
Tracy Alloway
Bloomberg Audio Studios Podcasts Radio News Joe, it started.
- [00:50]
Joe Weisenthal
It started.
- [00:51]
Tracy Alloway
It's what, like two, three weeks later?
- [00:54]
Joe Weisenthal
Yeah, so we had, yeah, three weeks basically since the election and the trade war, at least to some extent. Maybe a trade skirmish. We don't really know what's gonna happen. It's kind of begun. It started last night.
- [01:05]
Tracy Alloway
Yeah. So Trump, he didn't tweet. He said on Truth Social. Is that what it's called?
- [01:11]
Joe Weisenthal
And by the way, I respect that he still uses Truth Social.
- [01:13]
Tracy Alloway
Yeah, kind of a slap in the face to Elon Musk, I guess.
- [01:19]
Joe Weisenthal
I did a deadlift.
- [01:20]
Tracy Alloway
1, 2, 3 Jem and Jimmy okay, good barges.
- [01:26]
Joe Weisenthal
This is an After School special, except.
- [01:28]
Tracy Alloway
I've decided I'm gonna base my entire personality going forward on campaigning for a strategic pork reserve in the us where's.
- [01:34]
Joe Weisenthal
The best squid ink pasta?
- [01:35]
Tracy Alloway
These are the important questions. Is it robots taking over the world?
- [01:39]
Joe Weisenthal
No, I think that, like in a couple of years the AI will do a really good job of making the Odd Lots podcast. And people are saying I don't really need to listen to Joe and Tracy anymore. We do have Cha Ching, the perfect guest. Welcome to Lots More where we catch up with friends about what's going on right now.
- [01:58]
Tracy Alloway
Because even when Odd Lots is over, there's always lots more.
- [02:02]
Joe Weisenthal
And we really do have the perfect guest.
- [02:06]
Tracy Alloway
But he said he's thinking about or he's going to impose 10% tariffs on goods from China and 25% tariffs on goods from Mexico and Canada. For some reason, by the way, we're.
- [02:21]
Joe Weisenthal
Recording this November 26th Tuesday, and he specifically tied those tariff threats to Mexico in Canada, to which various conditions that theoretically can be met related to immigration crackdowns and the flow of drugs across the border.
- [02:38]
Tracy Alloway
Yeah, so this is the thing that's being debated in markets right now. To what extent is this a negotiating tactic? You know, you come in with a big threat and you start from there and you Sort of whittle it down. Or again, how serious is Trump actually about this?
- [02:53]
Victor Schwetz
Well, I think it's both domestic and international in a sense that if you think what drives it and why the likes of Bernie Sanders and the likes of Donald Trump read the mood of American people much more than institutionalized people like Biden or Harris is really to do what I describe, actually Danny Roderick of Harvard University described as a political trilemma of global economy. You cannot have globalization and economic integration, nation states and democracy all at the same time. You can pick up two out of the three, but you can't have all three, and you can't have all at the same time. So if you think of domestic and international pressures, I think Trump is reflecting both of them. If you go back in time, it's really Paul Walker deregulating global financial system, followed by Bill Clinton in 1994, NAFTA, followed by China entering WTO in 2001, have created Environment where people feel justifiably or not, but they feel that their jobs, their livelihoods somehow were stolen by other people. And so this is response to that, to say to people, I am looking after you. I am trying to protect it. But at the same time, there is also inflationary element that I think Trump fully understand, or he must fully understand, that the principal reason why Biden lost was inflation. And so the question is, when you start imposing those tariffs, you have to remember that up to half of all US Imports are intermediate goods. So if you actually impose tariffs, you're taxing your own manufacturers and your own exporters. So there is an element of domestic and international.
- [04:42]
Tracy Alloway
We are here with Victor Schwetz. He is, of course, a global strategist and author of the new book the Twilight before the how to Avoid a World on Fire. World on Fire. Sounds kind of ominous. Yeah. Well, since you mentioned the tensions in the neoliberal order, or what remains of it, what do you see on the horizon? Like, what political system are we actually on course for?
- [05:08]
Victor Schwetz
Well, that's a great question. One of the things my new book explores is that the last time we had the same degree of disequilibrium or polarization was really in 1930s. And back then there were three systems on the menu. You could choose communism, you could choose fascism, or you could choose constrained democracy. It wasn't a choice between freedom or liberty. It was just a question, how much freedom do we need to sacrifice in order to lower the tensions and defang the extremes? So today, in a very similar position, the world as a whole does not agree on what is the right social policies, political system, economic systems, business systems, and if we don't agree, what is the right thing to do? Alternatives proliferate. So today there are various alternatives competing against each other, whether it's China, Russia, Iran, US trying to redefine what it is. Europe is trying to redefine what it is. And we're in this period, which might last up to a decade, where ultimately we will find a compromise. Ultimately there will be a consensus that will be established. And the only question the book asks do we need to go through the world of fire of 1940s or can we just go straight into 1950s and forget the 1940s?
- [06:26]
Tracy Alloway
I'd sign up for the 1950s.
- [06:27]
Joe Weisenthal
Yeah, I'd choose the latter path. When you presented your trilemma. So just globalization, the nation state as we know it, and democracy. And you mentioned that candidates like Bernie Sanders and Donald Trump both to some extent, for better or worse, correctly or incorrectly, there is the economic vulnerability that perhaps people feel. But it also sounds, when you say nation state specifically, and when you contrasting that against globalization, it sounds like there is, yes, there is an economic impulse, anxiety, security, et cetera, but also this notion of legitimate sovereignty of a nation. A nation has the right to control its borders to some degree and to modulate and turn the dial on who can get in or out. It has the right, we see this in the war in Ukraine, the legitimate right to have a military and a precondition to having a military is some sort of domestic manufacturing capacity to build weapons.
- [07:24]
Victor Schwetz
Yes.
- [07:24]
Joe Weisenthal
It feels like there's a big element of what's being debated now in the US Specifically, is the re exercise of sovereignty across a number of different dimensions.
- [07:34]
Victor Schwetz
Totally. Totally. I mean, if you think of, I usually describe it as three I's, inflation, inequalities, immigration. Yeah, if you think of those three elements, if you combine them, that pretty much explains almost everything you need to know. So if inflation was much lower in the sense of absolute prices have come down to a level that people regard as acceptable, if inequalities, whether it's wealth or income, were much better managed, if immigration was not a major issue either in Europe or in the United States, most other issues, whether it's cultural wars or anything else, will just fade into oblivion. So in other words, the cultural issues color how you look at those three eyes. And so if you do not fix inflation, if you do not fix inequalities, and if you do not fix immigration and control of your borders, then culture issues become even More dominant, driving you to a certain conclusion.
- [08:33]
Tracy Alloway
Speaking of the culture wars, one thing I wanted to ask you from an investment perspective is we have also seen them kind of creep into the corporate sector, where companies basically are forced into choosing a side. So, for instance, Tractor Supply rolled back its DEI initiatives. There was the Bud Light boycott, and then Coors Light, I think Walmart just last night. Oh, really?
- [08:58]
Joe Weisenthal
Yep. This was a big news just last night. Walmart becomes. I'm reading an NPR headline. Walmart becomes latest and biggest company to roll back de Policies. I think that's huge.
- [09:05]
Tracy Alloway
Yeah, that's massive. How do investors handle the politicization of companies that at one point said they were just out to maximize shareholder returns and now seem to be doing something else?
- [09:18]
Victor Schwetz
Yeah, that's exactly what my book discusses. That the idea, neoliberal philosophy that really become embedded in the late 1970s, early 1980s really died around the global financial crisis around 2010. Over the last decade of 15 years, we'll all be trying to find, as I said, what is a new societal consensus? How important are corporates, private sector, public sector? What responsibilities do they have? So the idea of Milton Friedman that the primary objective of a corporate is to generate returns to shareholders actually died around 2019, when U.S. business Council already redefined objectives. But right now, societies still don't agree what is right, what is wrong. And so corporates are trying to be careful because corporates are nothing more than an outgrowth of societies they're in. I think one of the things I mentioned in the book, if societies decided that burning witches is the right thing to do, we probably would have been burning witches. And so corporates have to reflect society. And so what you find, corporates try to find the middle ground somewhere between extremes. However, as I said early on, five, ten years from now, and I keep looking in this book into Millennium and Z generations and what those generations actually want to have as they become the dominant voting bloc. Because today they only run 30% of the votes. When they become a dominant voting bloc, they will identify exactly the frontiers, the borders, how far you can go, where should you go. And at that point in time, the corporates could actually solidify. But right now, they're in a flux. They're reflecting purely societal flux.
- [11:01]
Joe Weisenthal
It feels to me like when Trump won in 2016, corporations in the way, they're like, you know what, the election happened, but we're going to continue on. This doesn't change our commitments to net zero. This doesn't change our commitments to diversity. This doesn't change our Commitments to gender equality and so forth. It feels like a. They're following the mood of the election much more this time. I was really struck by a utility company the day after the election, say, yeah, we're probably going to burn more coal now, in line with changing regulations. You see the Walmart news three weeks afterwards. I want to get at something else about the three eyes. There are tensions among them. And how much does the American way of life, the middle class or the upper middle class way of life in some way? There's a lot of tension about the cost of living. How much, though, is it somewhat predicated on inequality and the ongoing influx of cheap immigrant labor to sustain what people expect is this sort of like comfortable middle class to upper middle class life here?
- [12:03]
Victor Schwetz
Totally. One thing, whenever Donald Trump discusses current account deficits, I'm not sure he fully realizes it's an accounting identity. The deficit of one country is equal to surplus of another country. Unless we start trading with Mars or extraterrestrials, exports and imports, surpluses and deficits have to line up. And so one of the things the incoming treasury secretary is discussing is basically unwinding Paul Walker's revolution, which led to significant discontinuities. In other words, some countries been accumulating significant surpluses, other countries were accumulating significant deficits. So one thing American people probably don't realize that they can't just maintain consumption at the current level and still not run the deficits at the same time. If Americans run the deficits, by definition, China, Germany, Japan have to run the.
- [12:56]
Joe Weisenthal
Surpluses, but just on the immigration component as well, how much does the US Standard of living as we know it and our service sector labor, restaurants. I mean, I'm thinking back to the immediate post pandemic period when we had this fairly modest labor market tightening and people went ballistic about the quality of service they were getting in restaurants because workers didn't immediately go back to their jobs at the pace.
- [13:19]
Tracy Alloway
It would be very ironic if Trump won because of post pandemic inflation caused by labor tightness in part. And then part of his administration is basically imposing a new form of labor market tightness.
- [13:33]
Victor Schwetz
Well, that's right, but you also have to separate politics, optical illusion, what you're trying to do, and the reality, if you remember, well, you don't remember, but anyway, Eisenhower in operation, I think it was called wet pack operation, which is a horrible name. But Anyway, Eisenhower expelled 1.1 million Mexicans in 1950s only to see them all trickling back into the country in a matter of months. And years. So you have to separate politics, what you're trying to do, optical illusion you're trying to create, and the reality of what is actually being achieved. My view is that there is sufficient guardrails in a system in the US to prevent probably the worst outcomes that potentially could have happened. Now, the first, clearly guardrail is electoral process. US Is one of those countries that elections never end. I mean, they just carry on all the time. So if you think of inauguration In January, within 12 months, everybody will be in a midterm mode. Everybody will be discussing what's going to happen to midterm. So if you're not careful and you're causing significant frictions in the labor market, significant tightening, some inflation coming back, you have to roll back your policies. But there are other areas. Capital markets is a classic example. That's why you get your treasury secretary a hedge fund manager. Because at the end of the day, markets are bigger than individuals and they're bigger even than the underlying economies. So any distress that you're going to see in risk premia, in mortgage rates and interest rates or anything like that, they will have to pedal back a lot. So what that basically implies there is a friction here between political objectives, what you're trying to do, what you genuinely believe, and I think Trump probably does believe, it's a good idea to expel those people out of the country. Any economic reality, inflationary reality that you're going to face, don't also forget commercial and corporate interests, like he's talking about Getting Rid of Chips act or IRA Act. Over 80% of the money in those acts went into the red districts, which are represented in Congress, which has a tiny majority. You really are looking at only four or five seats they're going to have in a majority in the Congress. So there is constant tension. Now, that tension will create volatilities. Inevitably, they're going to create currency volatilities, they're going to create equity volatilities, interest rate volatilities. So that's inevitable. But the hope is that the guardrails between electoral cycles, tiny majority in Congress, between corporate interest, the capital markets, stickiness of institutions. Remember, you can't just unscramble a lot of the commitments that the United States have, whether it's a wto, whether it's NATO, whether it's UN Whether it's nafta, you can't really do that, that there is enough there that, as I said, tariffs are not going to go up to 20%. They will increase from 3, 4 to maybe 6, 7, 8, but they're not into 20. You're going to not be expelling millions of people. Labor force increase will shrink, but probably no more than 25, 30% rather than a much more robust numbers that could have occurred and that should moderate some of the inflationary outcomes and economic outcomes. Direct lending has been one of the most dynamic areas of the private alternative space these last few years, having grown massively as a source of capital for both corporate borrowers, but also financial sponsors that have kept going from strength to strength and have needed that private capital to foster the growth that they've been experiencing. For leading alternative investing insights, listen to.
- [17:20]
Tracy Alloway
Speaking of Alternatives from pjym, the forces.
- [17:24]
Victor Schwetz
Shaping markets and the economy are often hiding behind a blur of numbers.
- [17:29]
Tracy Alloway
So that's why we created the Big Take from Bloomberg podcasts to give you the context you need to make sense of it all.
- [17:35]
Victor Schwetz
Every day in just 15 minutes, we dive into one global business story that matters.
- [17:40]
Tracy Alloway
You'll hear from Bloomberg journalists like Matt Levine.
- [17:43]
Victor Schwetz
A lot of this meme stock stuff is, I think, embarrassing to the secular. Follow the Big Take podcast on the iHeartRadio app, Apple Podcasts, or wherever you listen.
- [17:54]
Tracy Alloway
You said earlier that the 1930s were your preferred historical analogy to our current time period. And one thing that happened in the 1930s was also tariffs and the Smoot Hawley act. And then we had retaliation and expulsion.
- [18:10]
Victor Schwetz
Of all the illegals too.
- [18:11]
Tracy Alloway
Oh, oh. So it happened.
- [18:13]
Victor Schwetz
US was doing six times expulsions in 1930s than they were doing in 1920s.
- [18:17]
Tracy Alloway
Oh, wow. So it happened. There was a big wave in the 1930s and the 1950s.
- [18:22]
Victor Schwetz
That's right. That's right.
- [18:23]
Tracy Alloway
America has a long history of expelling immigrants.
- [18:26]
Victor Schwetz
But not just the US was expelling in 1930s, so was Germany, so was many other countries. So desire to close the borders, the desire to expel foreigners, the desire to establish terrorists, protect local interests, it was all prevalent in 1930s.
- [18:43]
Tracy Alloway
But what I was going to ask is how worried are you? Or what's the potential for retaliation by other countries? Because we've obviously been focused on the US Everyone is focused on what Trump is doing. But he is not the only actor here.
- [18:58]
Victor Schwetz
No, he is not. And that's one of the issues that and I think he probably understands that if he's been negotiating with anybody, he has to understand it, that the other side will try not to reciprocate aggressively, primarily because of the size and importance of the US Domestic market. But you can't push them too far. You have to find that middle ground. And that's where discussion of negotiating tactics that I think you started from, I think comes in that I do think that the US Side understands that you have to find a compromise. And that compromise optically should look better for the United States. It's like if you think of renegotiation of NAFTA back in 2017, 2018, it hasn't actually changed a lot. But optically, it was presented as a much better case for the United States going forward. So you need to find that sort of middle ground. If you don't, if you actually do become aggressive, as it happened in 1930s, yes, you could have retaliatory actions very quickly. That's one of the things I keep highlighting that today people are angry, people are polarized, but they're not yet mad enough to burn down the house. Whereas in 1930s they were really mad. In other words, they were exacerbating primarily because degree of suffering that actually people encountered in 1930s were significantly worse than anything we experiencing. So people are not happy, but they don't want to burn down the house yet. Maybe another war, another pandemic, and people will be really angry. But that is not today. So if people are not angry, they're pulling back the politicians within their countries. Also because people are not angry, geopolitical tensions are kept under some degree of control. It's only when people magnify extremes that both geopolitical tensions and domestic tensions get out of control. And I don't think we're at that point yet. I said we might be at some point in time, but not today.
- [21:02]
Joe Weisenthal
One of the things, and it came up during the first Trump administration significantly, and it's almost certainly going to come up now, and I mentioned sovereignty, and an element of sovereignty is having a military, and an element of having a military is having a domestic weapons manufacturing economy. Trump has put a lot of pressure on the Europeans allies specifically, to spend more on defense. Very angry at their military budgets, their lack of military budgets, etc. And you know, in the dream society of peace, no one has to spend too much on military. How inflationary is that? If every. If, you know, there's this perception that the US Is gonna pull back the security umbrella, so to speak, if there's this trade pressure to spend more, if there is a major rearmament, even setting aside war, which of course would be costly on multiple levels, if there is this sort of major impulse among governments around the world, oh, we do have to spend more. Maybe we can't rely on the US Maybe the US is putting stress on us. Maybe we have to be more anxious about further Russian expansion. What does this do economically if more countries feel this pressure?
- [22:08]
Victor Schwetz
It depends on the extent. Because one of the things I discussed in a book in 1950s and 60s, there was no inflation. In fact, inflation didn't pick up until 68, 69 and then much more into 1970s. At the time, military spending globally were about 5, 6% of GDP. Some countries were up to 7%. Today, global military spending already up to about 2.2 2.3%. So in other words, we're spending more on defense than R and D. For example, on a global basis already in the US we are up to about 3.5, 3.6% of GDP. If all we're going to do is go up to maybe five and Europeans may go up to about three, there will be no inflationary impact at all. But if you have a much hotter conflicts, that's where military spending goes up to 15, 20, 30, 40% of GDP. So for example, in the World War I, US was spending 15% of GDP. In World War II, at the peak in 1944, US was spending 40% of GDP on defense. If you think of countries like Britain or Japan, they were spending up to 80% of GDP on defense. So when you get to that level, normal economy just collapses. It's just war economy. That's all you're dealing with. So long as we're staying around the area of the Cold War of 1950s, 1960s, that is we're spending maybe 5% of GDP on defense, I do not believe there will be any significant inflationary impact.
- [23:41]
Tracy Alloway
Despite all the scary things that we're talking about. And the fact that you mentioned the World on Fire as part of your book title, you kind of end the book on an optimistic note and you talk about things maybe getting better, specifically in the 1940s, maybe we'll get a big productivity boost and our social values will change. And you know, we could have a three day work week or something like that. Of course the irony is that I'll be retired by the 1940s, right. When that you're going to have to.
- [24:12]
Joe Weisenthal
Unretire in the 1950s when your retirement portfolio gets eaten away.
- [24:17]
Tracy Alloway
Yeah, like why the 2000-40s specifically and then like what causes you to be optimistic given everything that's going on, make me feel better?
- [24:28]
Victor Schwetz
Well, the way the way I look at it, human history is very convoluted and very complex, quite often contradictory. I like Kevin Drum phrase that I keep using Constantly in the book. He's a blogger from California. When he said humans are just overclocked primates, that beneath very thin layer of civilization lies 5 million years of primate evolution, and therefore we are still bound.
- [24:53]
Joe Weisenthal
By it, you were supposed to say something comforting.
- [24:56]
Victor Schwetz
We are tribal. We are subject to dominance displays and all the rest of it. And so human history is very complex. But one thing we've learned that over time, we overcome those challenges. Over time, productivity arises. Over time, output increases, health care improves, longevity improves. And there is no reason at all to believe that this period will not be followed by this nirvana at some point in time. Why 20 years from now? To me, that's a process at the time you need in order to achieve two things. Number one, a sustainable increase in productivity. So in other words, it's not just one country grows productivity because they're eating demand from other countries, and other countries are stagnating, but you actually have a global increase in productivity. To me, we're still residing on the bottom of the U curve, which means we have not yet figured out how to use technology sufficiently to maintain aggregate demand, to avoid unemployment and to drive productivity all at the same time. But over a period of the next decade or two, we will find a way to do it. Now, that probably will imply a lot of people will not have jobs, probably many of us will not be even working, but the productivity probably will be 4 or 5%, 6% per annum instead of something closer to 1% we have right now. So that's the first area. The second area is generational change, because there is a reason why baby boomers, the next generation, behave as they do. You know, give me freedom, give me the rope, and I can either hang myself or succeed. Give me an opportunity without determining outcomes. And the reason why that is so, because they no longer have a fear. They've never seen chaos. Yeah, they've never seen bad stuff. And therefore they assume that institutions of state or the environment will always be there. It's like the air you breathe. You don't think about it, but the younger generation, those who are today 30 years old, 35 years old, 25 years old, 20 years old, they actually have seen quite a lot of bad stuff occurring. From global financial crisis to never ending wars to pandemics, they've seen a lot of bad stuff. Not at the level that people who are growing up in the 30s and 40s saw, but nevertheless, quite a lot of bad stuff. And so the question is, when these younger people become electoral majority across most developed countries, what sort of world would they like to have? And to me, all the surveys are pointing to much more state driven world, much more community driven world. Even if you think of Republican Party today or Democratic Party, Republican Party today is not Ronald Reagan's Republicans. They're not Eisenhower Republicans. They accept that neoliberal framework is incorrect. The only difference between Democrats and Republicans is whether the role of the state will be indirectly through tariffs, through something else, or whether directly through investments, the way the Democrats wanted to do. But both of them essentially agree that the state role will increase, not decrease, the level at which state will penetrate your life in various forms, whether it's adjudicating discussions, whether anything else will change. So to me, this 20 year period, number one, allowed time to raise productivity and number two, allow time for societies to coalesce around a consensus. And As I said, 20 years is about the right time when things will get much, much better, in my view.
- [28:22]
Tracy Alloway
All right, Joe, we're going to have to wait for 20 years.
- [28:25]
Joe Weisenthal
I love so things are going to get better because we're really all primates and the next generation doesn't really believe in freedom as much. I feel great. I feel great. I feel great. Good. I feel reassured.
- [28:38]
Tracy Alloway
You know what I'm actually still really upset about is the politicization of cheap beer because I like both Coors Light and Bud Light. And you know, I don't want to make a political statement when I go to a bar.
- [28:50]
Joe Weisenthal
Miller High Life is.
- [28:52]
Tracy Alloway
Oh yeah, is the way through the neutral alternative.
- [28:54]
Joe Weisenthal
That's right. Lots More is produced by Carmen Rodriguez and Dashiell Bennett with help from Moses Ondam and Cale Brooks.
- [29:05]
Tracy Alloway
Our sound engineer is Blake Maples. Sage Bauman is the head of Bloomberg Podcasts.
- [29:10]
Joe Weisenthal
Please rate, review and subscribe to odd lots and lots more on your favorite podcast platforms.
- [29:16]
Tracy Alloway
And remember that Bloomberg subscribers can listen to all our podcasts ad free by connecting through Apple Podcasts. Thanks for listening.
- [29:28]
Victor Schwetz
Are you looking for a new podcast about stuff related to money?
- [29:32]
Tracy Alloway
Well, today's your lucky day.
- [29:34]
Victor Schwetz
I'm Matt Levine.
- [29:35]
Tracy Alloway
And I'm Katie Greifeld and we are.
- [29:37]
Victor Schwetz
The hosts of Money Stuff, the podcast. Every Friday we dive into the top stories about Wall street, finance and other stuff.
- [29:45]
Tracy Alloway
We have fun, we get weird and we want you to join us.
- [29:48]
Victor Schwetz
You can listen to Money Stuff, the podcast on Apple Podcasts, Spotify or wherever you get your podcasts.