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

Summary

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

Bloomberg's Odd Lots podcast, hosted by Joe Weisenthal and Tracy Alloway, delves into the intricacies of finance, markets, and economics. In the live episode released on November 5, 2024, the hosts engage with a panel of experts to analyze the impending election's impact on various economic facets. This summary encapsulates the key discussions, insights, and conclusions drawn during the episode.

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1. Election Day Dynamics and Live Recording

Timestamp: 00:00 - 02:30

The episode kicks off on Election Day, capturing the palpable tension and anticipation among listeners and participants. Joe Weisenthal introduces the live format, highlighting the swift turnaround time to address timely election-related content. Tracy Alloway and Zvi Moshevitz set the stage for a multifaceted discussion, emphasizing the convergence of politics, markets, and policy.

“Joe, this is very special. This must be our fastest turnaround time on an episode ever.”
— Zvi Moshevitz [00:30]

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2. Prediction Markets: Accuracy and Constraints

Timestamp: 07:08 - 09:05

The conversation delves into the reliability of prediction markets like Poly Market and Kelshi. Zvi Moshevitz, an advisor to Poly Market, shares firsthand insights into a live experiment conducted during the recording, illustrating how prediction markets react to real-time information.

“My belief in efficient markets has been completely debunked.”
— Joe Weisenthal [04:30]

Brad Setzer emphasizes the significance of prediction markets as valuable data points, asserting that they incorporate diverse information sources, thereby enhancing market accuracy.

“I take them at least as seriously as any other data point or source of information that we have available.”
— Brad Setzer [08:17]

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3. Polling Reliability and the Herding Effect

Timestamp: 09:05 - 14:06

Neil Dutta and Skanda Amarnath discuss the diminishing reliability of polls, attributing it to methodological biases and the increasing prevalence of partisan pollsters. Brad Setzer introduces the concept of herding in polling, where pollsters align their results to avoid criticism for unexpected outcomes.

“Polls are scammier now.”
— Neil Dutta [11:17]

Tracy Alloway elaborates on how procedural adherence in trade policy limits swift responses to economic shifts, further complicating market predictions.

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4. Real Markets and Macroeconomic Indicators

Timestamp: 14:06 - 22:36

The panel shifts focus to real markets, examining fixed income trends, regional banking health, and the broader economic landscape. Skanda Amarnath posits that recent economic data suggest a trend toward slower growth and benign inflation, regardless of the election outcome.

“The next few rate cuts are really just baked, I mean, regardless of who wins.”
— Skanda Amarnath [16:21]

Brad Setzer discusses the interplay between prediction markets and financial markets on election night, noting the potential for significant volatility based on incoming results.

“The odds will move dramatically and they will respond very quickly to every piece of news.”
— Brad Setzer [20:40]

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5. Monetary Policy Trajectories Under Different Administrations

Timestamp: 15:53 - 19:18

Skanda Amarnath provides an analysis of how monetary policy might evolve under a Trump or Harris administration. He contends that near-term monetary decisions are driven more by economic indicators than political shifts.

“I think the underlying dynamics in the economy are still kind of pointing to slower growth, benign inflation, and probably ongoing monetary policy recalibration.”
— Skanda Amarnath [16:21]

Neil Dutta echoes this sentiment, highlighting that policy changes are unlikely to occur abruptly post-election, regardless of the victor.

“Policy is not going to be changing on a dime.”
— Neil Dutta [17:08]

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6. Productivity Growth and Inflation Implications

Timestamp: 35:15 - 38:43

The discussion transitions to productivity growth, with Brad Setzer expressing skepticism about the optimistic projections fueled by advancements in AI.

“The skeptical line on productivity growth is we're talking about percents per year every year over the course of 10 to 20 years.”
— Brad Setzer [35:15]

Neil Dutta offers a nuanced perspective, noting that while productivity has outperformed pre-pandemic levels, the measurement metrics may not fully capture the efficiencies introduced by technologies like AI.

“Productivity growth is actually outperformed post pandemic in a pretty meaningful sense relative to what we were seeing pre pandemic.”
— Neil Dutta [35:57]

Zvi Moshevitz adds that realistic productivity assessments must consider both measurable transactions and the qualitative improvements AI brings to welfare.

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7. Globalization: Resilience Amid Claims of Fragmentation

Timestamp: 46:02 - 65:38

Brad Setzer interviews Tracy Alloway about her recent paper on globalization's resilience. Tracy challenges the prevailing narrative of deglobalization, presenting data that underscores continued, albeit "unhealthy," globalization driven by tax incentives and China's export-driven model.

“The world has continued to globalize, but in unhealthy ways.”
— Tracy Alloway [47:59]

She highlights the U.S. pharmaceutical industry's reliance on low-tax jurisdictions like Ireland, illustrating tax-driven globalization's persistence despite political rhetoric.

“These exports are a reflection of deep weaknesses which... make China incapable of growing at the pace it wants without relying more, not less, on exports.”
— Tracy Alloway [50:27]

The conversation further explores U.S.-China trade dynamics, emphasizing that despite tariffs and trade wars initiated by both administrations, globalization remains robust, with continued trade surges from China.

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8. US-China Trade Policy and Corporate Taxation

Timestamp: 54:32 - 65:38

Tracy Alloway dissects the impact of the Tax Cuts and Jobs Act, revealing that major U.S. corporations, particularly in the pharmaceutical sector, have leveraged loopholes to minimize U.S. tax liabilities by offshore operations.

“The six biggest pharmaceutical companies clearly pay less to the US government after the Tax Cuts and Jobs act than they did before.”
— Tracy Alloway [55:22]

She critiques the act's effectiveness in encouraging companies to repatriate profits, noting that many have simply shifted intellectual property offshore without substantial tax contributions to the U.S.

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9. Policy Recommendations for Addressing Unhealthy Globalization

Timestamp: 74:17 - 78:55

Tracy Alloway proposes strategic policy adjustments to mitigate unhealthy globalization. She advocates for revising the corporate tax code to eliminate incentives for offshoring and harmonizing industrial policies with allies to counterbalance China's economic maneuvers.

“My immediate priority... would be... to address the remaining incentives in the corporate tax code that have clearly encouraged or not discourage the migration of intellectual property and production outside the United States.”
— Tracy Alloway [74:17]

Additionally, she suggests mutual agreements with European allies to recognize each other's goods for subsidy qualifications, thus fostering a more balanced and open market against China's restrictive practices.

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10. Final Thoughts and Takeaways

Timestamp: 79:01 - End

As the live recording concludes, the panel reflects on the ongoing election uncertainties and anticipates future discussions. The emphasis remains on understanding the intricate links between political outcomes and their economic repercussions, underscoring the episode's central theme: navigating the complexities of election dynamics within the broader financial and economic landscape.

“Look, Tracy, thanks for really closely reading my paper.”
— Zvi Moshevitz [70:56]

“This has been another episode of the Odd Lots podcast.”
— Tracy Alloway [80:15]

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Conclusion

The "Odd Lots Live: What to Watch on Election Night and Beyond" episode provides a comprehensive analysis of the 2024 election's potential impact on markets, monetary policy, productivity, and globalization. Through expert insights and data-driven discussions, hosts Weisenthal and Alloway guide listeners through the multifaceted economic scenarios poised to unfold based on electoral outcomes. This episode serves as a crucial resource for understanding the interplay between politics and economics in a rapidly evolving global landscape.

Transcript

[Joe Weisenthal]

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[Tracy Alloway]

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[Tracy Alloway]

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[Joe Weisenthal]

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[Joe Weisenthal]

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[Brad Setzer]

The forces shaping markets and the economy are often hiding behind a blur of numbers.

[Zvi Moshevitz]

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.

[Brad Setzer]

Every day in just 15 minutes, we dive into one global business story that matters.

[Zvi Moshevitz]

You'll hear from Bloomberg journalists like Matt Levine. A lot of this meme stock stuff.

[Tracy Alloway]

Is, I think, embarrassing to the SEC.

[Brad Setzer]

Follow the Big Take podcast on the iHeartRadio app, Apple Podcasts wherever you listen.

[Zvi Moshevitz]

Bloomberg Audio Studios Podcasts Radio News hello and welcome to another episode of the Odd Thoughts podcast. I'm Tracy Alloway.

[Joe Weisenthal]

And I'm Joe Weisenthal.

[Zvi Moshevitz]

Joe, this is very special. This is actually. This must be our fastest turnaround time on an episode ever.

[Joe Weisenthal]

Well, it is election day. Yes, I think we had technically a faster turnaround day on the day of the Baltimore Bridge collapse.

[Zvi Moshevitz]

Okay, fine, fine. But this was like 4 hours of content that we are squeezing into a very timely episode. So what you are about to hear is a live recording of the Ott Lots podcast, multiple panels, multiple conversations that took place on November 4th at a recording in front of a live live audience in New York.

[Joe Weisenthal]

That's right. So today is election Day. Last night was election Eve. We figured a bunch of people, if they have preferences in this election, we're probably anxious, looking for something to do other than just sort of refresh the Internet and refresh Twitter all night. So we figured why not get some of our favorite guests over the years from the podcast and get our fans who we always love seeing our listeners and hang out and talk politics and policy for a little while. And I didn't drink, actually, but some people drank.

[Zvi Moshevitz]

I stress drink. You did?

[Joe Weisenthal]

Yeah, I didn't.

[Zvi Moshevitz]

But what better way to spend Election Day than listening to some live recordings of the A Thoughts podcast? So what you are about to hear is a selection of the conversations. We had some amazing guests. So we started with Zoe Liu. She is of course a senior fellow for China Studies at the Council on Foreign Relations. And we had her with Jordan Schneider of the China Talk podcast. We've spoken to both of them before, but we had a great conversation about what's going on in China right now and what could possibly happen with us China trade.

[Joe Weisenthal]

Right. And then where this particular episode will pick up. Then we had a conversation with Neil Dutta of Renaissance Macro Research, Skanda Amarnath executive director at Employ America. And we had a special guest that we kind of have to explain here for a second because otherwise some of the conversation might not make any sense. We had Zvi Moshevitz, and he is a prediction markets better. He's a writer. He's a legendary designer of magic, the Gathering decks. He's an advisor to Poly Market. He used to be a Jane street trader. We're going to have to have him on sometime, Tracy. Just totally separate.

[Zvi Moshevitz]

He was great. I just want to talk to him about deck construction.

[Joe Weisenthal]

Deck construction and Jane Street. Let's do like that episode.

[Zvi Moshevitz]

Okay. But Zvi, in addition to all those things, set up a betting pool on Manifold, for which podcast he would actually appear on in 2024. And one of those options was Odd Thoughts.

[Joe Weisenthal]

Right. He set it up at the beginning of the year. And so there's all these different possibilities. Which podcast will ZV appear on? And just again, to sort of set the stage, we never announced that Zvi was going to be part of this.

[Zvi Moshevitz]

He was our mystery guest.

[Joe Weisenthal]

He was our mystery guest. But we flashed the market onto the screen behind us while we were at Caveat, the place where we recorded the episode. And then during the conversation, we watched as the market slowly repriced.

[Zvi Moshevitz]

Repriced up and down.

[Joe Weisenthal]

It was very strange. My belief in efficient markets has been completely debunked.

[Zvi Moshevitz]

No, you know what it was? This is actually really interesting. There was someone in the audience who was using free manifold tokens to bring the probability down even as V was actually on stage. So a live experiment in how prediction markets work, how they actually work.

[Joe Weisenthal]

Right. Well, actually, one of the things you'll hear is V talks a lot about one of the constraints in prediction markets being a capital constraints among traders. So here is a guy who apparently had no capital constraints because he had free tokens. And you see how much that destroys that. So we started off that conversation about all things markets, finance, what to watch for, polling, what to watch for in tonight's election.

[Neil Dutta]

Yep.

[Zvi Moshevitz]

And then our headliner of the evening was Brad Setzer. He is of course a senior fellow at the Council on Foreign Relations, one of our favorite guests. We've had him on I can't even remember how many times.

[Joe Weisenthal]

Nine times now, probably.

[Zvi Moshevitz]

Yeah. He was also a trade advisor to us, Catherine Tie under the Biden Administration. So someone who definitely knows what's up when it comes to, I guess, the sausage making of trade policy. So a fantastic group, a great evening. Big thanks to everyone who came. And if you weren't able to make it in person, we hope you enjoy this version.

[Joe Weisenthal]

Right, so start off. Check out our first, our conversation with Skanda, Neil and Zvi. We have some great guests coming up.

[Zvi Moshevitz]

Now's your chance to make money. Now's your chance you could place get on manifold.

[Joe Weisenthal]

We have one of the people. I'm not gonna say who it is, but one of the people that we will be having on the show is an avid prediction markets trader expert in this area. And I'm not gonna say who it.

[Zvi Moshevitz]

Is, but it's a mystery.

[Joe Weisenthal]

Truly, it's a mystery guest. So let's bring to the stage, in no particular order, we have Neil Dutta of Renaissance Macro Research, frequent odd lots guest. And we have Skanda Amernath of Employ America, another frequent odd lots guest. And we have Zvi Moshevitz, he's a writer, trader into prediction markets and stuff. And currently on manifold markets, there's a 20% chance that he appears on odd lots in the year 2024. So we're doing a little test of prediction markets, or, sorry, efficient markets, right here live on stage. So thank you so much. He's ready to insider. He hasn't insider traded on his own market yet, but it's just sitting there. We'll see. We'll see.

[Zvi Moshevitz]

We'll see if the odds move.

[Joe Weisenthal]

We'll see if the odds move.

[Zvi Moshevitz]

They should be at 100%.

[Joe Weisenthal]

So, yeah, I guess prediction markets are debunked if they don't immediately move to 100%. Actually, Zvi, let's start with you. When you look at any prediction markets and you're also advisor to Poly Market. Yes, I'm an advisor to polymarker Trader, Prediction market guy. Oh, there it is. It moved up to 44%. It works. It's still not high enough. Like, it's still.

[Brad Setzer]

I mean, someone's not sure.

[Joe Weisenthal]

It's literally on stage, folks. It's literally on stage right now.

[Brad Setzer]

Like, how do you know to bet? Yes. But you don't think you should take it? Far from.

[Joe Weisenthal]

Yeah, it's up to four. Okay, whatever. Maybe if someone. Oh, there it is.

[Brad Setzer]

There we go.

[Joe Weisenthal]

Someone tweet this out. There's still 14% gains to be made. The IRR of 14% in like 30 seconds is incredible. Anyway, when we see these odds, not for this market, apparently, but when we See these Poly Market and Kelshi Odds, et cetera, they say, whatever. How seriously should we take them?

[Brad Setzer]

I take them at least as seriously as any other data point or source of information that we have available. They are the best thing we have.

[Joe Weisenthal]

It's up to 94%. There's still a chance that you're not appearing on this stage right now.

[Zvi Moshevitz]

Yeah. Wait, why do you. They're the best thing we have. Like, please explain in the context of this still being stuck at 94%.

[Brad Setzer]

Well, if you're on the Internet, what other source do you have other than the actual broadcast? Like, obviously, if you're looking at the poll, not just the polls, but like the actual ballots, and you're like, oh, I guess we know who won, then that's better than a prediction market. But anything short of that that we have is going to be incorporated into the prediction market. Right. So, like the polls, the aggregations, the projections, all of that gets worked into how we trade the prediction markets. So for the prediction markets to be wrong, there has to be a systematic mistake. And those mistakes do happen, and you can, in fact, profit from them, but they tend not to be very large.

[Joe Weisenthal]

Neil, what about real markets? And you're always watching what's happening. I said real markets, the ticker djt, what's happening in rates, maybe regional banks. What are you seeing over the last few days? Or what are you going to be watching in terms of the real markets and how they trade?

[Skanda Amarnath]

My work suggests that the Trump trade, particularly with respect to fixed income markets, wasn't so much Trump, I mean, as it was just stronger economic news. I mean, you have to remember that the increasing probability, at least up until recently, that Trump would sweep into the White House, that was coinciding at a time of meaningful data surprises to the upside. We had a strong jobs number, strong retail sales. Jobless claims have been low. So I think it's less about politics and a lot more just about the data as it's been coming out. I mean, in terms of what I'm going to be watching in particular, my sense is that people will just replay the 2016 playbook if that's what happens. And if you get the alternative, in which case I think it's likely that Vice President Harris wins, you probably get a Republican Senate, you probably see, you know, a rally in fixed income.

[Zvi Moshevitz]

Skanda, what are you watching? Because with polls, so obviously there's a lot of, you know, people have strong opinions about the usefulness of polls. I kind of think, like, who is answering the phone Anymore if someone, an unidentified number is calling them, it feels like there's a bias towards a certain demographic that's actually picking up the phone. But what are you watching?

[Neil Dutta]

Yeah, I mean, I think there's a clear limit on what polls are going to be able to tell you beyond a certain point. I think that itself just kind of tells you it's close. It's probably 50, 50. Your ability to discern whether it's 5050 or 6040 is pretty limited even. Like you could make a case for 60, 40 for either side. But beyond this, we don't have a lot of information that polls tell us polls are scammier now.

[Joe Weisenthal]

What do you mean by that?

[Neil Dutta]

There are some establishments that seem a little less scrupulous, that do a good job of gaming the rating systems. So I guess to give the finance analogy, so passive versus active, the idea of just like, okay, just trust the aggregation more so than individual polls. But now we have a weird set of partisan or quasi partisan pollsters that come in less transparent methodologies. And the attempts to make process to better understand who's better, who's worse is not great. So we actually have aggregators that I don't pay as much attention to relative to just like, okay, if there's a good poll from whether it's a Republican establishment or Democratic establishment, there are some good ones on either side. I think that's got more information in it. But even then it's very limited. There's a ceiling. I mean, I'd be more curious to see about the geographic distribution. So obviously the swing states come out 7pm onwards. We get some early states that report early but are red. Just seeing the geographic distribution is going to be kind of interesting because that's actually the polarizing thing I see, which is urban versus more Democratic trending, suburban versus rural. And it's ultimately about the margins and how those shift relative to 2020. That's still not really clear about how many new Trump voters can come out of the woodwork. There were a lot in 2020. And how much will a lot of those suburbs swing further to the left? Yeah, these are all kind of open questions. I don't think we have great ways of benchmarking probability beyond a certain point.

[Joe Weisenthal]

ZV and Scanda, maybe. Can you explain the herding controversy? I've been seeing a lot of tweets like pollsters are hurting. And what's that? And then, and I don't how do you heard exactly? Like, what is that all about? Like, what are they doing?

[Brad Setzer]

So the idea is if you have a poll and you come up with the same result as every other pollster, and so everyone is saying Harris plus one or Trump plus one, you come out with Harris plus one or Trump plus one or zero, then no matter what happens in the election, this is not your fault. Right? You didn't screw up. But if you were to say Harris plus four and then Trump wins that state, then suddenly everyone looks at you and goes, you're terrible. Your career is over. You're an idiot. And to a lesser extent, if it's Trump +4, so what a lot of these pollsters are very clearly doing statistical analysis of the polls is they are cooking their books, putting their fingers on the scale to make sure that their number comes back very close to what everyone else is saying. And there are only a few, like New York Times Morning Consult, that are clearly not doing that. And often they'll also do this thing where they'll take a poll and they'll see the result is, like, way off, and then maybe they just won't release it or they'll find a way to adjust it or whatever they have to do. And Nate Silver posted recently on Twitter, the chance of all these polls coming in this close, even if the race was actually tied, was on the order of 1 in 9 trillion. So it's clearly just not a coincidence.

[Zvi Moshevitz]

So what actually happens on prediction markets on election night, I imagine, like, things are going to be moving quite a bit. But also, when does the actual payout occur for Trump versus Harris?

[Brad Setzer]

So the payout depends on the exact terms of the contract. So four years ago, we had a lot of very interesting discussions going on behind the scenes and a lot of very public yelling as different sites proposed to pay out based on the fact that Biden had actually won the election and other people very much disputing that Biden hadn't won the election and in fact, buying Trump long after Biden had won the election.

[Joe Weisenthal]

That was weird.

[Brad Setzer]

Yeah, I made some money on that. That was kind of awesome. And so, I mean, like, the bets before election day, they did okay. I won them, but should have held my money. The bets after were so much better. But the way it works is there's a technical rule for when the bet pays out, and this can vary based on where you bet. So one of the ways to do it is you say, okay, if the networks call the election, then that counts because they're being very conservative these days. And then we pay out immediately, no matter what happens. And that way you don't have to hold it for weeks and weeks, including if there's another dispute, which we all hope there isn't. But you never know. Trump. That could easily happen.

[Joe Weisenthal]

It occurred to me. So you're now at 96% chance of appearing on odd lots. It occurred to me there may be some ambiguity of the rules because this, this audio could, I don't want to jinx it, but maybe it never comes to see the light of day. And so maybe just the same way people are wondering the technical rules of your contract here and whether interviewing you on the stage is the same as appearing on the podcast. Let's get to a little macro. Neil, monetary policy. Have you been contacted about being either the next Fed chair or being on the FOMC in the event of a Trump victory?

[Skanda Amarnath]

What are you trying to say?

[Joe Weisenthal]

I am not saying anything. I'm simply asking whether the transition team.

[Skanda Amarnath]

Has reached out to not a role, not been contacted. And I wouldn't expect you though I know people that are that traffic in those circles.

[Joe Weisenthal]

Okay. Do you, what do you like when you think about the medium term trajectory of monetary policy under a theoretical Trump administration or a Harris administration? Does tomorrow night sort of change your outlook on that type of policy?

[Skanda Amarnath]

Not really. I mean, I think in terms of what I typically do, as you know, I don't let political outcomes really affect my kind of near term decision making in terms of what my monetary policy call is going to be. I think the next few rate cuts are really just baked, I mean, regardless of who wins. And that's because I think the underlying dynamics in the economy are still kind of pointing to slower growth, benign inflation, and probably ongoing monetary policy recalibration. So I don't think that's going to change before the first quarter of next year. So I think they'll keep cutting. It's really just about how much they will.

[Zvi Moshevitz]

Skanda, I'd be curious to get your take on this as well. What kind of economy or how would you characterize the economy that either Harris or Trump will inherit?

[Neil Dutta]

So I mean, all things considered, employment's still very high, inflation is generally falling. I mean, each month there are bumps. That's not a bad hand to be given. Productivity growth looks like it's picking up a gear, at least for the time being. All these things are pretty good. At the same time, to Neil's point, there are going to be some. We're seeing signs that growth will be slower in Q4 and probably Q1, and for that reason, like we're going to see some bumps in the road I don't think that policy is going to be changing on a dime. Even if Trump goes for really aggressive tariffs, these are not things that will be done overnight. And so that's the kind of friction in the system. Everyone likes to talk about politics and how it's relevant to markets, and there will be some election reaction, but it's like, as 2016 kind of told you. Right. Whatever correlation structure was there pre election doesn't have to be there post election. And I do think that's something just to be mindful of as far as policy will take more time to change. I think it's pretty clear that if it's a Harris administration, it's probably with the Republican Senate. There's some compromise on tax policy. You're not gonna get big things done. But I don't think there's even a huge appetite within the Democratic Party to do big things. That's a little different in terms of. They've already passed a lot of legislation, but in terms of Republicans, they actually have a good shot at trifecta.

[Skanda Amarnath]

Right.

[Neil Dutta]

And if that happens, then the box opens up. They might cut corporate taxes more, but there's also more discretion on, like, trade and immigration that Trump could wield.

[Skanda Amarnath]

Well, I was just gonna say, I mean, if you go back to 2017, remember that discussion around monetary offset? We were all talking about monetary offset because the idea was, well, you know, Trump is gonna be this sort of inflationary demon, and, you know, the Fed has to do all this sort of rate hikes to offset it. And in hindsight, there wasn't really a monetary offset. They ended up doing more or less what they were planning to do. So I just think it's important to try to separate these things out and just take the world as it comes to you. I think that's as opposed to trying to forecast and front run potential fiscal outcomes.

[Joe Weisenthal]

If you're the Fed, Zvi, do you see anyone? Whoa, you're back down to 50%.

[Zvi Moshevitz]

How did that happen?

[Joe Weisenthal]

You've fallen. Someone. Someone hit the cell. And apparently the order book must not be. They're like, all right, I'm going to take my profits at 96%. And I guess the order book was pretty thin because whoever just sold you, like, really got a bad price on that. So you shouldn't have sold whoever that was sold with all free money. Oh, okay. There you go. Yeah, we got to get some liquidity here. Is anyone doing, like. Do you see people in your world trading cross between the prediction markets and the real markets? I don't know what to call them. Do you see much of that? Where it's like this level of confidence in Trump is not consistent with this thing we're seeing in, I don't know, Bitcoin or something like that. Are you seeing much of that?

[Brad Setzer]

So you earlier asked what happens on election night, and what happens on election night is that the odds will move dramatically and they will respond very quickly to every piece of news. And there's both the reaction that happens when the news is available to those who are paying attention. So, like, if the counties file their numbers online, there are some people who are downloading the information from the counties and they have their spreadsheets ready and they're analyzing all the details and they're trying to stay ahead of the game. And then there's the people who are watching the news and they're like, they've networked, called Wisconsin, and then they suddenly, you know, the money comes in.

[Joe Weisenthal]

But of course, it's kind of embarrassing, isn't it? I remember that last time, the people I was following on Twitter clearly knew stuff before the official calls, and yet the market seemed to react to the calls in many cases.

[Brad Setzer]

That's right. So if you know what the calls are going to be, you can clearly make some money by doing something before the market moves. But this is often true of there's one set of people who have one set of information and the set of people who have a different set of information which is coming to them slower, right? They're more square action, they're more sophisticated, and they still help make the market more accurate in general. But they're often predictable somewhat in advance. But there are transaction costs.

[Zvi Moshevitz]

Neil, I know one of your people.

[Brad Setzer]

Only have so much capital. Like all the major players on election night are going to be somewhat capital constrained in the prediction markets because they're often going to see there's some sort of systematic mispricing or some sort of opportunity, and they're going to have to watch their bankrolls and make sure they don't spend too much. Right? So in a situation where everyone's looking for these big mispricings, but then, like, you have these different waves, and then one of the things you notice is the early movement on the prediction markets is often actually ahead of the financial market movements and things like currency and things that are open and you can, in fact make money for real if you are watching about this, because the beta thing is real, right? So, like, you go into election night, you say, okay, what is going to be the Trump you know, beta for everything in the world, right? Every currency exchange, every index that's still trading, whatever you can get. And if this was going on during market hours, it would be so much more fun.

[Zvi Moshevitz]

Wait, who's actually trading on the prediction markets? Like, walk us through the typical person who's doing this and whether or not that introduces some bias into the probabilities. Because I imagine for something like polymarket, you have to have a vpn, you have to be somewhat crypto literate, fluent. Yeah, yeah. So, like, does that influence some of the numbers that we're seeing?

[Brad Setzer]

So you could be a French multimillionaire, you could be a Scottish teen, is the other traditional joke. But the answer is, you know, all types of people around the world are getting into it. But yes, because it's polymarket, you see a difference between polymarket and say, you know, Kalshi or, you know, these other sources predict it that are allowing Americans in and that aren't crypto. Because there's absolutely a bias in who has easier access to polymarket, who wants to get involved in polymarket, who's eager to do that. And that bias is favoring Trump this year. Trump is much more for crypto. You see these associations in various different ways. So polymarket has been several points stronger for Trump than other similar prediction markets. And you could also, of course argue that, no, it's polymarket, that's fine, and then everyone else is biased and, you know, who is really to say you're.

[Joe Weisenthal]

Up to 98.6 now, Skanda, tell us more about what specifically you're going to be watching. You mentioned the rural urban splits that even in the red areas we may get signal from some of these things. Are there bellwether counties that are useful to watch? Waukesha County, Wisconsin is like a short term crucial. Waukesha county now you're down to 58%. Is there anything like that? Like what are. What are. Talk more about how you're going to be consuming the information and running.

[Neil Dutta]

Yeah, Bellwether counties are basically fake, right? So, like, what matters? Like, you can have. We've had in 2020 and 2016, where.

[Joe Weisenthal]

It'S like P hacking, isn't it? Because you can always find some county that always vote for the winner, but it doesn't necessarily mean anything. All right.

[Neil Dutta]

I mean, we have every county is moving somewhere at the margin, right. And every marginal vote counts. So if, like, let's say Harris is really well at just trimming Trump's margins in rural counties, that's like a big deal. In the same way that Trump's ability to amplify them in 2020 was very underrated by the polls, by general expectations among forecasters that he was able to scale rural turnout. Even the percent margins, which people obsess about. Percentage margins in a lot of deep red counties did narrow in 2020, but just because turnout was ramped up even further, Trump got more margin. And so a lot of states were a lot closer than what the polls predicted. You find your ways to cluster the counties, whether it's urban, suburban, exurban, rural, whatever way you want to swing it. That cluster, every single one matters, right? Every part of it. There's going to be some movement among the urban counties, those that are trending blue, and every vote counts on all of them. So it doesn't really make a lot of sense to obsess about a particular county where if it flips from red to blue, that can happen at the exact same time a bunch of red counties that are deep red become even redder. And that's like what happened in Florida, for example.

[Joe Weisenthal]

Right.

[Neil Dutta]

So we had like Pinellas county was highlighted as that chooses the winner, and it wasn't in 2016, it was Hillsborough county, and that wasn't right. So these flipped blue and it didn't really matter. And I just. That's a good warning for a lot of this election night coverage.

[Zvi Moshevitz]

Neil, I know one of your favorite things to do is to tear apart the ISM manufacturing survey. What happened to the vibes like the soft data post the election and how should we measure it? I guess not the ism, clearly.

[Skanda Amarnath]

Well, I mean. You mean when? Right now?

[Zvi Moshevitz]

No, after the election, next week.

[Skanda Amarnath]

I mean, I think you would. I would expect to see a pretty meaningful increase in consumer confidence and small business sentiment, primarily because, you know, small business sentiment. I mean, that survey really skews, you know, I mean, think about who's putting it out. It's the nfib. What do they do? They're a lobbying organization on behalf of, you know, sort of right wing causes. So my sense is that the small business sentiment number would go up a lot. Consumer confidence would probably go up a lot, too. Whether that actually translates into real consumer spending, I have my doubts. But that's kind of what you saw after the 2016 period. Right. And similarly, you saw a big decline in sentiment after the 2020 election. But again, that didn't really translate into what people were actually doing. So I think 2016 was an interesting case because things like the ISM, which you mentioned, I mean, Trump was Coming into office at that time at the front edge of a global manufacturing recovery. So the so called sort of Trump boom, I mean that was, it was an ABE boom and it was a, you know, you saw that in a Macron boom. I mean, everyone was kind of feeling it at the time. So it wasn't just us specific this time around. I mean, manufacturing frankly looks a little sluggish. I mean, there hasn't really been much, there's been a lot of construction of manufacturing facilities. And I know Skanda has been pointing that out quite a bit, but if you look at actual manufacturing production, it hasn't really been great shakes.

[Joe Weisenthal]

Is election uncertainty. And you see this in the anecdotal comments on some of these surveys, Whether it's the ISM or the Dallas Fed, which always has very colorful anecdotal aspects. Is election uncertainty real or is that just a code word for people who prefer Trump hoping that that's the outcome and then that may be changing their outcome, their outlook?

[Neil Dutta]

I'm sure it's probably both.

[Joe Weisenthal]

I think there's like somewhere there really deals not happening. It's like, I don't, we don't know.

[Neil Dutta]

Who'S gonna be President Trump.

[Joe Weisenthal]

I'm serious.

[Neil Dutta]

Well, think about all the enacted legislation, right? So if you say there's like, if, let's say ira, maybe parts of chips that have come up under scrutiny or parts of the infrastructure bill. These are all things that are cast as, these were all left wing items that Biden passed. And if it depends on whether Trump's gonna be in office or not, if you perceive it as like, well, it's a 50, 50 proposition, if Harris is in place, then it's gonna stick. If Trump's in place, it may or may not stick. Then I can actually see like a case for like if you have any business attached to a government contract or a government subsidy that might actually be genuine. I think that, I think there's also some partisanship though, obviously.

[Skanda Amarnath]

I think generally speaking in my career, I mean, you talk about these sort of formal measures of policy uncertainty like the one from Nicholas Bloom that's widely cited. My experience is that when that index is high, it's usually a time to go long equities, right? So when policy uncertainty is high, it's usually a time to dip your toe into the market. It's a buying opportunity for stocks. Historically.

[Joe Weisenthal]

Direct lending has been one of the most dynamic areas of the private.

[Neil Dutta]

Alternative space these last few years, having.

[Joe Weisenthal]

Grown massively as a source of capital.

[Brad Setzer]

For both corporate borrowers.

[Tracy Alloway]

But also financial sponsors that have kept.

[Neil Dutta]

Going from strength to strengthen and have.

[Joe Weisenthal]

Needed that private capital to foster the growth that they've been experiencing for leading alternative investing insights.

[Zvi Moshevitz]

Listen to Speaking of alternatives from pjim.

[Marin Sums]

Not everybody likes talking about money. Some people find it awkward. Sometimes they even find it a little embarrassing. I do not. I like talking about money, whether it's the boardroom, the newsroom, the trading floor. I've spent the last 30 years talking about money, writing about money and talking about it and writing about it a little bit more. I'm Marin Sums at Webb and every week senior reporter John Stepek and I answer your questions about personal finance and we discuss the best strategies for making the most of your money. Listen in for the kind of insights and explanations everyone can use to help them make better saving and investment choices for themselves and their families. My question is whether you think maxing out my company Pension Match is enough.

[Brad Setzer]

For when it comes to saving for.

[Skanda Amarnath]

My pension, should I attempt to pay.

[Zvi Moshevitz]

My child's university fees and living costs?

[Tracy Alloway]

My partner and I have excess savings.

[Marin Sums]

So should we overpay on our mortgage.

[Zvi Moshevitz]

Or should we put the money into stocks?

[Marin Sums]

From Bloomberg podcasts, tune into Maren Talks Money, Follow Marin Talks Money on Apple podcasts, Spotify or wherever you listen.

[Zvi Moshevitz]

Can we go down the line and talk about like what everyone's day is actually going to look like tomorrow? Like, how are you spending the election? Let's start with Neil.

[Skanda Amarnath]

So like I said, I mean the election is actually a very small part of what I try to do on a day to day basis. I'll probably, I mean just to front run it, I'll probably be spending some of my spare hours working on this piece that I was talking to you about.

[Joe Weisenthal]

Thank you. We have a new daily Odd Lots newsletter and Neil has promised to be one of the contributors and so we have a piece coming from him.

[Skanda Amarnath]

So it just sort of gives me an opportunity to kind of take a step back because I have no edge. I don't try to pretend to have an edge on, on political stuff. And one of the things I've been thinking about is just the sort of this neutral interest rate. I mean the Fed's talking about it all the time and just exploring the idea. Is there like a dual neutral rate? I mean, for example, the neutral rate for housing, I mean whatever it is that it's not working. I mean housing is not working with mortgage rates here. So the neutral rate for housing is clearly a lot lower than maybe it is for say the housing. I mean the labor market, I don't know. I mean, and so if you sort of buy into that, I mean, it would imply that the Fed needs to do a bit more to get certain areas of the economy going. And if the Fed's lost the ability to stimulate housing, you know, I think that that's a potential problem. So I'll probably be focusing more of my time on that as opposed to checking out the returns in, I don't know, what is it, Cuyahoga county or something.

[Neil Dutta]

I too am working on a piece for that's forthcoming as well on productivity. But look, elections are for people who like numbers changing and like following them, which is probably most of you, I'm going to guess on some level if you're interested in finance and markets. Yeah, it's just a fun exercise of seeing how margins shift. I have some spreadsheets prepared for myself just to kind of track things if the New York Times needle isn't up and running. And yeah, I'll probably take it easy in the day, but maybe I'll catch a nap and then I will probably be up till at least 3am so.

[Brad Setzer]

As a writer, I want people to read what I'm writing and I want them to think about it and pay attention to it and learn from it. And I want to influence them. So this past week has been a case of if I write about something, no one's going to pay much attention to it because they're going to be focused on the election. And so I kind of take this time off because I'm not going to try and put anything up except for my weekly update until after the election is settled. So instead I've had a chance to program some tools that are going to help me write over the long term. I might go see a movie, have a nice long lunch, relax, and then of course in the evening I'm going to absolutely be following. I'll have the prediction markets up in various windows and various devices.

[Joe Weisenthal]

How many screens do you have?

[Brad Setzer]

I have three 30 inch screens. So I have one horizontal and two vertical on the two sides. Yeah, as a trader you have six. But now that I'm trying to stay away from that, I think that three is about right. And so about one of them will probably be various prediction markets, especially Poly Market, in various different markets within them. So you need a lot of space. And then you're watching the television like everybody else and you're watching Twitter and you're just trying to get through it and process it because you know that even if you don't really want to pay close attention. What else are you going to do tonight?

[Joe Weisenthal]

What else is anyone going to be doing? Wait, real quickly, why has the spread on some of these markets between say Kelshi and Poly Market not been arbed away? What is the constraint to free money?

[Brad Setzer]

The constraint is liquidity and access to the market and the capital costs of committing the capital to multiple places, moving the money in and out. You know, everyone's kind of a little bit terrified every time they initiate any crypto transaction that somehow the money's going to vanish or something wrong is going to happen. I mean it's very, very unlikely in any given transaction it's going to happen. But I definitely have an opinion. By the way, I want to be clear, like when I say, like who knows which one is wrong. I very strongly believe that the Poly Market line is the one that is biased in the situation due to the access issues. Whereas I think that the line at the other markets is much more reflective of what the line kind of showed in some air quotes sense.

[Joe Weisenthal]

Be actually real quickly, Skanda, since you mentioned productivity and I know you have some thoughts on productivity, Zvi, in fact you just mentioned coding up some tools to make your life as a writing easier. I think you both have some difference. You think we're going to have like 50% GDP growth in the coming year on year because of AI or something like that?

[Brad Setzer]

No, not 50% this year, no.

[Joe Weisenthal]

But give us the short synopsis of what you think is coming for productivity growth.

[Brad Setzer]

I think that the skeptical line on productivity growth is we're talking about percents per year every year over the course of 10 to 20 years. And I think that's sort of the ultimate bear case for AI just doesn't do what we want or expected or hope it would do. And the bull case singularity superintelligence world completely transformed.

[Neil Dutta]

Great.

[Joe Weisenthal]

Skanda, what's the gist of the productivity? And then also Neil, but what's the gist of your productivity piece that you have coming for the odd lots daily newsletter. Yeah.

[Neil Dutta]

So just speaking in terms of the realized data, and I try to start from how's the data measured? What are we actually capturing? Which may not be indicative of sort of conceptually what we associate with productivity, but productivity growth is actually outperformed post pandemic in a pretty meaningful sense relative to what we were seeing pre pandemic. So Pre pandemic was roughly 1 in 0.4%. If you take longer look backs and we've been down post pandemic period, something like 2%. Maybe it's 1.9, maybe it's 2, but that's on an annualized basis. That's pretty meaningful deviation. And there are a lot of reasons why. But I think that it all kind of has to come back to the measured set of transactions, inflation adjusted, divided by total hours worked. That is basically our most measurable version of productivity. It comes with lots of flaws. For example, Google Maps that everyone uses on a day to day basis. Right. It's ad supported. Right. It's not supported by a final expenditure. It should filter in somehow into our productivity statistics. But we don't have a great way of saying how. And estimating that's actually really hard. So for example, there's a lot of things that probably AI can make our lives very efficient in the same way the Internet's made our lives very efficient, but it didn't necessarily lead to a lot of transactions. And that's kind of the open question that's like for a lot of AI breakthroughs, how that leads to. It may improve a lot of welfare, but the actual nuts and bolts of how it leads to more people spending in ways that are reflecting real things and not price increases, that is like actually a big part of the ballgame.

[Zvi Moshevitz]

Neil.

[Joe Weisenthal]

Neil, any thoughts on productivity?

[Skanda Amarnath]

I mean, I agree with Scanda. The measured data is what the measured data is or the data are. I mean, it's over, it's 2%. That's very strong, I think, for what that means for me is that basically this is one reason why we should not worry about inflation. Okay. And that should give the Fed plenty of COVID Right. This is something we talked about earlier in the year. Right. Is that it's one thing to just see the inflation data, it's going up without having a rational framework for why it's going to keep doing that. And the fact that productivity has been fairly robust over the last year, I think it means a couple things. Number one, we should sort of resist the temptation to kind of buy into the stagflation story. You can't really have stagflation if productivity is doing what it's doing. But it also makes the likelihood of some inflation reacceleration highly unlikely as well. Where is it coming from? Unit labor cost growth over the last year is basically zero. So for a Fed that has a very labor market centric view of how the inflationary process works, the robust growth and productivity that we've seen I think is an important kind of, you know, story in terms of mitigating inflation risk.

[Zvi Moshevitz]

If you had to choose, what would you say is the biggest constraint for Trump and Harris both? Like, is it political? You know, maybe like Harris gets in and doesn't have a trifecta. Like maybe the Republicans would have. Is it something like the deficit? Choose one for each.

[Skanda Amarnath]

Well, I mean, personally, I think that it's going to be. I mean, the markets have been sort of like, oh, the unified gop. But I mean, even if Trump, even if it was to be a unified GOP government, the margins in the House would still be very, very thin. It's not like they can just steamroll whatever the hell he wants next year. But I would probably say the bond market's the constraint. I mean, you have to be worried about what's the appetite going to be in the fixed income market to fund a huge sort of deficit spending plan.

[Neil Dutta]

Skanda, I go back to the politics. I think American government makes it very hard to pass things in general in the wisdom of that where everyone wants to debate. It's just even under a unified government, to Neil's point, Lisa Murkowski still has a lot of leverage. Susan Collins has a lot of leverage. They probably will pass some things. It's easier to pass things under a unified government than under a divided government, but that's probably still binding constraint. It was the constraint on Biden in 2021 and 2022. I mean, even though interest rates are going up, the real question was what is Joe Manchin willing to say yes to? And so even if, like, we can debate how much, what's the nature of public finance constraints? Oftentimes they are reduced ultimately to, like, the hardball legislative politics.

[Joe Weisenthal]

I've alluded to this before, and I don't want to, like, let it shade my view, but I would like mortgage rates to come down in next two years. Do we need to get, do we need to, like, do we need a spending crackdown? Do we need to go into austerity mode to get mortgage rates back to roughly somewhere in the ballpark of the 2010s?

[Neil Dutta]

I mean, I would say to the extent you can. Free of real resources, right? I mean, to the extent that you're actually reducing inflation or getting the Fed to be more confident about the willingness to lower interest rates, that would probably be the main mechanism.

[Joe Weisenthal]

I won't let my mortgage affect how I assess the economy, but I'm just saying.

[Neil Dutta]

Yeah, but I think that's like the tricky thing. You can do a lot of deficit reduction that doesn't necessarily move the needle on inflation or the Fed's reaction function. But healthcare costs, for example, healthcare costs in general need to be constrained. They do have a pretty direct role in inflation outcomes. And because of those two things, that's a pretty strong nexus for if we could reduce healthcare inflation by half a percentage point each year, that would be a very big deal for what the Fed will ultimately get to the last mile of whatever the Fed's trying to achieve.

[Joe Weisenthal]

Zvi, can you say a little bit more like about the spreadsheet setup? That and Scandi, you mentioned your spreadsheets too, as that data is coming in tomorrow night. I mean, this is what we really care about, right? Like the numbers start to come in, they get posted on what Secretary of State websites, et cetera. Like how are the traders ingesting that in that process to be ahead of when the networks say they called Wisconsin?

[Brad Setzer]

It's going to vary a lot from trader to trader, from house to house. And a remarkably large number of people just don't do this. And that's clear because you look at the financial markets over time. I haven't followed the most recent elections like 2022, that carefully in terms of the reactions, but you definitely see these delays. And if there was a lot of participants in the market who were keeping close eyes and incorporating that information instantly, that wouldn't happen. So the right ways to do it involve things like setting up automatic interfaces with these websites to just pull things into your spreadsheets, right? So you have your Excel spreadsheets that contain all of the county by county data from all of the returns. And then ideally you want to figure out what that implies about the results. And the technically correct way to do that is a Bayesian calculation. It takes into account all the information because you don't know which piece of information you're going to get. So you need to know how to feed them into your calculation. And then that should then output a range of distributions with various probabilities of various different outcomes. And you price that into your beta on various things based on those elements and you figure out what the prices are supposed to be and then you make the good trades.

[Zvi Moshevitz]

Zvi, weren't you at Jane street before? What was election night like there?

[Brad Setzer]

Well, I mean, all hands on deck, right? So everyone's there, it's a working night, and you use what tools you have and you, you use what instruments are available for you to trade because it's the middle of the night. So like, you know, obviously if the US Stock market was open, everything would be dramatically different. But you are somewhat limited I have.

[Joe Weisenthal]

One last question as an AI productivity optimist, like, I don't know anything about how to code a system that will ingest all the data and set up a Bayesian model. In your vision of what AI could do. Can I in a couple years, could I go to ChatGPT and say, like, write the code that will pull this in and then build some kind of model?

[Brad Setzer]

You can do that now.

[Joe Weisenthal]

All right. All right. Zvi, Skanda and Neil, thank you so much. I feel prepared. Zvi is at 91%, so there's still some ambiguity about whether he was on stage or not.

[Zvi Moshevitz]

People are still unsure.

[Joe Weisenthal]

Direct lending has been one of the most dynamic areas of the private alternative.

[Neil Dutta]

Space these last few years, having grown.

[Tracy Alloway]

Massively as a source of capital for both corporate borrowers but also financial sponsors.

[Joe Weisenthal]

That have kept going from strength to.

[Neil Dutta]

Strengthen and have needed that private capital.

[Joe Weisenthal]

To foster the growth that they've been experiencing for leading alternative investing insights. Listen to Speaking of alternatives from pjim.

[Marin Sums]

Not everybody likes talking about money. Some people find it awkward. Sometimes they even find it a little embarrassing. I do not. I like talking about money, whether it's the boardroom, the newsroom, the trading floor. I've spent the last 30 years talking about money, writing about money and talking about it and writing about it a little bit more. I'm Marin Sums at Webb and every week senior reporter John Stepek and I answer your questions about personal finance and we discuss the best strategies for making the most of your money. Listen in for the kind of insights and explanations everyone can use to help them make better saving and investment choices for themselves and their families. My question is whether you think maxing out my company pension match is enough.

[Brad Setzer]

For when it comes to saving.

[Skanda Amarnath]

For my pension, should I attempt to.

[Zvi Moshevitz]

Pay my child's university fees and living costs?

[Tracy Alloway]

My partner and I have excess savings.

[Marin Sums]

So should we overpay on our mortgage.

[Zvi Moshevitz]

Or should we put the money into stocks?

[Marin Sums]

From Bloomberg podcasts, tune into Maren Talks Money, Follow Marin Talks Money on Apple podcasts, Spotify or wherever you listen.

[Zvi Moshevitz]

All right, the final stretch here with Brad Setzer, senior Fellow at the Council for Foreign Relations. Who better to tie up all the disparate things we've been talking about in the previous two sessions then. Brad, we always enjoy speaking with you because we can basically throw anything at you.

[Joe Weisenthal]

See the record holder? It's closed.

[Zvi Moshevitz]

Yeah, I'm pretty sure you might be close to the top for number of odd lots appearances, but why don't we start with something really specific because you published a paper recently all about globalization. The title is the Surprising Resilience of Globalization, An Examination of Claims of Economic Fragmentation. And your conclusion was basically that we are still globalizing and to some extent since 2016, we've globalized even more. Walk us through how you come to that.

[Tracy Alloway]

Well, first, thanks for inviting me and thanks for asking me about my recent paper. You are the first person who actually seems to have read the whole title.

[Zvi Moshevitz]

I promise I did actually read it. I read it earlier today, but I am impressed.

[Tracy Alloway]

And then thanks to everyone for sticking around. Appreciate it. So most papers, or many of my papers, originate out of a sense that a narrative has taken hold and that narrative has sort of perpetuated itself even when that narrative isn't fully backed by all of the detailed data. And there have been two narratives that have been. They're closely related narratives that have been very prevalent and prevalent at the imf, prevalent at Davos, prevalent in the financial media, prevalence on Bloomberg. One is that the world is deglobalizing and the other, which is related but not quite the same as the world is fragmenting, different political blocs are interacting less economically. That thesis seemed at odds with a couple of things. One, I spend a lot of time, don't ask why, looking at trade in pharmaceuticals. It's an interesting subsector of the global economy.

[Joe Weisenthal]

It's a hobby.

[Tracy Alloway]

It's a hobby, yeah. I'm certainly not paid for my odd take on the pharmaceutical industry. And the pharmaceutical industry has continued to globalize. U.S. imports of pharmaceuticals have doubled since 2016. The U.S. imports from low tax jurisdictions, which is a big part of pharmaceutical trade. It's not with low cost jurisdictions, it's low tax jurisdictions. About half of our imports are from five tax hubs. They've doubled. One quarter of those imports come from the great country of Ireland. So that's not a story of deglobalization. That is a story of continuity. It's a story of globalization continuing because there's a tax advantage still to globalization. But then the other component of the argument is the one that sort of irritates people. I looked at the data, everybody tries to look at the data. And if you look at the data for China, biggest economy and the biggest potential source of fragmentation, you can fragment with Russia, which has happened, but fragmenting with China would be big and I didn't really see the evidence. So China's exports to the world are up by about of manufacturers are up by about $1 trillion since 2019. So since the peak of the trade War. Since the pandemic, China's imports are up, manufacturers up 200 billion. China's surplus of manufactured goods is up 800 billion. And I'm pretty confident because I have some sense of magnitude, that that's not all trade with Russia, there's a little bit which is trade with Russia, but it is mostly because trade deficits amongst democracies have risen. So the classic offsets to China's surplus are the deficits in the uk, the US and India not geopolitically aligned with China, but the global counterpart. So my overarching thesis is the world has continued to globalize, but in unhealthy ways. Unhealthy because there's still a lot of tax driven globalization and unhealthy because this increase in China's exports is a reflection of deep weaknesses which have already been discussed in China's domestic economy which make China incapable of growing at the pace it wants without relying more, not less, on exports. So that's the theme, a lot to.

[Joe Weisenthal]

Chew on and that's what we're going to do. But the trade war that started in 2018, does it show up in the data in any meaningful sense? When you look at the data now versus some counterfactual where tariffs hadn't been put in place, do you see fingerprints of it?

[Tracy Alloway]

Yes. The most obvious is that, you know, the US is the one country that currently doesn't import any cars from China. And since the trade war, China has become the world's biggest auto exporter and the US market is effectively for now, walled off. If you look at the bilateral trade data between the US and China, the first thing to note is they no longer agree. In the bilateral data from the US side, we think our trade with China has gone down. And significantly, if you look at that same data from the Chinese side, China thinks its exports to the US are broadly unchanged. Now you can still say there's an impact because China's exports to Europe, the obvious counterfactual, have gone up. So there's some evidence of a bilateral decoupling, there is a lot of evidence of tariff avoidance. And then at a global level, there's no real evidence of a serious decoupling or fragmentation. Because a serious fragmentation in my view at least is one where China runs a smaller surplus with democracies, where China trades balances amongst the axis of autocracies. That clearly hasn't happened.

[Zvi Moshevitz]

You mentioned earlier tax incentives to globalization and I'm trying to think how to frame this question, but like why are we so obsessed with tariffs if the ultimate cost of a product is not the only thing driving decisions about where it's made and where it's going, I.

[Tracy Alloway]

Mean, in all honesty, I think it's because Donald Trump won the 2016 election and Donald Trump believes tariffs matter. Donald Trump is. He's a tariff man. He really is. The other one is, look, there is absolutely no lobby, powerful lobby that is pushing back against importing more pharmaceuticals from Ireland. And there's a very powerful lobby that wants this current pattern to remain. By producing outside the United States and moving intellectual property outside the United States, the American pharmaceutical industry has reduced its effective tax rate to roughly 10%. Why wouldn't you want to maintain that the opposite side, the loser side, is mostly the taxpayer. There's not a lot of jobs at stake, although there's some, a couple of shocking to me, little nuggets. The US pharmaceutical industry top six companies roughly made 60 to 70 billion dollars in 2023. Top six companies. Those top six companies paid collectively, so a little bit of offsets zero in tax to the US federal government. They reported losing money on their US operations even though the US has well known much higher pharmaceutical prices than the rest of the world. And they report making all of their profit and paying all of their tax in other jurisdictions. So everyone except but the US Taxpayer seems to win.

[Joe Weisenthal]

What was the effect, if any? So one of the things, regardless of who wins tomorrow's vote, at some point there's going to be the Tax Cut and Jobs act is going to come up. Though I think the corporate side is permanent. That part is going to be less controversial or not going to be a thing. But what was the effect of the Tax Cut and Jobs Act? Because there was some impulse at least claimed that, oh, this will encourage companies to recognize their revenues in the United States and crack down on that. To some extent, at least in the realm of pharmaceuticals, as you've described, that hasn't happened. What was the intent and what was the effect of that bill?

[Tracy Alloway]

Look, first of all, you broke my heart by saying there's nothing that's going to happen on the corporate tax code next year, is there? It is obviously going to be part of a negotiation.

[Joe Weisenthal]

Okay. Yeah, that's right.

[Tracy Alloway]

It is the great chance that we have to correct some of the flaws, in my view, in the tax cuts.

[Joe Weisenthal]

The corporate side doesn't expire automatically the way some of the personal does.

[Tracy Alloway]

So how much detail do you want to go into? The 21% does not expire. The 10 and a half percent low guilty rate, which is for your global intangibles income, which is.

[Joe Weisenthal]

I don't know anything about this stuff.

[Tracy Alloway]

Clearly it goes up to 13.125, which of course some people care about. And the foreign derived intangibles income tax or FIDI goes up to the God awful high rate of 16%. So there are some ratchet ups. So what happened with the Tax Cuts and Jobs Act? First of all, the corporate side was a total revolution. Before the Tax Cuts and Jobs act, the US had a system called deferment, a deferral where profits earned abroad in theory were taxed at the US headline tax rate of 35, but only if the profit was returned to the United States. Profits were never returned to the US Companies borrowed against their offshore profits. And that was essentially a system that sort of worked. But it meant that US companies had on the US side of their balance sheet a lot of debt and on the foreign side of their balance sheet a lot of assets. It wasn't great. So the main thing the Tax Cuts and Jobs act did was it got rid of deferral. You pay tax as you go. Once you pay your US tax, you're free to move your money wherever you want. That was supposed to bring a lot of money back. It obviously lowered the headline tax rate from 35 to 21. It created this new global minimum on intangibles, which is sort of a strange concept, but essentially intellectual property that everyone pays on their global income. So in theory it's down territorial, but it's not entirely. And then it created a separate low tax rate, the foreign derived intangibles income tax rate for companies that moved their intellectual property back to the US and used it to export. Pharmaceutical companies make most of their profit, although they don't say it on their US sales, they preferred to keep their intellectual property and production abroad and remain in the 10.5% guilty bucket. So no change there. Apple, same thing. Microsoft, broadly the same thing. But some companies did adjust. Facebook and Google return their intellectual property to the us you see this very clearly in their corporate returns and now sell their intellectual property to their Irish subsidiary where they book most of their ad revenue globally. Qualcomm has also adjusted its global tax posture, so it's not a story of no change, but it is a story of mixed change. And it is a story where, at least in my view, the six biggest pharmaceutical companies clearly pay less to the US government after the Tax Cuts and Jobs act than they did before because they actually had to bring some money back from their offshore tax subsidiaries at their 35% to cover their ongoing cost. And Apple now, mostly for even more complex reasons, but Apple books more of its profit in Ireland than in the United States, and Apple is now paying roughly as much in tax to Ireland as it is paying to the United States. That's why Ireland has a sovereign wealth fund. So there are still changes that could be put in place that, broadly speaking, wouldn't significantly increase the corporate tax burden, but would increase the amount that the biggest and most successful US Companies pay in the US So hence you broke my heart. You said there's nothing to be done.

[Joe Weisenthal]

It was just me being ignorant. It was not. It was just me being ignorant.

[Zvi Moshevitz]

I realize I should have said this in the intro, but in addition to writing and researching and tweeting about all these issues, you also have real life experience when it comes to trade policy. You were an advisor to U.S. trade Representative Catherine Tai, who has also been on the show. Maybe you can't get into specifics here, but like, give us a sense of what the most surprising thing was when you were actually in that advisor role. When it comes to the construction the rail politic, I guess, of making trade.

[Tracy Alloway]

Policy, I guess one surprise, and it's just a cultural thing about usdr, as I previously worked at the US treasury, is that financial markets, which are the obsession of this town, presumably this crowd, are weighted at about zero in USDR internal decision making. People do not get a report on what happened in the market at the start of a significant meeting at uscr, whereas that would be kind of the norm at the US Treasury. So culturally, it's not driven by the market. Culturally, US Trade policy is driven by lawyers, and lawyers care a lot about process. So I think what surprised me the most is the weight that is given to following the procedural niceties of the various different trade laws, which I think are actually quite relevant if Trump were to win, which I personally certainly do not hope is the case. But those procedural niceties become constraints on how quickly he can restart various trade wars.

[Joe Weisenthal]

You mentioned in the beginning that globalization continues despite all the memes and despite all the narrative, but you described it as an unhealthy form of globalization. Was there a point where it was healthy in your view? And is there a turning point where the globalization process went from healthy to unhealthy?

[Tracy Alloway]

So in general, I think globalization in the 1990s had a different impact on the US economy than globalization after the 1990s. If you look at trade patterns in the 1990s, there's a significant interruption in the Asian financial crisis. And I think most people in Asia would say globalization went wrong in the 1990s. But during that period, broadly speaking, exports and imports were both expanding symmetrically and you didn't have an expansion and explosion of the offshore balance sheets of big banks and their special investment vehicles like the obsession of Wall street in the pre global financial crisis period. So to me that was a healthier form of globalization. What went wrong? Well a technical thing, checked the box made it really easy for US companies to shift intellectual property offshore. That unleashed a wave of tax driven globalization that we have not yet in my view been able to rein in. It created incentives wherever broadening sectors of the US economy. So one of the things I point out in the Aspen Economic Strategy paper is that semiconductor equipment manufacturing, actually a pretty strategically important industry, has between 2005 and 202324 moved a lot of its manufacturing and all of its profits to Southeast Asia. Why we thought that was in our strategic interest is beyond me. But it wasn't just a one off. It's been a continuous process. And then obviously China enters the wto. The Chinese surplus explodes. And I think that generated a period of unhealthy globalization as well. And so that's why I'm a little worried right now that the increase in China's surplus, judged on a global basis, not on the bilateral basis against the US is on a magnitude comparable as a share of world GDP to that scene Immediately after WTO entry.

[Marin Sums]

Bonds are.

[Joe Weisenthal]

Back and so is all the credit PGIM Fixed Incomes Monthly Podcast Series from the latest trends to long term perspectives, you'll get timely fixed income insights from leading economists, research analysts and investment professionals. Whether you're new to bonds or a seasoned investor, tune in to all the credit wherever you get your podcasts. This podcast is intended solely for professional investor use. Past performance is not a guarantee of future results.

[Marin Sums]

Not everybody likes talking about money. Some people find it awkward. Sometimes they even find it a little embarrassing. I do not. I like talking about money. Whether it's the boardroom, the newsroom, the trading floor. I've spent the last 30 years talking about money, writing about money and talking about it and writing about it a little bit more. I'm Marin Sums at Webb and every week senior reporter John Stapper and I answer your questions about personal finance and we discuss the best strategies for making the most of your money. Listen in for the kind of insights and explanations everyone can use to help them make better saving and investment choices for themselves and their families. My question is whether you think Maxing out my company pension match is enough for when it comes to saving for my pension.

[Zvi Moshevitz]

Should I attempt to pay my Charles University fees and living costs?

[Tracy Alloway]

My partner and I have have excess savings.

[Marin Sums]

So should we overpay on our mortgage.

[Tracy Alloway]

Or should we put the money into.

[Marin Sums]

Stocks from Bloomberg podcasts, Tune into Marin Talks Money follow Marin Talks Money on Apple Podcasts, Spotify or wherever you listen.

[Zvi Moshevitz]

There seems to be some consensus about diagnosing the problems in the Chinese economy. So not enough domestic consumption, too high savings, et cetera. And yet it still seems relatively committed to the extra export driven model. Why is that?

[Tracy Alloway]

The pithy answer would be that there can be no consensus in China that doesn't include President Xi. So actually I don't think there is consensus because I think President Xi doesn't share this diagnosis. I think President Xi, generally speaking views support for households as unproductive and he views investment, particularly investment in high tech sectors, as productive. The intellectual leap that giving checks to households, taking less from households lets households spend more, and therefore supports investment, not just consumption, but it supports investment throughout the economy, is not one that President Xi obviously shares. So yeah, I don't think there is yet consensus.

[Joe Weisenthal]

One of the things that people love to talk about is just forever for as long is the future of the dollar. And you know, it's just one of those things. People just love to talk about it.

[Tracy Alloway]

I've noticed.

[Joe Weisenthal]

Yeah, when you look at it is.

[Tracy Alloway]

Not a topic that I prefer to talk about, but I will talk about it.

[Joe Weisenthal]

No, we don't have to talk about it.

[Tracy Alloway]

You can talk about it.

[Joe Weisenthal]

All right. Tracy, when she introduced, she said we could ask Brad anything. This is on my mind. When you look at unhealthy globalization, do you see any strains on the existing the dollar regime or any reasons to think that there is going to be a meaningful change in the trajectory of dollar usage either within the trade for goods and services globally or the use of dollar in financial transactions globally?

[Tracy Alloway]

Not really. There has been one obviously important and significant change, which is the sanctions on Russia. Russia is one of the top 10 global economies, produces a lot of oil and the world wants oil. We meaning in this case the US, the EU, the sanctioning coalition, the G10 countries have generally not actually sanctioned dollar and euro payment. But even though we have not sanctioned dollar and Euro payment, Russia obviously is very concerned that we could, particularly because we've frozen all the central bank's assets and that was a pretty big step. Russia, to be fair, was the country that did the most before 2022, the invasion to reduce dollar usage didn't get rid of it. But Russia had moved almost all its reserves out of the dollar. It had certainly removed all of its reserves out of visible dollars, stuff that the US can see in this normal data reporting. And it had migrated to basically using the euro for most of its oil and gas transactions. Now that you could say that's just logical. Russia traded mostly with Europe before the invasion, but it was using the euro to denominate trade with China, not the yuan, not the dollar. And I think the main lesson of the sanctions has been that if you want to diversify out of the dollar and you want protection against sanctions, which is the one thing that you get with diversification out of the dollar, diversifying out of the euro isn't diversifying far enough. So you essentially have to diversify into using the yuan. Now, the yuan has a bunch of disadvantages. The yuan is not accepted globally. If you're an African country and you get yuan for selling something to China, you can't use the yuan to buy stuff from your neighbor. It's not that kind of global currency. Yet the dollar and euro are. And in general, holding financial assets in yuan means you've been holding a depreciating currency with lower yields than in the dollar. And then, by the way, China uses its geopolitical, and mostly it's been over its trade leverage pretty aggressively. And you would have to assume if you have a lot of your financial assets in yuan or your trade is denominated in yuan, that you are potentially subject to Chinese financial pressure. So you get a little bit of defense against US and European sanctions, but at a pretty significant cost and you just don't see it. So one anecdote, because anecdotes are a little interesting, it was sort of striking to me because I hadn't been to China for quite some time. I was a little nervous about it, to be honest, and heard a bank treasurer from a big Chinese bank talk about how they were thinking about the world and what that Chinese bank was worried about. I was worried about the fact that yuan lending rates were being forced down and that was squeezing yuan, net interest, margins and fair things. That's what all banks tend to worry about. Although it was striking to me that this bank treasurer was more or less saying, you know, the official lending rate which the Chinese have been deemphasizing was actually really important. Other thing he was complaining about is, well, there's all these lending quotas. Like, again, I was like, ah, I thought you'd reformed your commercial Banks, you weren't doing quotas? No, no, no. Quotas for manufacturing, quotas for lending to innovation. The treasurer obviously was sort of implying quotas that required us to lend to companies that were going to generate losses in the future. So what was the great hope? Well, they looked at the Japanese banking system and discovered that the Japanese banks do this great dollar business that generates half their interest income. And they looked at that with envy. You could choose your own interest margin in dollars and you weren't forced to lend to loss making companies in dollars. So just as an anecdote, you see growth in the dollar business, offshore dollar business of Chinese state banks, which completely runs against the de dollarization narrative and is very much a function of China's own domestic weakness. So I think that to me that was telling.

[Zvi Moshevitz]

You had a great line in the paper just going back to the lending quota point. But you said free markets appear to favor a country that hasn't freed its own market. That is, China has probably benefited the most from the trade liberalization of the 1990s and early 2000s. Why is that?

[Tracy Alloway]

Well, again, Tracy, thanks for really closely reading my paper.

[Zvi Moshevitz]

I try.

[Tracy Alloway]

I actually thought that was a good line. You're the first person who's noticed it. I throw in like, hopefully like some witty quips and a 40 page paper just to test to see if anyone actually reads my past. You did. Look, I am not the first to make this observation. I think it's an observation that has influenced politics and policy in the United States and in Europe. China does not have a full market economy. The government runs the banking system. The banking system still dominates the distribution of credit within the Chinese economy. It favors some sectors over others. The Chinese state, in its many layers at the central government level, but also at the provincial level, provides a lot of equity investment for Chinese companies. And so you can argue that China doesn't just have one industrial policy, it kind of has 20 because all the different provinces have their own industrial policy trying to build up provincial champions that become national champions and in the process they get cheap capital, very cheap capital. There isn't a. I mean the private equity industry in China exists, but it's not demanding you lever up to get a 15% internal rate of return. It exists to provide a bit of a veneer of private capital for investments in strategic sectors. There's a lot of patient capital that has gone in to sectors that are quite capital intensive and that are willing to accept high risk and low rates of return, in part because it is state capital. And as a Result in those sectors where this internal competitive hothouse generates globally competitive products, production migrates to China. So that is the trend that was famously exhibited in the solar industry industry. Joe loves excavators. It's a slightly different story, but, you know, 20 years ago, China was importing a lot of excavators actually from the United States. Then Caterpillar sets up shop in China. Then a bunch of Chinese companies with state capital backing them, they're not all state owned, get into the excavator business. Then Chinese demand for excavator goes ballistic with the property market. Then the property market tanks and guess who's exporting excavators to the world? China. So, and obviously everyone's petrified that this is same pattern will replicate itself in electric cars and potentially legacy semiconductors and potentially cutting edge chips. But that's a little, there's a little tech war going on to stop that.

[Joe Weisenthal]

If Trump wins tomorrow, look, it seems very plausible that we could get some sort of radically different approach to everything, certainly on the trade front. So let's just sort of accept that that's again, per the models and the aggregators, a 50% chance if Harris wins. As you see it, what are the priorities when looking at unhealthy globalization? Not necessarily what she's thinking, but from your perspective, what are the priorities towards addressing this unhealthy version of globalization that you described?

[Tracy Alloway]

Look, well, I would start to some degree with some of the points that Secretary Yellen and Lael Brainard have made about China's own unbalanced economy. And fundamentally, the US has, in my view, an interest in a more balanced Chinese economy. And we have an interest in convincing our allies and partners who also join us in putting pressure to get a more balanced Chinese economy. That's a long, hard slogan. It depends a bit on choices China makes. So one interesting example, at least I find it interesting. Trump talks a lot about replacing the income tax with tariffs. That's been one of his ideas. It's unclear if he's actually going to do it, but it's an idea. China currently collects more revenue from tariffs than from its personal income tax. It already has achieved this, partially because it still has somewhat significant tariffs and partially because it only collects 1% of GDP in personal income tax, which is a very low number. We collect eight. So that to me is necessary. It's a part of the broader policy package that generates a more balanced Chinese economy. But it is not something that the US Congress can change. The other component for addressing unhealthy Globalization is something the US Congress can change, which is the US Tax law. So my immediate priority, if I were given advice to hopefully President Harris, would be, look, there is a budget negotiation. Washington, D.C. will be consumed with the expiration of the tax cuts. 2025 is a fiscal year. It is a year which is set up in D.C. to debate the structure of taxation. And Republicans, and this is conventional wisdom, have an incentive to come to the table because if nothing happens, we have a cliff and all of Trump's personal income tax cuts expire. Republicans don't go to Washington to raise people's tax. So they have an incentive to bargain. And my hope would be as part of that bargain, some of the remaining incentives in the corporate tax code that have clearly encouraged or not discourage the migration of intellectual property and production outside the United States get addressed. That'd be where I'd start. I also think one of the tensions, one of the tensions in Trump's trade policy was that bilateral tariffs are way less effective than he thinks. You can get around them really easily. You put 95% Chinese content, a few screws in Southeast Asia, you go to a zero tariff rate. It's trivial to get around with a little bit of work. So bilateral tariffs don't really work, but Trump loves them. One of the tensions in Biden administration views on trade, and again, widely accepted, is that the Biden administration talked a big game about French oring working with allies. And then thanks to Joe Manchin, your friend, a very important US Senator, thanks to Joe Manchin, we have an inflation reduction act. And thanks to Joe Manchin, that inflation reduction act didn't treat our friends very nicely. So I think there's a lot to do to kind of harmonize our industrial policies with our allies. And they have to make some changes too. I think the Europeans are ridiculously obsessed with following a super strict interpretation of what the WTO allows, which means that they won't do buy Europe on their EV subsidies inside Europe, even though China clearly did buy China on its EV subsidies inside China. They just didn't write it into the law. They just never qualified a foreign made car, actually initially never qualified a battery made in China by a foreign company. That only happened after the Chinese companies which now dominate global batteries, got a good foot hold. China has been super restrictive and I think Europe should be symmetric, do a kind of buy Europe deal. And my idea is that like, hey, we have by us, you have by Europe. We will, you know, this is what I learned at uscr. You can deem European or allied goods to be American for purposes of qualifying for U.S. subsidies. And we would offer to do that if Europe would deem American goods to be European for qualifying for European subsidies. So we kind of each create an open market towards each other while being pretty restrictive towards China. So those are, I think, to me, the cutting edge of policy in the Harris administration.

[Zvi Moshevitz]

Would you be open to a potential position in a Harris administration?

[Tracy Alloway]

I had a suspicion you might ask. I have never turned down an opportunity to serve my country.

[Zvi Moshevitz]

So that was our live recording of the podcast at Caveat in New York. I can't believe after all that that it's, it's actually election Day now.

[Joe Weisenthal]

Wait, did we find out last night who was going to win? I forget. Did anyone? I think that's the one question we forgot to ask.

[Zvi Moshevitz]

We should have put everyone on the spot. Yeah, maybe not.

[Joe Weisenthal]

Okay.

[Zvi Moshevitz]

But we hope if you came to the show, that you enjoyed it. We are hoping to do more of these events in the future. So if you liked it, please let us know. And in the meantime, a big thank you to everyone who worked to make this possible, notably Carmen Rodriguez, our producer, and Kate Seabury at the Bloomberg Events team, as well as the entire crew at Caveat.

[Joe Weisenthal]

Thank you so much. And again, we'll. We'll do it again in four years. But other things in the meantime.

[Zvi Moshevitz]

Shall we leave it there?

[Joe Weisenthal]

Let's leave it there.

[Zvi Moshevitz]

This has been another episode of the All Thoughts podcast. I'm Tracy Alloway. You can follow me at Tracy Alloway.

[Joe Weisenthal]

I'm Jill Wiesenthal. You can follow me at the Stalwart, follow all of the guests that we had last night, Follow Zoe Lu, she's at Zongwenzoelu. Follow Jordan schneider. He's at JordanSCHNYC. Follow Zvi Moshevitz, he's at the ZV. Follow Neil Detta at renmacllc. Follow Skanda Amernath at irvingSwisher. And follow Brad Setzer at Brad Underscore Setzer. Follow our producers, Carmen Rodriguez at Kerman Erman, Dashiell Bennett at Dashbot and Calebrooks at Calebrooks. Thank you to our producer, Moses Ondam. For more Odd Lots content, go to bloomberg.comodd lots, where we have transcript, a blog and a newsletter. And you can chat about all of these topics, including the election 24. 7 in our Discord. Discord, GG odd lots.

[Zvi Moshevitz]

And if you enjoy Odd Lots, if you like it when we record live episodes and then bring them to you in not quite record time, but very efficient time, then please leave us a positive review on your favorite podcast platform. And remember, if you are a Bloomberg subscriber, in addition to getting early notification that we are hosting these live events, you can also 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.

[Marin Sums]

Not everybody likes talking about money. Some people find it awkward. Sometimes they even find it a little embarrassing. I do not. I like talking about money, whether it's the boardroom, the newsroom, the trading floor. I've spent the last 30 years talking about money, writing about money and talking about it and writing about it a little bit more. I'm Marin Sums at Webb, and every week senior reporter John Stepek and I answer your questions about personal finance and we discuss the best strategies for making the most of your money. Listen in for the kind of insights and explanations everyone can use to help them make better saving and investment choices for themselves and their families. My question is whether you think maxing out my company Pension Match is enough.

[Brad Setzer]

For when it comes to saving for.

[Tracy Alloway]

My pension, should I attempt to pay.

[Zvi Moshevitz]

My child's university fees and living costs?

[Tracy Alloway]

My partner and I have excess savings.

[Marin Sums]

So should we overpay on our mortgage.

[Zvi Moshevitz]

Or should we put the money into stocks?

[Marin Sums]

From Bloomberg podcasts, tune into Marin Talks Money, follow Maren Talks Money on Apple Podcasts, Spotify, or wherever you listen.