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Superinvestors and the Art of Worldly Wisdom
#62: Ruchir Sharma On What Went Wrong With Capitalism
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This is super investors and the art of worldly wisdom.
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I'm jesse felder.
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I'm back to the test.
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This podcast is brought to you by the Felder Report. When I'm not interviewing one of the most interesting minds in the world of finance, I'm personally scraping the interwebs for valuable information about markets and investing. I put together some of the best things I find each week into a free Saturday morning email you can subscribe to@thefelderreport.com just click join now right there on the homepage and you'll be good to go. To Quote Aerosmith Steven Tyler there's something wrong with the world today. Wealth and income inequality have soared to levels not seen in a century. Housing affordability is at the worst levels on record. Consumer sentiment has plunged even though the unemployment rate hovers around 4%. The federal debt is growing exponentially even while inflation still simmers above the Fed's target, leading many to point to the growing risk of a debt crisis. Meanwhile, retail investors speculate in meme stocks and crypto projects, employing leverage in ways we have rarely if ever, seen before. But the underlying problem common to all of these issues has largely been misdiagnosed. In his latest book, Ruchir Sharma makes a compelling case for what went wrong with capitalism in the United States over the past 40 years and has led to many of the challenges we face today. In this conversation, he shares some of the high level themes of the book, including what it will take to rehabilitate capitalism, bringing much needed balance to the economy, and what that process will mean for investors. As the chair of Rockefeller International, he also has a clear vested interest in the outcomes. So I really hope you enjoy my conversation with Ruchir Sharma.
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Ruchir, I've just been a huge fan of your work for quite a while now, so I've really been looking forward to this. Welcome to the show.
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Thank you, Jesse. So nice to hear such words. That's what keeps the writer in me going.
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B
Well, I've really enjoyed your book, but before we get to that topic, first, you wrote a couple pieces in the Financial Times late last year on what you call the mother of all bubbles. Over the last 30 years we've had the dot com bubble, the housing bubble, and then the everything bubble. But I think you're referring to something a bit different. What is it this time that you see as having formed a bubble?
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Well, what I had said in that piece was the fact that never before had so much capital been invested in one country. And this really goes back the Long history that you've had different countries which have had their reserve currency. You've had countries that have been very dominant. But I don't, I can't recall a time when so much capital was concentrated in one country, and that being America. And there are various ways that you can measure that. You can look at the. Obviously, like if you look at the equity market, America's market cap as a share of the total global market cap is, you know, had reached more than 50% when I'd written that its weight in the global MSCI index as the benchmark, which as you know, most investors use, was touching on 70%. And then all the incremental flows this decade, whether it was public equities, private credit, private equity, about 70 to 80% of all incremental flow was just headed to one country, which was America. So I'd said that even if the American stock market itself may not be a bubble, but just the amount of capital going to America and the valuation that the American market was commanding relative to the rest of the world seemed like a bubble, like never before. Just because of that. As I said that never before had so much capital being concentrated in one country. So it's a bit different than the past that this was. In American exceptionalism, the term had become so popular that everyone was, listen, this is the only country that we want to put any capital in. And people were saying that even after Trump was elected. It's hard to believe that, but people were like that, listen, the only country worth investing in is America. If he does tariffs, that will lead to more dollar strength because the dollar was already very strong, but it will lead to more dollar strength. And if he didn't do tariffs, even then, it was going to be good for America in one of those classic cases where everything was going to be good for America relative to the rest of the world. And I was very careful to mention there that I'm not talking that I think the American market itself has experienced bigger bubbles such as what we saw in the dot com bubble of 2000. And it's possible that because of AI, we'll get another such bubble in the American market as such. But the gap between America and the rest of the world had already reached such extreme levels that I was willing to call that the mother of all bubbles and say that in the coming years we'll see a big unwind of that.
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B
Well, it seemed like your timing was excellent. It was only a couple months later that it really seemed to trend in the financial media that now this is the End of American exceptionalism. And that narrative has kind of died down. But that bubble, as you frame it, I think along with the ones that preceded it, seemed to be just kind of one symptom of a larger problem that has been growing for decades now. That is kind of really the subject of your, of your book, what Went Wrong with Capitalism? People generally seem to have a strong feeling that somehow capitalism is just not working for them. But the problem has been widely misdiagnosed. What is it that people are missing?
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Yes. So the book that I've written, what Went Wrong with Capitalism, is in a way a revisionist history of capitalism. Because the popular narrative, as you know, which is there in the media, is that we've had almost too much capitalism, too much free markets. Right. That's the sort of narrative out there that we've been living through some neoliberal era. And neoliberals become a very bad word because it seemed to suggest that there was this orthodoxy of straitjacketing different countries the same policy prescriptions of more free market. That's the popular perception out there. And what I show in the book is that yes, there were some elements you can argue which conform to more free market liberalism, such as the fact that you had globalization, such as the fact that the financial markets became much more of a centerpiece of our economic discussion and generally of our mind space and of our attention there. But we did not have any periods, like in the developed world in particular, where the government ever went into retreat. In fact, what I show in the book is that in the last 30 to 40 years, the government's role has expanded in every which way across the developed world. The only question is where is it expanded more or where is it expanded less? But across the developed world, the role of government has expanded. And this role of government is not just about government spending as a share of gdp. Government spending as a share of GDP has trended up across the developed world. But it's everything. It's got to do with the bailout culture, it's got to do with the Fed's involvement in the economy, of micromanaging the business cycle. It's got to do with a number of new regulations that the government puts into place which are particularly hurtful for small and mid sized businesses. So it's the entire suite of government action from government spending, bailouts, regulation, micromanagement of the business cycle, the Fed's over involvement in managing the economy and its mission creep. So I'd say that it has happened across the board. The government's Increase. And so that I've argued, is something which is not what capitalism is about. Capitalism is, is about people taking risk and the government not bailing out everyone at the slightest hint of trouble. Instead, the period we have had in the last 30 to 40 years as such, where the economies have become risk averse, where it is about the entire risk has been socialized across the economic structure. So that's the central point I trying to make in the book here, that this is not the capitalism that the founders had in mind. Capitalism is supposed to be pro competition, pro churn, and it's supposed to be people taking responsibility for their own decisions. It's not about the state providing a safety net to everyone from banks to rich investors to the middle class, or throwing the welfare net, net so wide that it covers everyone in good times or bad. So that's the central message of the book.
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Right. And these are topics that you've, you've clearly been thinking about for a long time. You note in the book that you grew up in India, but, but you traveled a lot doing due to your father's career. Traveling to Singapore in particular made a notable impression on you, especially as it differed from India, economically speaking. How so? And was this when you really started
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to become interested in economics and finance?
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Yeah, so I had a slightly unusual childhood, which is that because my father was in a government job, he'd get transferred every couple of years to a new place. It was mostly within India where I was born. But then in my formative years, which is that in my early teen years I was based in Singapore because my father was working there in the Indian High Commission. And when I was based in Singapore, this was in the mid to late 1980s. The contrast with India couldn't be greater because India in the 1970s and 80s was still very much a socialist economy where the government decided that pretty much what you could do in terms of your investment, your consumption and the government's role in the economy was very large. So India in its way had given its people, post its independence in 1947, a lot of political freedom because it was a democracy, but never really gave its people much economic freedom. And for me, capitalism is really about economic freedom. Now when I go to Singapore, I see the opposite. And I'm studying there in an international school. We are much more exposed to what's happening in the rest of the world. But Singapore itself is part of the East Asian economic miracle. And the standard model there was that the governments gave their people a lot more economic freedom, even if they did not give their people that much political freedom. In Singapore, I had seen how that city had transformed itself into such a bustling, quite developed country. It was flourishing because of being very open to trade, very open to business, finance, and the country was prospering compared to India, which for all these decades after independence, if you look at its per capita income, had barely grown. So that contrast for me really struck me in those formative years. And it's one of the reasons why I came to appreciate capitalism and the benefit of giving people as much economic freedom as possible. So that's the irony here, which is in East Asia, places you typically associate with very strong governments and even authoritarian regimes. But when it comes to the economic side, whether it was China and of course, Singapore, these countries were giving their people a lot more economic freedom, and that is what was leading to relative prosperity in East Asia, especially compared to nations such as India, which were doing the opposite.
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Right. And you write that probably the best measure of whether capitalism is working in any given country is productivity growth. Maybe you could just kind of define productivity for the listeners and then share why you think it's such a critical benchmark for grading results of capitalism's influence in the economy.
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C
Yeah. So, Jesse, as you know that going back to basic economics, that there are two drivers of economic growth, right? Economic growth in some way is the sum of the number of people coming to work and how much output they are producing per person, Right. So the number of people coming to work is defined as the growth in the labor force, and that ties back to demographics of a country. And the second bit is productivity, which is that, okay, these people are coming to work, but how much is each one producing per hour? Let's say that is called productivity. Now, demographics, in a way, is very hard to control. It is what it is. A nation has a certain amount of growth in its labor force, and productivity is really the more long term sustainable way for a nation to grow, because it's about how productive its population is. How much is a given center population being able to produce in goods and services. So that's what productivity is. So in the very long term, the key to economic growth really is productivity. And it's even more so now because the demographics, as we well know, in many countries around the world, is turning into a headwind for economic growth. When I was growing up in the 1980s, I think there were only about a couple of countries in the world where the working age population growth was actually shrinking. Everywhere the working age population was growing and people were talking about the population Bomb back then, and countries like China, India were fretting about what they could do to stop the incredible growth of their population. And having a very large demographic bulge was in fact, not considered to be a great thing. But demographics was something which was still there, pushing at least economic growth up in many countries. But now we have a situation where there are more than 50 countries in the world where the working age population growth is actually shrinking. That's because the fertility rates have dropped. And as nations have become more advanced, there's been more focus on individualism, and we just haven't seen the birth rates go up. They've been declining in many countries. And in countries like China and Japan, the population growth is actually shrinking. So you have less people obviously coming to work in these places. So it really makes the importance of productivity feel even greater that a nation needs to have very high productivity growth to try and grow very rapidly. And what I say in the book is that for some reason, despite the fact that we have had such major technological breakthroughs in the last few decades, we have had the massive boom in the Internet and before that the PC and after that in mobile telephony and even things like E commerce, cloud computing. These great technological advances, for some reason, productivity growth in the developed world in particular, and across much of the global economy, that growth rate has been declining. You take the case of America. In America's case, productivity growth rate was 2 or 3% in the 1950s and 1960s, a very big boost to economic growth. Then from the 1970s onwards, the productivity growth begins to decline. And it's been pretty much a straight line down since then. And America's current productivity growth is barely 1% a year compared to the 2 or 3% rates that we saw in the 1950s and 1960s. And the European nations, the productivity growth in many countries, such as Germany, France, UK is close to zero. So that's what explains why those countries have been literally stagnating and why even in america Now, a 2% economic growth rate we consider to be a pretty significant achievement. And we are far from the days of growing at 3 or 4%. Now. Part of this, obviously is demographics, but a big part is also productivity. And I explore in the book this productivity paradox that how are we living through such a period where you're seeing a massive increase in technologies and now this huge promise of AI, and. And yet we have broadly seen productivity growth over the last few decades on a declining trend. The productivity paradox, as I call it.
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Right. And you point out that this myth of neoliberalism shrinking the size of government kind of convolutes the problem here and that it's largely the trend towards bigger government that's coincided with this decline in productivity growth. Some would argue that even, okay, let's stipulate that, okay, the government has grown in influence, but maybe this is just correlation rather than causation. Why would you argue against that?
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Right. Yeah. Because I'd say that in terms of the only thing that I find which has led to a decline in productivity growth, and it's partly by process of elimination and partly what I see from what's happening is the fact that the government's role has expanded so much. So let's just take one example of how this plays itself out. That one trend that I've seen over the last few decades is the rise in the number of zombie companies around the world, and particularly in countries like the United States. What exactly is a zombie company? This term became popular in the 1990s when in Japan, we saw the rise of zombie companies after the Japanese economy started to slow down very dramatically. In that decade. These zombie companies were defined as companies which did not even earn enough profits to service their debt for three years in a row. And the American media then will mock Japan for keeping alive these zombie companies, saying that this is deadwood and capitalism is not supposed to do this, because under capitalism, the companies which are not doing well or which are not making enough profit are supposed to exit the system and make way for new companies to come out there instead. In Japan, we were seeing a lot of zombie companies being kept afloat by government intervention. A policy of very low interest rates, a policy of government support for these companies. At that point in time, the number of zombie companies in places like America was estimated to be about 2% of the total number of listed companies in America. This is the history going back, as I said, nearly 40 years now. Fast forward today and in America, by some estimates, the number of zombie companies is supposed to be close to 20% of all listed companies. In America, that's a staggering increase that's taken place. And the reason why so many companies are kept alive is because we have had a period of very easy money. We have had a period where the government is very risk averse to allow anyone to fail. Bankruptcies are close to record lows. And as I say in the book, that capitalism without bankruptcy is like Christianity without hell. So this zombification of capitalism, where you've had so many inefficient companies being kept alive by artificial government support, is Something that I think has led to productivity growth being undermined in this economy.
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Right. And it just makes me think, you know, the zombies are very closely related to what Hyman Minsky termed that, I guess, Ponzi units of the credit cycle. And as you point out, you know, what's missing, you know, what policymakers have done is really they've been grinding at the gears of creative destruction, to quote the book, I guess. Why is this creative destruction so crucial to the health of the economy and how has it been undermined by policy? Whether that's been inadvertent or intentional.
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Yeah. So I think that it's very important for new companies to come into being, as I said, that capitalism is pro competition, it's pro churn. What capitalism is supposed to do is to weed out the inefficient and make the way for new companies to, to come. And as I show in the book, that right up until the pandemic, the number of new companies being created in America was close to an all time low. That number had been falling. So you had a decline in both what they call the entry rate and the exit rate. The number of companies going bankrupt and being thrown out of the system was at a record low. And the number of companies, new companies coming in was obviously also at a record low. Because if you're not allowing the dead wood to clear, then you're keeping alive a lot of inefficient companies in the system. Whereas productivity growth is about regeneration, it's about allowing new companies to come, the most efficient companies to survive. And after the pandemic we've seen some uptick in that because so many companies were closed down by the pandemic and that has, I think at the margin, lifted a bit of productivity. But that could be temporary. The broad trend has been that because we have capitalized so much deadwood in the system, it's not allowed new companies to come into being. And even now there's so much concentration which is taking place, we have this very two tiered economy, which is a lot of deadwood being kept alive at the bottom. And at the top you have a few companies that completely dominate the American corporate system. And so you end up getting that for the average person, the median company. This is a very difficult time and partly the reason why small and mid sized business sentiment has generally been very low over the last few years, if not decades.
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B
Yeah, I think it's fascinating that you point out and you tie the easy money to this proliferation of zombies on the one end and then you have the, the, I guess the oligopolies on the other, and both are unhealthy in terms of competition. I want to, I guess, continue on the topic of easy money because you write that I'll just quote you again. Capitalism has been distorted above all by governments and central banks pumping more money into the economy than markets can possibly invest effectively. In addition to kind of the zombies and oligopolies, how do you believe that this, the misallocation of capital has been a problem, you know, for productivity in the last several decades?
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C
Well, I think that, you know, the, if I would trace this back, and this is where the contradiction really comes in, that we sort of look back at the 1980s as the start of the Reagan revolution, the Thatcher revolution, and we associate that period with the growth of free markets and the so called neoliberal era. And yet two very significant developments took place in the 1980s which were exactly against that trend. One was in 1984 that for the first time the US government intervened to bail out major financial institution, that was a Continental Illinois bank. Before that, there was no culture of America really bailing out its private sector companies, especially in the financial sector. In fact, in the 1970s there were some attempts at bailouts. And the reaction of even the policymakers in Washington was that we do not do this, we do not bailout private sector companies. But the precedent was set in a major way, I think, in 1984. And after that, what's happened is that every time there's been even a minor flutter, the governments have been rushing to bailout companies in the name of preventing wider contagion. But in doing so, they just make the system more and more brittle because the system expects the government to be there. And if the government's not there, like in 2008 for a while when Lehman was allowed to go bankrupt, the entire system feels a major shock because it doesn't know how to handle this shock anymore. And the ultimate example of this was in 2023 when you had the SVB bailout of Silicon Valley Bank. A bunch of rich depositors were bailed out there. And now everyone believes that even though there is no universal deposit insurance, particularly for deposits above a particular amount, everyone has come to believe that, no, that if something happens to any bank, the depositors, the government's going to be there to underwrite the risk. So that was a very significant change. And so therefore my definition of easy money is not restricted just to interest rates, which is a very sort of easy way of looking at it, but it's about the bailout culture. It's about the growth in money supply that's happened and therefore the financial market liquidity that has happened. Part of it because of the government pumping in so much money in times of stress and the risk is asymmetric. They pump in all that money, but. But they don't take it out at the same pace. It's a complete asymmetry which exists. And the second thing, which, if I go back to my point of what happened, it was in 1987, for the first time, the Fed actively intervened to prop up the stock market after a crash. Then, after the October 1987 crash, the Fed intervened with Fed chairman cutting rates and explicitly intervening to problem the stock market. That's when the term the Greenspan put came into being. And that term in some way or form still exists today. Today, the market breathed as a Trump put, for good or for bad, that every time the market freaks out too much, that Trump will be there to help prop the market up. Now, I'm all for policymakers being sensitive to how markets behave and seeing the message from the markets, but this expectation that the government's always going to be there to underwrite risk, what I call the socialization of risk, I think is something which is not good for capitalism. It leads to a lot of perverse outcomes. Misallocation of capital is one of them. But even other trends, I would say, like inequality, are further magnified by this, because any amount of intervention by the government is particularly beneficial to the incumbents, and the large incumbents are able to take advantage of that even more. So I think that that's my point, that the risk has been socialized and we have a system today where the upside, the gains are all yours. But on the downside, the government's there to underwrite your risk and to protect you. That's the implicit assumption under which most investors and people across the markets function today, I think.
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B
Well, and it seems that, you know, retail investors are starting to recognize this and realize that, hey, it doesn't matter that the Fed has taken the punchbowl away. They'll bring it back as soon as they need to in order to protect us from any losses. And it seems like there's potentially some major misallocation of capital going on in the markets today as a result of that, I guess. What do you believe could possibly disrupt the buy the dip impulse in the markets that's so strong today?
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C
I think the only thing which comes to my mind is when the government runs out of its ability to bail out companies or to be there to offer the put, you know, like, so the only thing which could change that is the. Is some sort of a riot in the bond market, where the bond market just says that, okay, this is enough of government intervention, enough of government spending, and, you know, we're not going to take this any longer. Now there are signs that that's happening in other parts of the world, from Japan to UK and in, before that in emerging markets, there were signs of that. But now it's, you know, the only country which is being left untouched by that broadly and has been America so far. We saw a bit of that during the entire Liberation Day and tariff drama in April. But broadly, most people are still willing to fund America's deficit. And even now, as I wrote my latest Financial Times column, and I was looking at why is the market and even the economy holding up so well despite all the tariff drama that's gone on this year? And for me, one big factor is the AI mania, but also that a lot of the capital spending that the firms are doing for AI, they've got a fresh tax offset in the latest budget bill to take care of that capex spending. So it encourages them to do even more, which is fine. But the whole idea being that there's this seems to be like this bottomless pit where the American government can keep spending, keep giving tax breaks without raising commensurate revenue and get away with it. So until I think we reach a situation where the market just says enough is enough and we cannot fund this, I think that this trend will continue where everybody, including the retail investor, feels that the government's always going to be there to intervene and prevent any dire outcomes. So the risk is always going to seem asymmetric to them. Yeah.
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B
And I'm glad you, you kind of come back to the, to the budget because as you write in the book, in Reagan's famous Shining City speech, there was a throwaway line that I think most people were maybe never even aware of, but if they were, they. They've forgotten it by now. And that is, quote, I've been asked if I have any regrets, will I do? The deficit is one. What do you think Reagan would have to say about the bipartisan attitude toward the deficit today? And how does the rapidly rising debt pile damage productivity, specifically, in your view?
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C
Yeah. So I don't like what people say in office. And what they say out of office is always very different. Right. When they leave office, they talk about the deficit. As someone said the other day, that talking about the deficit has become the new virtue signal, right? So you always talk about the deficit because it sounds responsible to do so. But when you're in office, there is no appetite to cut it and there's no incentive to cut it because some deficit cutting may endure short term pain. But as long as you know, like you can keep on getting away with it, you think at the surface, why cut it? And only takes a crisis. And this is true not just for America around the world, that countries only cut their budget deficits when they're forced to. No one does it voluntarily and says it's a good thing to do, I'm going to cut my deficit. No, you need a crisis. That's what got Greece and Portugal and Spain and so many emerging markets that I've covered over the years. The only time that they cut the deficit is when they're absolutely forced to do so by the market. So I don't think that there is any incentive to cut the deficit. And this trend is likely to keep going on of ever expanding deficits. And I think that we just have to wait and see that. At what level does the market just revolt and say, okay, we can't take this any further. So I think that's where we are as far as the deficit is concerned. Now, on productivity, as I said, it's not just the government's role defined by the deficit and government spending as a share of GDP which is undermining productivity growth, although I'm sure it is, but it's this entire suite, right? As I said, when you have so many zombie companies which are kept alive, when you have. And the other part that we haven't yet touched upon, even the regulatory environment where it takes so many regulations to set up anything in America today. And those regulations, the cost of those regulatory burden can only be borne by some of the very large companies because the other companies who are small and midsize, they can't bear those costs. I know it that if you were to set up an investment fund today in New York, the cost of doing so has gone up 10 times compared to what it was 20 years ago. And that is a staggering conclusion because it just means the incentive for the average investor is, you know, working on Wall street is just to join one of these very large trading platforms. And so therefore the big just keep getting bigger. That's true in the technology space. So I think that this regulatory burden is another big way in which productivity is being undermined. The bigger getting bigger and it's stifling a lot of entrepreneurial spirit. So these are the broad things that it's not just government spending, but it's the. All these habits that the government has picked up. And as I say that the road to hell is paved with good intentions. I mean, I'm not saying that people, you know, like in Washington, there's some, I don't subscribe to the theory that they are out there, you know, with some nefarious objective and they really want to do this. Fine, they're trying to be helpful, but in doing so, they're just creating bigger and bigger problems without ever stepping back and seeing, okay, we have done this, you know, for, for so long. What are the consequences? Are people happy? No, but every time there is a problem, everybody leans towards the fact that, okay, what can the government do to fix it?
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B
Right. And, you know, I think you point out too, there's a, there's an interesting parallel between the problems in, you know, the medical industry with pain management and the, the attitudes or, you know, the use of debt. You know, maybe you could kind of just elaborate on that. I think it's an interesting metaphor.
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C
Yeah. So like, as you know, that a lot of the, I mean, a lot of the medical research now shows that the drug epidemic in America has to do with the very liberal use of drugs, where at the slightest hint of any pain, like you prescribe drugs, you know, like to mitigate that pain. And so your body, that's what just keeps craving for. And obviously the more you give it, the less the body is able to withstand pain on its own or be able to cure on its own, much less ability to do that. So that's really what's happening, I think today as far as the entire American system is concerned, which is that is the slightest hint of trouble. We spoke about the SUV crisis as an example. At the slightest hint of trouble, you want the government to come in, administer economic medicine to it, which in the easiest way to spend more money by taking on more debt. But as I said, it's not just that. It's got to do with other interventions as well in the economy. So I think that the tolerance for pain in general has gone down a lot across American society. The epidemic in drugs that we are seeing is a lot of medical people now are owning up to the fact that the over prescription of drugs is a major reason for that. And I think it's something which we are seeing increasingly now as far as the economy also is concerned.
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B
Right. And there's been a real push towards reform in the medical industry over prescribing opioids and These types of things. You point out, you just mentioned a minute ago that before we, you know, deal with our debt problem, we're probably going to be forced to by some type of a debt crisis. Do you think, you know, that's going to be what's required to also address the, the, to try and rehabilitate, I guess, inspire people to try and rehabilitate capitalism as well? Do you think it'll take that type of a crisis, type of environment before some of these, these things, other issues are addressed in addition to the debt?
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C
Yeah, I think so. I think so, because it's always a fork in the road when you have a crisis because you can go in both directions. But the history, I think, of America and other economies suggests that once we have our back to the wall, that's when we make the best decisions, not when we think that we can spend like drunken sailors and it doesn't matter. So I think that we have to sort of get to that point where, you know, there's a strong reaction to all of this. I don't see us there as yet, but until we get that, it's very hard to change this habit, you know, like you just need a catharsis to happen there. And yeah, so I think that that's been the history of other countries. And until we get to that point where, you know, where the government's just not able to expand its role for some reason, I think that capital will remain distorted. So it's about walking back, it's about shifting the balance. Now, I'm not a believer that the state has no role. I do feel the state has a role. We can't return to the so called Dixanian form of capitalism which existed in the 18th century or pre the Great Depression. We need some sort of a welfare state, we need some sort of a regulatory environment. But we cannot have a situation where you keep on expanding the role of government across the spectrum and expect different outcomes. I think there has to be a recognition that whatever we have been doing in the last 30 to 40 years is not making the average American happy. Some of the most telling data I think I have in the book is some of the polling data which shows that about 70% of all Americans, you know, want some major reform in the system or want it to be torn down. And a similar number of Americans, about 70%, think that they are not going to be better off than their parents, which is a huge change from what the numbers used to be, you know, like a generation ago when most Americans thought they would be better off than their parents. So there's so much corrective stuff which needs to be done for capitalism to get back to delivering to its people. Otherwise you're going to keep having the situation where you're going to have anti establishment figures who rise from the left and the right with radical solutions. But the easiest thing as a solution, unfortunately, is to just spend other people's money, which is what I think that both the left and the right have come to do. One through more buyers, through tax cuts, one through much more biased through spending increases. But I do feel the fact that there are three things which can possibly be done before we even get to such a riot point, where the market just revolts and says, okay, we can't fund these habits again and we need to get back to a greater balance for capitalism here. I think those three things are, if I were to say, what's the one biggest symbol of what's gone wrong with capitalism? Its housing prices, which is that housing prices have been on a tier. And a lot of that has to do with the fact that the supply of new homes is severely constrained. It's very difficult to build a new home. There are so many licensing and other regulatory requirements. The supply of new homes has really been choked in America and much of the developed world, leading to very high prices. The consequence of that is that owning a home has been such a vital part of the American dream. It's been or in any society, but now the average millennial or the young person is still living with their parents because they just can't afford a new home. That's not what the situation used to be a few decades ago. So I think not owning a home is a big deal and doing something to improve the regulatory environment when new home supply comes in the market is one step which can be done to fix capitalism and to make the current economic system better. The second thing I think has to do with bailouts, that you just can't be doing these bailouts. And it's very difficult to avoid a bailout when you already have a crisis because of the fear of contagion. But in good times, at least the government can set the expectations right by saying, listen, we are not going to bail out just now. We will bail out once we think that the system is really needs it. But in good time, you set the expectation that this culture of bailouts is not going to happen. And a lot of average Americans, I think, will be very happy to not see such a bailout culture, because they're very much against this bailout. Culture. And the third thing, as I said, is this entire, the entire regulatory environment needs to be changed. And the over involvement of managing the business cycle in such a micro way, I think that also needs to change. So these are some things I think we can do preventively. We can see the benefits of that without needing a crisis. As I say that, you know, like a lot of people think that good economics is bad politics, but I think that these are three or things which can be done with good economics is also good politics. Because increasing housing supply, not bailing out corporate America and doing something in general to improving the regulatory environment. These are steps I think which could resonate and go down well with the average American without having to take pain. Because spending cuts, forget it. Spending cuts and tax increases, those are not going to happen until you get an absolute crisis.
- [44:36]
B
Right. And as you point out, you know, it's really about finding a better balance between, you know, the, an idea of kind of unfettered capitalism and then an appropriate level of kind of government regulation and involvement, I guess. What do you see today as maybe the best example of a country that has been able to safeguard capitalism from the sort of policy overreach that we've seen in the United States and other western countries?
- [45:06]
C
Yeah, so there is no perfect nation out there. In fact, every time I speak something good about a nation I get sort of a lot of pushback. But I have a chapter in the book on where capitalism is working. And I have three examples of this that I cite there for different reasons. Number one is Switzerland. I say that in the heart of Europe, which is otherwise seen to be the Silicon Valley of regulation and everything that's gone wrong with capitalism in an even more greater way than America. You have a country where government spending as a share of GDP is relatively low even compared to America, where the regulatory environment is much friendlier. And there's a lot of decentralization where every canton so called state in Switzerland is free to make its own decisions. And that leads to much better and efficient allocation of capital in each of those cantonments and much greater specialization as well. And Switzerland today has emerged as the richest country in the world, practically with a per capita income that's much higher than even that of America. So I show the case of Switzerland, where a relatively small government, light regulatory touch and a lot of decentralization has helped make that country the richest country in the world. So something to be learned from that. And then I speak about one middle income country such as Taiwan, where it's not a developed economy as yet, but it was praised a lot. A lot of the East Asian countries, like Taiwan, even Korea, were praised a lot during the pandemic for how well they handled it. And I show that in those countries, government spending as a share of GDP is much lower than any Western country, including America. And yet they've been able to create very efficient tech savvy states which are more geared for the 21st century and so done pretty well because of that. So, you know, that's been a shining example as well of what you know, of what that country, you know, what that country has done with much more limited government. And then I even cite the example of Vietnam, that this is still a relatively poor country, it's an emerging market, and yet it's going the way of China, which is when China gave its people more economic freedom. Economic growth exploded in the 80s and 90s and right up until Xi Jinping came to power. And Vietnam is following a similar path. So I show again here that as long as you're in the right trajectory of giving your people more economic freedom, over time you're likely to see much greater economic benefits. Now America has gone the other way. America, on these indices of economic freedom and stuff used to rank as among the freest countries in the world at number three or four. It slipped to number 25 in the last few years. So it's a much more restrictive environment that you're seeing out here. So I think that this is where I say that how the country has changed over time in America, but yet in these other countries, the direction of travel is positive. And in case of Switzerland, I think that's the closest you're going to get to a perfect nation in the world today.
- [48:16]
B
Well, I'm glad you kind of brought it back to comparing and contrasting it to kind of what's gone in on an American policy. Because to bring it back to the concept of American exceptionalism, there's definitely a degree of truth to that narrative that's really been kind of one of the primary drivers of markets recently. But it also might be reliant on some of these unsustainable trends that we've been discussing. You wrote recently that, quote, the overdue rebalancing of global markets has begun and is likely to be playing out for a long time. What does this mean for this trend, mean for investors?
- [48:59]
C
So there's a lot that America still has going for it. And the biggest stuff America has going for it is still still its innovative spirit. And what happens in Silicon Valley and its tech sector and the American Economy today is so much like the entire hope is hanging on one thing which I think is AI, that artificial intelligence is something which the entire American economy today is really banking on. So that's one thing which is still keeping the American exceptionalism, you know, like dream alive in a way you can argue, because America's lead in AI is quite significant compared to the rest of the world and is more trusted, you know, than even China, where there's been a significant breakthrough on the tech and the AI front. So that I think is something which is that America still has going for it, you know, which we have to recognize. But I do feel the fact that this environment that existed over the last few years where it seemed as if the only place in the world worth investing, you know, was America, that regime has shifted. Now, these shifts take a very long period of time because remember that in the entire 2000s, the narrative was how the BRIC countries were going to rise and take over the world, how China was going to exceed America's GDP level by the end of 2020. And all those kind of stories were spun and it never turned out that way. And now we've gone the other extreme where we think that America is the only country at the end of the day where you can put your capital. There is no alternative. So I feel that the truth lies somewhere in the middle. I still feel America will always be the dominant country in the world. But this over allocation of capital, where America is the only place to invest, that trend may have peaked. And the weakening of the dollar is a signal that other countries now have become also attractive to invest. Part of that is just the cheapness, the valuation, but part of it is also a reaction function that places like Europe and all felt that they were facing a complete existential crisis at the beginning of the year. And so countries like Germany decided to carry out some economic reform, whether on spending, whether on regulation, on defense, to try and sort of come back into the game. So there's a natural reaction that happens when countries are pushed with their back to the wall and countries which seem to be sort of like Teflon, like not affected by anything, become complacent, that nothing can really take them down. So I think that I expect that over the next few years more capital to be allocated to these other countries. America, as I said, may still get 50% of the incremental dollar flowing to any country in the world, but it's unlikely to get 70, 80% or some crazy number like that that we saw at the turn of this year. So These shifts are typically when they happen. And a great illustration of is the US Dollar. Then the average bear market for the US dollar tends to be about five to seven years once it begins. And that also tends to be a period when other countries and other markets in the world tend to outperform the U.S. we're seeing some signs of that this year with the international equity market returns in dollar terms being double that of the US So far, even though the US market's been relatively resilient. But we are seeing that there's greater interest in international investing, in greater allocation of capital to other countries and diversifying a bit of away from America. And I think that the only thing which is sort of possibly delaying this process or preventing it from accelerating further, given the other weaknesses in America, such as the massive budget deficit and all the dysfunctional politics, is the fact that the AI trade is very hot and buzzing in America. Right.
- [53:07]
B
And I'm glad you, you mentioned, you know, diversification because it seems like that's very closely related to the American exceptionalism. You know, it's the idea that diversification is dead. And, and so maybe, maybe now diversification will be rehabilitated or resurrected, you know, as part of, you know, these trends. You're talking about taking a step back. You're clearly a, a very deep thinker, Rucher, and that's. That seems to be a rarity these, in this day and age, in any given week. Where do you, where do you think you spend your most valuable time in this regard?
- [53:45]
C
Well, nicely to say that I'm not sure in terms of, you know, like, in terms of what I do that differently. But for me, as I said that just reading and researching a lot is very key. And I like to travel, you know, like to get different perspectives. I go back to my home country, India, frequently. I travel across different emerging markets when I have to, because when you travel to a country, it really focuses the mind on understanding that country so much more. And that's how I wrote my first book, Breakout nations, which was really an economic travelogue of the world. I'd say that in terms of just reading, researching, traveling, I think that that ingredient helps me do that. And as you know that when you are also managing some money, it keeps you intellectually honest as well that, you know, like, I can say all these things to you on air, but, you know, at the end of the day, if I'm going to be wrong consistently, you know, like, I know that I'm going to feel like a bit of an imposter talking to you because I'm like, okay, I'm saying all these things, but what do I have to show for it? So I think that that's the challenge and the discipline of also managing money and putting your money where your mouth is. But I feel most satisfied to research and write. And every time I have to put out a column like I do for the Financial Times every other week, I end up finding myself researching more and just feeling that much more intellectually challenged by, by seeing the questions I get and, and by absorbing that. So I'd say that that's what I try and do. And you know, like, also it's about having the balance that you. I'm a keen student of history, and yet I don't want to rely so much on history where I'm blinded to what's going to come in front of me. So I'd say that it's just the intellectual challenge of doing this and reading, researching and traveling is something which I think keeps me honest.
- [55:49]
B
Right, right. Well, I think the book is an absolute must read for investors. What Went Wrong with Capitalism? And I read your stuff in the Financial Times religiously. For listeners who are interested, are those really the two best ways to kind of follow your work right now?
- [56:07]
C
Yes, I would say so that, I mean, I'd say my Financial Times column which comes out every other Monday, you know, like I try and talk about some topic which is very current and yet try and give a, you know, like a longer term history to it, a longer term perspective to it. So I'd say that those are the. And then I, you know, try and come up with a new book every three or four years. So I'd say that those are the two best ways of doing that. I mean, I do other media appearances, but you know, and I enjoy talking to fellow market people like you, as this conversation has shown. But I'd say that those are the two best ways. Yes.
- [56:45]
B
Well, as I said, I'm a huge fan and I recommend everybody, everybody check it out. I'll put some links on my website that, you know, direct people to those, those sources. Richard, this has been really wonderful. I'm, I'm so grateful to you for taking the time to do this. Thank you so much.
- [57:03]
C
Thanks, Jesse. Really enjoyed our conversation.
- [57:11]
B
Now south darn in April of 142.
- [57:35]
A
For notes and links related to this episode, including where you can find Rushier's latest work, visit thefelderreport. Com podcast. Thanks for listening and I'll see you on the financial road less traveled.