Wall Street Week 05/31/2024
One Trump legal drama draws to a close, TikTok's legal drama gets put on a fast track and the wrestling match among inflation rates and the markets enters a new round. This is Bloomberg Wall Street Week. I'm David Westin. This week, Niall Ferguson of the Hoover Institution on what it means if we run out of people. We’ll get to the maximum population
probably some way before the low, the 10 billion mark and after that population is going to decline and decline pretty steeply. And Jennifer Huddleston of the Cato Institute and the legal battle over who gets to own TikTok, how much intervention would that allow the government to have into the social media market? More generally, we begin with the markets and in particular the credit markets, which appear to be staring down a 500 basis point Fed rate hike without much of a hiccup, at least for so far. We welcome back now Glenn August. He's founder and CEO of Oak Hill Advisors, a significant player in the credit market, especially when it comes to private and distressed credit. So, Glenn, great to have you back with us.
Nice to be back. Six months ago that we were together. Tell me what's happened here. How could the credit markets stare down to they say that 500 basis points they seem to have just absorbed. And go ahead. How about the equity markets? Up 15% also true. So, look, the markets are up because the economy is doing better than people expected.
And the big adjustment has been that inflation hasn't gone away and that reversed the market's expectation. Signs of six Fed cuts down to one one or two this year. And so when you have a resilient economy, it's good for equities and it's very good for credit, too. And when we talked last time, you were talking about something like one trillion dollars in debt that was going to have to be refinanced at a different interest rate than we'd seen before.
What happened to that? It doesn't seem to have happened yet. They're just extending the time. Are they fixing it? What's going on? So I'd say the biggest development in the markets has been the reopening of the syndicated markets.
Again, we as a firm do syndicated markets, private credit stressed in distressed and structured credit and what happened is the cost of financing for what's called close these collateralized loan obligations, which are the biggest buyers of leverage loans. It's not the banks who buy leverage loans. It's the close that by lenders own 70 plus percent. The cost of financing has come down 50 basis points in the last six months. And with that cost coming down and with a positive economic backdrop, there's been and with very limited M&A, private equity activity, you've had demand pick up because the close have low cost of capital, you've had limited supply of new deals. And guess what happens? Pricing goes up, spreads come down and you have this very a buoyant refinancing market.
So there's been a lot of refinancings in this syndicated market, principally because of close. So we've taken a dent out of that wall, but there's still a trillion plus of debt coming due. And that's something we're going to have to deal with and something that we're quite excited about. So more creativity is going on as well.
I hear things about things like liability management exercises or transactions. I hear about payments in-kind. Are these ways that creditors are defining to really restructure their capital stack so they don't have to pay the debt. So let's separate the pieces because pay in kind pick features is something that is 30 plus years old, is now making a resurgence.
I'll come back to that in a minute. Liability management exercises are essentially when companies have debt coming due in 2025, 26, 27, and because of some challenges in the business, because of higher interest costs, there's a sense that maybe they can't refinance at par in a couple of years and the debt is trading at discounts, say now again, the distress ratio, which is a percentage of the high yield market that trades a thousand basis points over the ten year Treasury over the relevant Treasury, five year Treasury is only 6%. So there's not a lot of stressed and distressed debt out there. But where there is, what companies are doing is these so-called like liability management exercises where they're going to the debt holders and say, Hey, we'll swap you into something that's coming due, something that was coming due in 26. And we'll ask you to extend your maturity. If the debt might be trading at 60, we'll offer you an 80 cent, we offer you $0.80 of recovery in something that people perceive to be money good,
so they can take their existing paper from 60 to 80. Now they are leaving $0.20 on the table because they have a poor claim. And so the liability management business is a very complex business. It's super exciting.
We're incredibly active in it and I do believe that is the next wave of stressed and distressed credit on the payment and kind of pick features. What you're seeing is that you hadn't seen that much pick issuance where you now starting to see and it's emerging in private credit is companies are looking at their business is and they may buy a business for $2 billion and it may be a very high growth business and they want to do ,000,000,000 of debt issuance and rather than then pay out cash interest, they'd rather have the debt accrue in-kind. That's not necessarily a bad thing, nor is it necessarily a good thing if you can if you invest in that company and you believe that company is absolutely worth $2 billion and you're investing, let's make it 800 million out a billion, and you pick on a small portion, you're compounding at that rate, which they would be in the neighborhood of ten, 11%. And it gives the company extra cash flow where pick is a little bit more concerning is which companies are more challenging.
They don't have the cash at all. I think picks in new deals are really about financing growth as opposed to remedying more challenge situation. I'm going to tell you what the risks being faced by the people putting money into private credit.
We had Jamie Dimon this week sort of come out and say there may be hell to be paid if, in fact, I'm afraid to go south. He seems to think there's a lot of risk he may be talking his book. I don't know. But what's he talking about?
Okay, Jamie always has incredibly interesting things to say. At the same time, Jamie is talking about adding more money in private credit, intentionally buying a private credit manager. I think where he's focusing on is that in a market where there's lots of demand, there is sometimes a tendency for people to be too aggressive in underwriting and there's certainly a number of players out there that are new to private credit and may be willing to be a bit more aggressive. That said, when I think about the underwriting that we and many of our large peers do, and medium sized peers too, if you have 50 plus percent equity cushion in a deal and you do a reasonable job of underwriting the credit, even if you make some mistakes, you have a lot of cushion. And I'll make a couple of points. One is that we did this study and we looked at what does it mean to have 50% equity cushion? So I did a study of the Russell MidCap, which basically has a median EBITDA of 150 or so million kind of right down the fairway of what we do.
And I did the analysis asking how how often did a company that is more than 50% of its equity value in 23 years in 2000 and the answer 5% of the time and that happened in 2001 after 911 and the Internet bubble bursting or it happened in 208 from the GFC and happened in 2022 when growth stocks got hit. And so if you do careful underwriting and you pick good companies, you really should have sufficient cushion. The last thing I'd say in terms of where I think Jamie was going is there's a legitimate question on the accumulation of alternative assets by the retail investor and by the high net worth individual.
And there's certainly some concern that Jamie expressed that maybe some of these investors went in if they go to take their money out and they can't get out or they have losses that their congressmen will get concerned Again, I think because the amount of cushion is so significant, I think that outcome is less. But for sure, and we have wealth distribution with our products. We want to make sure that the people who are buying our products, just like the institutional investors, understand what they're buying. I'm happy to say. Glenn August of Oak Tree Advisors will be staying with us as we turn from the day to day of the markets to the larger question of what they are telling us about the state of the overall economy and whether this time it truly is different. That's next. On Wall Street Week on Bloomberg.
This is Wall Street Week. I'm David Westin. Glenn August has stayed with us to talk about what he sees ahead for the economy and whether the markets truly can only go up. So if you look at markets reasonably, you sort of conclude they only go one direction. There has to be a stop to this.
How do you interpret what we're seeing? Look, there there's the macro. There's the micro, and then there's the risks that are out there. And so from a macro standpoint, what is clear is that the broader economy and corporates have been able to weather this meaningful increase in rates. And as I said earlier, the Fed decided not to cut rates thus far this year because inflation is real.
And you've heard Kashkari this week and others say we've got to see more data. But I think that speaks to the resilience of the economy today. Now, my own personal view is that what we're benefiting from still today is a stimulus of a couple of years ago.
And the and that stimulus is working its way through the system. And we're also still working through post-COVID. I mean, again, it is it is certainly at this point, years ago, four years ago, this this spring. But behaviors have changed.
Consumption has changed. And so the real question is when, when do the effects of stimulus and changes to consumption change? My sense is there is a reasonable chance we start to see some modest slowdown in 2025. Obviously, it's a big political year, so we'll see what happens with fiscal policy. But I think for the near-term we see a reasonably solid economy. Where we see weakness is on the very low end of the consumer side. But that's that's it.
You see a little bit of delinquencies picking up. And so when we look at our portfolio, again, we're credit investors, not equity investors alone. Our philosophy is to buy the company as our mentality is, is this is all about owning companies, but with the amount of cushion we have, again, I think we can weather some softening.
And again, I think we were in if you go back to the 2008 to 2000, 9 to 2019 period, we were able to grow at low, low growth and low inflation for a long time. The question is, will some of this wage inflation start to temper where will our immigration policy be? Where will the post-COVID mentality and more will it will revert back or will it stay the same? And so it's a delicate balancing act. But I think from a macro standpoint, we're okay. Part of it is the stimulus that was injected for during the great financial crisis to get us out of that. And then the pandemic, as you say, we've had a series of crises, but how much it also is psychological at this point. The markets and people in the markets basically assume daddy's going to bail us out no matter what happens.
Well, I don't I don't know if it's daddy's bailing us, because if you look at it, you know, the COVID distress cycle was about two weeks. So it wasn't even, you know, okay, it took six months. I think there is if you look at the breadth of the market, clearly Nasdaq, anything that has a eye has exploded.
And one of my partners at our recent annual meeting said if credit people are talking about, I you know, it's real. But there is definitely a sense that there is we on the in the earlier stages of an extraordinary growth wave where they are and what that does. Now again, there could be ripples, too, that that could hurt employment. Certainly there's lots of commentary on what it could do longer term to unemployment. And maybe they'll there'll be some interesting impacts to the to slowing down inflation at that point in time. So I don't I look I look at equities and they certainly their trajectory has surprised me, especially given where rates are.
But this growth trajectory and people's fear of missing out the FOMO that's in the equity markets in credit again, I think spreads have come in some. But as I commented earlier, when you adjust for the quality change, it's actually reasonable. And certainly in private credit, when I look at the opportunity, make ten plus percent on leveraged in multibillion dollar companies at a 40 to 50% loan to value, that feels really good to me.
Still, even though spreads have come in 100 basis points, we rely on prices to actually indicate where we should be investing our capital as individuals, as a society is the most efficient place you're catching up with, by the way. CEOs use it for that purpose as well. Is there a danger of undermining the reliability of prices as a way of allocating capital when the government's playing in the game? The extent to which it's been, the government is always playing the game again? I do think that part of the reason why M&A deal activity, buyout activity is down 40 plus percent from a couple of years ago is because rates are higher mean the price of money and how one thinks about discounting future cash flows is fundamental. And yes, the government plays a role in setting the short term rate. The markets play the role and setting the medium and longer term rates. And so I'm a big believer in the markets and yet there obviously incredible inefficiencies and there are obviously moments when the markets get it all wrong again.
Six months ago when I sat here, the forecast was for 625 basis point cuts, 150 basis points and instead the ten years up 75 basis points. Instead, those cuts have now gone to maybe one or two. So that's where there's opportunity. And like this opportunity in rates markets for people want to make those calls.
There's opportunity in picking individual credit, and that's what we do. We have a portfolio of 750 companies today across our 65, 64 billion of capital, and we're looking at thousands more. And so you have the opportunity to pick you have the chance to take a stand on what you believe in good businesses, good management teams, good industries, good sponsorship, good capital structures, right documentation, right pricing, fair pricing. You'd rather sacrifice a little on pricing than on quality or documentation. So I think there's an enormous opportunity to be made in what we do and whether equities go up ten, 15% forever.
If you can make, you know, 10% high singles, low double digit returns and credit, that feels awfully compelling to me. Yeah, it sounds pretty good to me as well. Thank you so much, Glenn. It's really a delight to have you with us. Thank you. That's Glenn August of Oak Hill Advisors.
Coming up, the legal drama surrounding TikTok heated up this week in a Washington court. We'll go over the state of play with Jennifer Huddleston of the Cato Institute. It's still a bit unclear what the primary national security claim that proponents of this bill that the government, as it's defending it in court, will seek to make. That's next on Wall Street Week on Bloomberg. This is Wall Street Week.
I'm David Westin. TikTok has challenged the law that gives it a year to separate from its parent company and the Washington, D.C. court hearing the case this week ordered oral arguments in September, setting up a possible Supreme Court ruling by the end of the year.
Take us through what Congress has said and the challenges to it. Welcome now, Jennifer Huddleston, Cato Institute senior fellow in technology policy. So, Jennifer, thank you so much for joining us.
First of all, take us into the challenge as we understand it. What I've read, at least in the coverage, is it's principally a First Amendment challenge whose First Amendment rights are being really invoked here. Thank you so much for having me. As you mentioned, what's really at the heart of this debate and at the heart of the debate over this law is this kind of question of free speech and First Amendment rights versus a legit national security concerns.
So as you mentioned, TikTok has filed a legal challenge to the divest or ban elements that were in the foreign aid package, where it is explicitly named in that portion of the law. And part of that challenge is on the First Amendment grounds, both as it relates to the app as well as as it relates to the app's users. There's also a separate challenge brought by a group of TikTok users or TikTok content creators that is about the user's speech rights separate from some of the other issues that may come up in the case involving TikTok itself. So as far as you can tell, Jennifer, looking at what Congress did, what it said it was doing.
Is this a matter of concern about what the expression is on TikTok or access to the data about who's using TikTok? Because I've heard both invoked during the discussion in Congress. It's still a bit unclear what the primary national security claim that proponents of this bill that the government, as it's defending it in court, will seek to make, because during the debate there have been several different elements expressed. Some are about questions with regards to Americans data security, which would have one set of potential solutions to weigh against a divestiture ban. Others are more about TikTok's algorithm and the potential that it could be used for some form of foreign influence, or even just about the type of content that's on TikTok.
And in those cases, we're getting much more to a traditional First Amendment analysis that we've seen play out before. A lot of questions about content neutrality and whether or not this is a prior restraint on the speech of the American users of TikTok. Well, as you suggest, I mean, there are different levels of scrutiny depending on first of all, and whether it's content neutral or not, if it's not content neutral.
It's a strict scrutiny standard. It could national security trump a strict scrutiny standard. Based on what we've seen so far. The government will have to make a really compelling case that lays out a very strong national security argument if that's to be something that it's able to overcome. When we look at the case involving the Montana ban of TikTok, which was a straight ban as opposed to a divest or ban bill at the preliminary injunction stage, what the court found was that that particular law would not even pass intermediate scrutiny, let alone strict scrutiny. Now, that was a state level challenge as opposed to a federal law.
It was a flat out ban as opposed to a divestiture ban. But that's probably the most similar case that we've seen in the court so far, which would seem to indicate that you would have a lot of skepticism and a really strong need to prove any case when weighing it against the First Amendment rights involved in this scenario. I'm glad you raised the Montana situation that was a state restriction, as I understand. There was also an attempt, an executive order at the federal level.
TikTok so far has done all right in these challenges. Does that track record to indicate anything about how it might fare in the D.C. Circuit? I think it indicates that we have strong First Amendment precedents when it comes to the rights of American users of this app.
The fact that this would be the government potentially foreclosing a venue for speech that millions of Americans have chosen to access when there could be less restrictive means to consider if there are national security concerns. We've seen, for example, requirements around removing TikTok from government devices or government networks, both at a state and a federal level that have seemed to not face the same degree of legal scrutiny as something more like a ban or divest or ban. There are also other questions around, you know, could there be some element of disclosure or mandatory audit that would resolve some of these concerns if they were valid? Short of going to step, that would have such an impact on American speech rights as something that could potentially take away this venue. Jennifer, you're a specialist in technology policy, and I wonder what the possible ramifications could be of a decision here in the D.C. Circuit for other regulation of social media companies. I mean, for example, if the D.C.
Circuit and we're actually to strike this down, might it limit the government's ability to have other regulations for other social media outlets? I think there's more of a question of what happens if the D.C. Circuit upholds this. How much intervention would that allow the government to have into the social media market? More generally, while the bill explicitly names TikTok, it also opens the door to the government being able to regulate other companies that may be seen as having ties to Russia, China, North Korea or Iran, Notably, some other companies that have been brought up in this discussion include e-commerce platforms like Shein and Temu that have been incredibly popular. They're also messaging apps and video game apps that may have some degree of ties, and it's unclear what due process rights a company has or how tenuous those ties can be for the government to establish that it falls under this kind of element. So while we're seeing a broader debate around online speech, both in Congress and in the courts with things like the net choice cases also moving forward, I think the more interesting question here is how far could this law extend? How much could this allow the government to intervene into social media or app stores more generally? And into American speech were it to fail in the courts? Jennifer, thank you so very much for being with us today.
Jennifer Huddleston of the Cato Institute. Coming up, Cold War 2 with China. That's what Niall Ferguson at the Hoover Institution calls it. We'll ask him how it's going. What's been striking about the last decade or so has been the shift in American attitudes. That's next on Wall Street Week on Bloomberg.
This is Wall Street Week. I'm David Westin. New U.S. tariffs on imports from China and Western concerns with Chinese overcapacity underscore the fraught relations with the world's second largest economy. Niall Ferguson of the Hoover Institution continues to analyze what he calls the second Cold War.
In a series of columnist for Bloomberg Opinion. And we welcome you back now to Wall Street Week. Nialll, thank you so much for being back with us. Let's talk about this second Cold War. And I guess a broad question I have is what should US policy if for the matter of Western policy or a U.S.
policy be toward China in this second Cold War? Well, I've been arguing that we're in Cold War, too, since 2018. And at the time when I first said there was a good deal of skepticism, there's a lot less. Now, in fact, there are no books appearing with the title Cold War two. I should get some royalties out of those.
But the key point is that in many ways there's a big difference between Cold War one, which was with the Soviet Union from the late forties to the mid eighties and Cold War two, which is primarily with the People's Republic of China. And the key point is that the Chinese economy is much larger in relative terms and the Soviet economy ever was. I mean, the Soviets barely got to 42% of U.S.
GDP at peak the second and related point is that we do a hell of a lot more trade with China than we ever did with the Soviets. And so there is this intertwining of the economies that really wasn't a feature of Cold War one. And that means that we have to approach the challenges of Cold War two somewhat differently. And I think to give them their due, the Biden administration has understood this, and they have been pursuing a primarily economic or technological containment strategy.
Its containment as in Cold War one. But the emphasis is on the technological rather than the military. And I think that's warranted considering that a military showdown with China would be extraordinarily dangerous.
And I think particularly at this time, it's to be avoided at all costs. Is it possible, Neal, to have a bifurcated strategy which is containment when it comes to technology, but not with such a trade? I mean, we had this talk about disengagement. People backed off of that. And then there's this de-risking, right. Because we have to be involved in them. So in a sense, for the reason you said, the Soviet Union was not that major a player in the global economy.
I mean, we had to, of course, restrict technology transfers to the Soviet Union if we could. But the Soviets were pretty good at stealing, say, the keys to nuclear fission. So there was some elements of economic or technological containment in Cold War one.
But I think what's been striking about the last decade or so has been the shift in American attitudes. If you go back to the later Obama years, there was almost an acquiescence in China's rise. The last national security strategy of President Obama's second term effectively recognized that there was no stopping China's economic rise. That all changed in 2017 when Donald Trump's national security adviser, H.R.
McMaster, redrafted the U.S. National Security Strategy and emphasized that China was now a rival, a competitor, and needed to be seen as such and treated as such. Trump himself favored tariffs as a tool, and I think the tariffs that Trump imposed did something to check China's growth. Though they remain highly controversial amongst economists. But what proved to be more important were the technological measures that began by targeting far away, which was on the point of taking over global 5G networks.
Interestingly, Joe Biden's administration did not radically change tack on China. It basically took Trump's policies and developed and they didn't lift the tariffs. And on the technology front, the Biden administration, under Jake Sullivan's direction, I think, proved even more effective at applying technological containment to China, most obviously with respect to semiconductors. One of the big aha moments for me, David, of the last decade was realizing that China was spending more on importing semiconductors down on importing oil. That has turned out to be a kind of Achilles heel for the Chinese economy. And the Biden administration has taken that Achilles heel and given a real hard kick, if not a spear jab, with the restrictions on the export of sophisticated semiconductors and the things you need to make them to China.
That's really set China back, particularly in the competition to develop artificial intelligence. Neal It strikes me that President Xi has from time to time accused the United States policy of basically being to prevent them from growth. As I listen to you, it sounds like that actually should be our strategy to as much as possible prevent them from further growth. Well, I don't think it's quite that, because if anything, it's been president seen his policies have somewhat slowed China's growth. Remember, he cracked down on the real estate sector. He kind of beat up on the tech sector, even on the on the private education sector.
And all of those things, I think, have had a negative impact on the private sector in China. It's not that the US wants China to stop growing. It's more that the US wants to prevent China acquiring technologies that could pose a real threat to US national security. And I don't think there's any question that artificial intelligence as powerful and potentially very dangerous applications in the military domain. So this is a technological containment that I would say is intended to prevent China establishing parity or even leading the United States in areas such as artificial intelligence or, for that matter, quantum computing. I don't think the US would mind at all if China's policymakers decided to grow Chinese domestic consumption and allow Chinese households to enjoy more of the fruits of their labors.
But that's not Chinese policy, as you know, David. Chinese policy has pivoted in the last year towards a new manufacturing export drive that threatens to overwhelm the world in electric vehicles, batteries and solar cells that the Chinese can manufacture much more cheaply than anybody else. And that's not really a policy with which most Western policymakers are comfortable. I mean, it's one thing to compete with the US or Europe when it comes to apparel or footwear. The stuff that China did early on in its meteoric rise. But when you go after automobiles, I think it's clear that there's just a greater political salience.
We had one big China shock in the early 2000s after China joined the World Trade Organization, and it took out a lot of Western manufacturing capability. I think the prospect of a second China shock the basically eviscerates automobiles, for example, is not one that many policymakers in Europe or North America are prepared to accept. So, Neal, finally, I wonder what the economic ramifications for the United States and the West of conducting this Cold War two, and particularly, does it inevitably lead to higher inflation and higher interest rates as we put tariffs on, as we constrict trade in order to fight this war, this Cold War? Does it mean we necessarily have to have more inflation? I think it would be very hard to claim that this was a disinflationary policy.
Globalization in the sense of free trade, free capital movements, free labor, mobility, that all together was a disinflationary policy in the world, saw a general disinflationary trend in the entire Cold War period from 1991 until around about 2017 2018. I think now that we're in Cold War two, we can expect there to be some upward pressure on inflation from a variety of sources. If supply chains have to move away from China, they're probably moving somewhere somewhat more expensive. If we're putting tariffs on, there's going to be some impact on the price of goods somewhere along the supply chain. And of course, if we're spending more on the military, which China certainly is and European countries increasingly have to, then that's likely to be inflationary, too, particularly given how fiscally constrained everybody is after the financial crisis and pandemic and all those things that have driven up public debt in recent years.
So I'm afraid Cold War two is likely to be a time of higher inflation and higher interest rates just in the same way that the interwar period between the cold wars was a time of low inflation and low rates. And one last one, Neal. What does Cold War two mean for the climate? Because, for example, if you're talking about electric vehicles, you're talking about solar panels, we might be helping the climate by importing a lot of inexpensive, relatively inexpensive green energy out of China.
And yet we're saying we don't want to do that. Well, the Chinese love to say that. And that's the argument they make with we're producing all of these electric vehicles and using all these batteries and solar cells and you're putting tariffs on them, you're not doing enough to save the planet. And the correct response to that is when you manufacture these EVs and these solar cells, what is it that you actually use to generate the electricity? And the answer is coal.
And the reality is that China has been the leading consumer of coal over the lifetime of of gratitude burger. I think that goes back to 2003, a massive increase in coal consumption globally, about 80 to 85% of that increase has been accounted for by China. You're not saving the planet if you're buying electric vehicles from China that are manufactured with electricity, that's produced by burning coal. That is, I think, a pretty good definition of the law of unintended consequences. And that's why I think it's right for the US and Europe to push back against this great wave of Chinese exports.
It's not going to save the planet if they're building new coal fired power stations every week of the year, which right now they are. Niall Ferguson will stay with us as we turn from problems with China to a problem the world faces with China as the global population moves toward its peak. That's next.
On Wall Street. Week on Bloomberg. This is Wall Street Week. I'm David Westin. Niall Ferguson of the Hoover Institution has remained with us.
Niall, you wrote a short while ago a piece for Bloomberg Opinion on the peaking of the global population and the consequence of that. I have heard from various people in and around Wall Street that that has been a very influential piece. People are very concerned about that over the long run. First of all, give us the facts of where we think we are now, where we're headed in terms of population growth. Well, David, when you and I were young, the world worried about a population ball. There was going to be a Malthusian crisis named after the great 18th century political economist Thomas Malthus, where overpopulation would lead to famine and disaster.
And it was those those ideas back in the sixties and seventies that led to some pretty drastic population policies, not least the one child policy in China. Well, fast forward to the 2020s. And it turns out that the law of unintended consequences has struck again.
And we now are facing significant population declines, not only in Asian countries that drastically reduced family size, but right across the globe, except in Africa. And it looks as if, although you can debate the exact timing, humanity will peak in the 2060s. We'll get to the maximum population probably some way before.
Below the 10 billion mark and after that population is going to decline and decline pretty steeply. This is most easy to illustrate with the case of China, where the population is forecast to decline by half by 50% between now and the end of the century. But it's not just the Chinese story.
Ultimately, it's a global story. And this is one of these trends that I think most people haven't fully grasped because it's just a little bit out of the average person's planning horizon, the 2060s. So so what happened? Why is it that we have, in fact, the fertility rates going down the way they are in so many countries around the world? Well, that's not the easiest question I've been asked today, because explaining why in all kinds of different contexts, couples have chosen to reduce the number of children that they have below the replacement rate. Now, it's typically said that the average couple has to have 2.1 children.
Yes, I know there's no such thing as point one of a child, but just above two for us to maintain population because obviously there are some people who die prematurely, perhaps even in childhood. So the replacement rates 2.1 per couple. But all over the world, couples have taken that number down below two. Indeed, in countries like South Korea.
The fertility rate is below one on average. And so the one child family has become pretty much the norm in East Asia. And it's it's rapidly spreading around the world.
Population in the United States has continued to grow only because of immigration. It's not because of natural increase, because in the United States, as in most Western countries, the average fertility rate fell some time ago, but below 2.1. Now, why is that? I mean, there are all kinds of explanations that you can advance. Maybe the attitudes of women change to family size because women began to pursue more ambitious careers in the wake of feminism. Or maybe it's just that as societies become more economically advanced, people decide to spend their resources not on having more children, but on having more vacations or or requiring yachts and McMansions.
There are a bunch of different explanations at work here. I was drilling down into the South Korean case, and the answer that I got from the South Koreans I talked to was, Well, it's just so expensive to raise kids in Seoul these days. We spent we spend a fortune on educating one kid. We just can't imagine doing it for two.
And, you know, you have to ask yourself what the rationale is for a society that invests so heavily in education that the fertility rate falls to below one. I mean, that's a society that's going to be very highly educated until it goes extinct, which happens, you know, pretty quickly. If you reduce your your fertility rate down 2.5 or point six.
It begs the question of what, if anything, governments through their policies could do to affect this. Obviously, we had the one child policy in China. They're trying to change that. Not so easy. But we hear, for example, the United States suggestions that things like child tax credits subsidizing, making, working more flexible may in fact, encourage more births. Do we have any evidence that, in fact, those things might be effective? Pretty much none.
I mean, governments have been trying to do this since nearly a hundred years ago. Was Mussolini when he was the Italian dictator who talks about a battle for births and all kinds of incentives were created by the totalitarian regimes of the mid 20th century to increase the birth rate. None of it works.
It would seem that once people have got down to two children, it's extremely hard to get them back up to three. When they're down to one, it's hard to get them back up to two. So I think it's very hard to find any evidence of a successful economic policy that change the decision making that couples make about about family size. And this is a big problem, if you will, Jinping, and you're staring at this dramatic decline in population, it's already begun. I mean, the workforce is already shrinking. And so the one child policy, which was one of the more dramatic interventions the Chinese Communist Party did back in the days of Deng Xiaoping has been replaced by a three child policy.
But I can assure you the number of Chinese couples I know who are planning to have three children is tiny and it's highly unlikely in my view, that China will be able to increase the fertility rate back above two. If you assume that the fertility rate stays where it is in a country like China, that actually the population will fall even faster than 50% between now and the end of the century. And the thing that's really striking, David, is if you look beyond 2100 into the next century, what's what's really amazing to me is how quickly the global population could decline.
We shot up from 2 billion back in the early 1920s to where we are today with astonishing speed and indeed the last hundred years was one of those periods of population explosion. You can see why people in the 1970s started to panic about it. Well, get this, if you fix that problem so much that fertility falls well below the replacement rate, then the population of the world could fall with almost comparable speed, certainly between now and the end of the century, nearly all the increase in population in the world is going to come from sub-Saharan Africa. And after they bring their family size down, which it's highly likely they will, there just won't be any sources of additional population.
And that means the immigration option will no longer really be available for countries that want to continue to grow. But talk about that immigration option in the interim period. What ramifications does that have? As you mentioned, the United States actually has been maintaining its population growing because of immigration. What does this mean for immigration policy in places like the United States and other Western countries? Well, it's relatively easy if you can just get the politics right, because there's obviously a competition for talent in the world and the talent that's in relatively poor, relatively crowded countries wants and you can tell this from opinion polls to come to the United States. And if it can't make it to the United States, to Western Europe or the U.K., but the United States has taken the rather
odd decision to make it really difficult to migrate to the United States legally. I mean, all the kind of legal channels are more or less blocked at the moment or extremely hard to navigate. And so we've ended up with this curious strategy of allowing illegal immigration across the southern border, which is now pretty much a scene of chaos. The Canadians must be looking at this with a smile because their immigration policy is much more targeted on attracting talent and making sure that the immigrants are likely to add to economic growth and not to be a cost of some kind. So I think for Western countries, there's an obvious argument for immigration reform that aims at attracting the right kind of people with the right kind of talent and doing it through legal channels rather than just having a free for all on your on your border.
I mean, I think that's the critical issue. But we have to understand that this is not something, a gift, if you like, that will keep on giving indefinitely sometime around the 2060s. The supply of immigrants, of potential immigrants is going to look like it's declining.
And I think it will become an increasingly heated competition for the people with the talent. The entrepreneurship between countries that still want to attract immigrants. Remember, not everybody wants to do this. China does not have a policy of attracting immigrants and relatively few, if any, people choose to migrate to the People's Republic of China. So what are the Chinese going to do if they don't do immigration and their population is heading towards dramatic contraction? The answer may be robots that I tried to sum up the future of the world by saying that the Cold War to challenge the rivalry between the United States and China may end up being immigrants, be robots. Neal, thank you so much. Is a really important issue, really.
Thank you for bringing it to us. That is Niall Ferguson of the Hoover Institution. Coming up, looking for truth in all the wrong places. Campaign rhetoric around the world. That's next on Wall Street Week on Bloomberg.
Finally, one more thought. The Prussian statesman and diplomat, Otto von Bismarck said that people never lie so much as after a hunt, during a war or before an election. We're going to put Prince von Bismarck's epigram to the test in a series of elections over the next month or so, in different places and in different contexts all around the world.
First off, ExxonMobil held its annual general meeting this week in a fight with some shareholders over a proposal to speed up the move towards zero emissions. The company didn't just oppose the request. It sued the activist shareholders behind it, saying it was a governance issue, not really about climate. But some big shareholders like CalPERS sided with the activists. It was obvious we were not going to reach agreement on this litigation. It's an absolute governance failure by the Exxon board, which is why our vote is against the entire board, including the CEO, Darren Woods.
In the end, the board won reelection and things went on as usual, at least for now. We're about to have another election in the corporate world. But this one isn't so much about climate for the planet as it is for Elon Musk's personal ecosphere.
As he puts before Tesla shareholders next month, his request for a $46 billion payday. Refusing to accept the no answer that's already come from the Delaware Chancery Court. Did he accomplish really incredible things that were sort of laid out in this pay package, in this award? Absolutely.
But has he really sort of shot himself in the foot? In the political world, we move closer to a final result in the lengthy India elections with a final answer due on June four. As things have played out over the last month, Prime Minister Modi's apparent lock on an historic win looks ever so slightly less certain. And surprisingly. Although temperatures during the election have reached toward 122 degrees Fahrenheit. Climate issues have been conspicuously absent in the campaigning.
Instead, it's been much more about the economy. And the former head of India's central bank says economic policy likely won't change much. No matter what the outcome, whatever government comes in will take a lot of the good stuff that's been done and continue it. In the meantime, we have two notable elections coming up where there are only women on the ticket. In Tokyo this July, a prominent female opposition leader will challenge the female incumbent mayor in one of the highest profile positions in Japanese politics. And of course, on Sunday, Mexico will hold its national elections where an estimated 98 million people are expected to vote.
Their choice will be between a former climate scientist, Claudia Sheinbaum, and an opposition candidate. Xochilt Gomez. Climate will be very much on the ballot. Quite apart from this Sheinbaum background as Mexico City tied heat records throughout last weekend and both candidates promised to make climate a priority. Either way, we're getting a woman for the first time as the president of Mexico. Both of them pro-business listeners touching their communities and really caring about their constituents at all levels for the sake of the planet. We can hope that Von Bismarck's wrong and that they're telling us the truth.
This election. I'm going to do something really outrageous. I'm going to tell the truth. That does it for this episode of Wall Street Week.
I'm David Westin. This is Bloomberg. See you next week.
2024-06-03 02:03
