MacroVoices #544 Viktor Shvets: How Markets Survive Disruption

Viktor Shvets frames disinflation as the dominant long-term structural trend, driven by technology pushing marginal costs toward zero across labor, products, and assets. Inflationary spikes from COVID, the Russia-Ukraine war, the Iran conflict, and chaotic trade and immigration policies are transient disruptions layered on top of that disinflationary backdrop rather than evidence of a regime change. On a three-month moving average, US inflation under the Biden administration was already close to 2 percent before the new policy waves began. One- and two-year inflation swaps that spiked during the Iran conflict have since normalized to below 2 percent, and five-by-five and ten-year swaps remained anchored at 2.2 to 2.4 percent throughout. Shvets warns, however, that overlapping transient episodes can become perceived as permanent by businesses and consumers even when each episode is individually short-lived.

Shvets distinguishes between two competing views of the neutral rate. Stephen Merran places real neutral rates near zero, implying a policy rate of roughly 2.5 percent, while Federal Reserve dot plots imply a real neutral rate of 1 to 1.5 percent, pointing to a policy rate of 3.5 to 4 percent, approximately where the Fed stands today. The key difference is that systemic risks have been expelled outside economic and capital market cycles into polarization, geopolitics, climate, health scares, and technology, and central banks have close to zero capability of assessing, timing, or measuring those expelled risks. The Fed itself is no longer unified, with a wide spread in dot-plot projections and high internal dissent. Kevin Warsh holds only one vote out of 19 Fed voices and Shvets characterizes him as a politician rather than a hawk or dove, arguing his stated goals of reducing Fed communication and returning risk to markets are not practically achievable given how far financialization has already progressed. The Supreme Court preserved Federal Reserve independence while dismantling most other federal institutions, leaving the Fed as the only remaining independent institution in the United States, which Shvets acknowledges is intellectually inconsistent.

On the Iran conflict, Shvets argues it resembles Vietnam in having no clear objectives, no defined exit, and shifting US goals against Iran's consistent strategic aims. Aerial bombardment campaigns historically fail because they tend to unite populations behind regimes, and regime change without ground occupation will not succeed and would likely make the regime more extreme. Iran exceeds one million square kilometers, making it fundamentally different from Venezuela or Panama. Modern technology drastically levels the playing field between large and small countries, destroyed infrastructure can be replaced rapidly as demonstrated in Ukraine, and Iran has chokepoints beyond the Strait of Hormuz as evidenced by Houthi activity in the Red Sea. Shvets predicts the conflict will persist for a long time with recurring flare-ups but no conclusive resolution. He contrasts this with Russia-Ukraine, which he compares to the Korean War, predicting Ukraine will join the European Union and could reshape its agriculture, manufacturing, defense, and IT sectors over time, while Russia is likely morphing into a milder version of North Korea.

The VDAM polarization database places the United States at plus 2.3 on a scale where plus 4 represents civil war, which Shvets describes as the highest and fastest polarization in the history of the database. The share of wages in US gross domestic income is at its lowest point since 1947, while the profit share of national income is approximately 16 to 17 percent, more than double the 6 to 7 percent Warren Buffett once considered too high. The top 0.1 percent of US households, roughly 135,000 households, control about 15 percent of national wealth, up from approximately 8 percent in 1980. Shvets argues that Bernie Sanders, Donald Trump, and New York Mayor Mamedani share similar economic positions including eliminating student debt, supporting tariffs, and suppressing pharmaceutical prices, and that left and right extremes converge on economic interventionism while differing primarily on social issues. Depolarization requires either violent upheaval, redistribution policies that account for humans becoming less relevant as inputs to production, or a sustainable productivity surge Shvets places at least ten years away.

Shvets describes AI as a general purpose technology encompassing data centers, chips, LLMs, robotics, automation, 3D printing, biotech, and quantum computing. LLMs today use less than one third of the energy expected three years ago and may use around 10 percent of that original estimate within four more years. Quantum computing will make many data centers obsolete and will unscramble almost everything within five to seven years. Open-weight systems represent the clear future for LLMs, meaning valuations ascribed to most LLMs will not hold. He predicts rolling bubbles will occur sequentially in commodities, infrastructure, robotics, humanoid robotics, biotech, 3D printing, and eventually every industry restructuring around AI, with concentration of returns remaining high at roughly 10 stocks delivering up to 50 percent of index performance in some years. The United States has already completely lost the electrification stack including EVs, batteries, solar panels, and wind to China, and Shvets sees China extending that lead into robotics and automation while the US falls relatively behind in science and technology.

China has maintained a national saving rate of approximately 45 percent for more than three decades, forces overinvestment and export dependence, and now invests 11 to 12 trillion dollars every year, nearly triple the GDP of Japan. Because of this excess investment, China acts as the biggest deflator on a global basis by pressurizing global prices downward.