Capital Wars and the Death of Fiscal Illusions | Paulo Macro & Le Shrub

In Episode 410 https://hiddenforces.io/podcasts/capital-wars-and-the-death-of-fiscal-illusions-paulo-macro-amp-le-shrub of Hidden Forces, Demetri Kofinas speaks with investors Paulo Macro and Le Shrub about the consequences of a breakdown in the international capital and trading system—and what this means for markets and investor portfolios. The first hour revisits last year's discussion on "EM-ification," the breakdown of the rules-based global order, and the urgent search for a new safe asset in a world of deteriorating fiscal balance sheets. Together, Demetri, Paulo, and Le Shrub map out what investors should be paying attention to in the year ahead. In the second hour, the conversation turns to the implications of a full-blown trade and capital war, including: The impact on U. S. assets—especially Treasuries and the dollar—if surplus nations redirect their capital flows away from the United States Resurgent inflation fueled by strategic rearmament and industrial policy A potential decoupling from—and even a hot war with—China The abandonment of fiscal restraint in the face of an economic slowdown amid persistently high or rising borrowing costs for the U. S. government The risk of massive wealth destruction triggered by a dramatic revaluation of the U. S. dollar Subscribe to our premium content—including our premium feed, episode transcripts, and Intelligence Reports—by visiting HiddenForces.io/subscribe https://hiddenforces.io/subscribe. If you'd like to join the conversation and become a member of the Hidden Forces Genius community—with benefits like Q&A calls with guests, exclusive research and analysis, in-person events, and dinners—you can also sign up on our subscriber page at HiddenForces.io/subscribe https://hiddenforces.io/subscribe. If you enjoyed today's episode of Hidden Forces, please support the show by: Subscribing on Apple Podcasts https://podcasts.apple.com/us/podcast/hidden-forces/id1205359334, YouTube https://www.youtube.com/channel/UC8URhgYos5fjHqFSO4RSIEg, Spotify https://open.spotify.com/show/0TK6u251zGSlMgJKH6cOaP, Stitcher https://www.stitcher.com/podcast/demetri-kofinas/hidden-forces, SoundCloud https://soundcloud.com/hiddenforces, CastBox https://castbox.fm/channel/2629539, or via our RSS Feed http://hiddenforces.libsyn.com/rss Writing us a review on Apple Podcasts https://podcasts.apple.com/us/podcast/hidden-forces/id1205359334 & Spotify https://open.spotify.com/show/0TK6u251zGSlMgJKH6cOaP Joining our mailing list at https://hiddenforces.io/newsletter/ Producer & Host: Demetri Kofinas Editor & Engineer: Stylianos Nicolaou Subscribe and support the podcast at https://hiddenforces.io https://hiddenforces.io/. Join the conversation on Facebook https://www.facebook.com/hiddenforcespod/, Instagram https://www.instagram.com/hiddenforcespod/, and Twitter https://twitter.com/hiddenforcespod at @hiddenforcespod Follow Demetri on Twitter at @Kofinas https://twitter.com/kofinas Episode Recorded on 04/15/2025

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:00Demetri Kofinas?

  What's up, everybody? My name is Demetri Grafinus, and you're listening to Hidden Forces, a podcast that inspires investors, entrepreneurs, and everyday citizens to challenge consensus narratives and learn how to think critically about the systems of power shaping our world. My guests in this episode of Hidden Forces are Paulo Macro and Les Shrub, two popular Substack authors with large Twitter accounts who were on the podcast together almost a year ago to the day to discuss their respective frameworks, including the EM-ification of developed economies and their political systems, the search for a new safe asset in a world of worsening fiscal balance sheets, and how the strain on the international system and

• 0:43Demetri Kofinas?

  on American military and financial hegemony could amplify some of the budgetary and political headwinds facing developed economies in the years ahead. I asked them back on the podcast to revisit that conversation in the context of everything that has transpired in the last year and to plot a series of possible courses for what investors can expect in the year ahead. In the second hour of our conversation, the three of us discuss what a smashing of the international capital and trading system could mean for investors and for the value of US assets in particular, including US Treasuries and the dollar, if exporting countries begin reinvesting more of their current account surpluses in their own economies and in asset classes outside the United States.

• 1:26Demetri Kofinas?

  We also discuss what we think will actually happen from a policy standpoint. Will the proposed tariffs lead to an escalating trade and capital war with the endgame being a complete decoupling from and possible hot war with China, as unthinkable as that may have seemed only a few years ago? Will it lead to new bouts of inflation as national economies seek to stimulate domestic investment in strategic industries and find new sources of demand if US consumers retreat behind tariff barriers and fiscal austerity? And how realistic is talk about cutting fiscal deficits in the United States if the economy begins to materially slow or if borrowing costs for the US government remain persistently high or rise precipitously?

• 2:09Demetri Kofinas?

  If you want access to that part of the conversation and you're not already subscribed to Hidden Forces, you can join our premium feed and listen to the second hour of today's episode by going to hiddenforces.io/subscribe. All of our content tiers give you access to our premium feed, which you can listen to on your mobile device using your favorite podcast app, just like you're listening to this episode right now. If you want to join in on the conversation and become a member of the Hidden Forces Genius Community, which includes Q and A calls with guests, access to special research and analysis, in-person events, and dinners. You can also do that on our subscriber page. And if you still

• 2:49Demetri Kofinas?

  have questions, feel free to send an email to [email protected] and I or someone from our team will get right back to you. Lastly, because this conversation deals with investing, nothing we say on this podcast can or should be viewed as financial advice. All opinions expressed by me and my guests are solely our own opinions and should not be relied upon as the basis for financial decisions. And with that, please enjoy this entertaining, thoughtful, and highly educational conversation with my guests, Paulo Macro and Les Shrub.

• 3:31Demetri Kofinas?

  Paolo and Shrub, welcome back to Hidden Forces.

• 3:35Speaker 01

  Thanks for having us, man. It's good to be back. Timely, timely session. Just make sure you timestamp it because things are changing fast.

• 3:42Demetri Kofinas?

  Right, that's right. We're recording this on Monday, April 14th. And I gotta say, the moment we jumped on this call, my anxiety kind of dissipated and I felt I saw some familiar faces. I feel like maybe this is kind of like not just a, an investment podcast, but also like a group therapy call.

• 3:59Speaker 01

  Oh, that is perfect. Paolo, this is what we do every day together, right?

• 4:04Speaker 02

  That's right. That's right. The frequency with which Shrub and I chat on the side and record for our little substacks goes up with the stress in the markets and in the world. So it's exciting times, but let the healing begin.

• 4:19Speaker 01

  Exactly. That's why we write. That's why we speak to each other. That's why we message each other, right, Dimitri? So this is what keeps us sane. So let's do this.

• 4:27Demetri Kofinas?

  What's cool also is that we've all spent time together in person, though never at the same dinner. You guys have been to separate dinners, but I've got to spend time with both of you guys. So whenever I've consummated a relationship in the analog world, it makes it feel much more personal when you connect over Zoom.

• 4:43Speaker 01

  I don't think we should ever get together, the three of us, because that could constitute a singularity. You never know.

• 4:48Demetri Kofinas?

  We actually should, but well, I mean, with me and Paolo, it's easy because we're both in New York, but you're kind of all over the place. I don't know if you we know where you are exactly, the Shrub. I think you're somewhere somewhere outside of the US.

• 4:59Speaker 01

  Exactly.

• 5:00Demetri Kofinas?

  So Shrub, you had been on the podcast two years ago initially from Athens. We recorded that one. Then we did another one, which was basically a year ago. It was in May, early May, we recorded it May 7 of 2024, the three of us. I didn't go back and listen to that, but I did go through the synopsis and it looks like we spoke about EM-ification of developed economies, which is something that Paolo writes about, which I feel like in some sense we're seeing, but maybe not necessarily in all of the ways that Paolo suggested. The one specific way I'm thinking of it is like the bananification of America, which I felt like is kind of what happened after the meme coin launch. The need to understand

• 5:41Demetri Kofinas?

  the incentives of policymakers and how those impact interest rates and inflation expectations, as well as credit rationing, which I feel like is totally relevant to today. The strain on the international system and on American military and financial hegemony, which I feel is totally relevant to this conversation. Budgetary and political headwinds facing developed economies in the years ahead, totally relevant. The conundrum facing policymakers in China, totally relevant. And investment opportunities commodities, which I think is very interesting to talk about because I feel like you could totally script the scenario here where this would be really bad for commodities and commodity economies and commodity currencies. And the search for a new safe asset in a world of worsening fiscal balance sheet,

• 6:24Demetri Kofinas?

  which is totally relevant. But what's interesting is I was as I was reading this stuff, I was like. Wow, it feels like we did an episode a year ago that's like, basically like, you know, foretold all of this, but in no way do I feel like a year ago, I was in any way prepared for the world we live in today, which is kind of like this. So it makes you kind of wonder, and maybe this is my first question, guys. To what degree are we living in a world that we understood was possible, but that we just couldn't imagine viscerally? And I'm speaking for myself, right? Like, it's one thing to sit out and say like, these are all problems. These are all things that could happen, you know, a rotation out of US equities

• 7:05Demetri Kofinas?

  because of overvaluations, risks to the dollar that could be brought about by mistakes made in Washington, or by a rejection of the international system, a fraying of the global order, a move from unipolarity to multipolarity, the increased premium for gold because of the need to find some alternate reserve asset, because again, of the same things we're talking about here. It's one thing to imagine those things intellectually, and to develop frameworks. It's another thing to really like, believe them viscerally. And while we've talked about this stuff on the show, and you guys have done this as well in your respective substacks, and with your audiences, it's another thing for me to live through it. And it feels chaotic. And it's, again, you know, I was kind of joking about the group therapy call, but not really. It does. It does produce some concern and anxiety

• 7:50Demetri Kofinas?

  for me. So I'm just curious, Shrub, we'll go with you first, but like, does any of that resonate in terms of like, trying to understand where things are going, while also like, the difference between that and actually living through it?

• 8:01Speaker 01

  Yeah, look, I think, just to start with an obvious comment, you know, the world has been imbalanced for a while. So all the things we talked about a year ago, you know, these are problems that are structural problems. High deficits in the US, in the developed world, the EM-ification of DMs, that's a structural trend. Then the weakness of institutions, again, that's a structural trend. But there's always a catalyst that just brings everything together. And you know, just market wise, because I view it from the perspective of a trader. You know, last year was actually an easy year to be talking about it because I was very bullish equity markets for a simple reason that it's in an election year.

• 8:45Speaker 01

  You know, all these high deficits, they're actually good to pump the economy, pump the market. And this is what was happening all of last year. So last year, we could ignore all these structural issues. And we were just playing along as investors is like, oh yeah, let's just ride the wave into the election. Yellen is going to save us on every dip, which she did. And you know, the election comes. Then Trump gets elected. There is the sort of like the honeymoon period where everyone gets excited still and talks about a strong dollar under Trump and all that nonsense. But once the honeymoon period ends. That's when you have the hangover and the hangover, you just remember all the problems that you had. And all those problems, you actually made them worse.

• 9:27Speaker 01

  Because you know, I know that it's easy to blame Trump and Besse and the administration about things, but let's just be honest. I mean, these things have been brewing for a while now. And the previous year has been a bit of a disastrous year for the US in terms of like, you know, giving a bit too much of a juice to the economy to reelect. And to be honest, this is something that emerging markets do. But has been also a very typical reaction in the developed world as well. So here we are again. I think the biggest problem we have as investors is that we're, you know, we're very near term focused and they just failed to see the big picture. And they're also very biased. So let me tell you the event to me that was, there were two events that were very, very important this year to accelerate and to act as catalysts to this whole awakening that we're going to get to.

• 10:11Speaker 01

  So the first awakening was the deep sick moment of China. So the US market has been driven a lot by the AI bubble, AI narrative, let's not call it a bubble, let's call it narrative. So the deep sick moment of China was a very key catalyst in what I will call the end of American exceptionalism. And the reason why it was a catalyst is because you had companies, the Mac Seven, spending, you know, hundreds of billions of dollars in CapEx to win the AI race. You have SoftBank's Masayoshi Son saying that he's committing 500 billion, as if it's like money out of thin air, to build Stargate, the AI infrastructure in the US. And then suddenly, Deepsea comes out of nowhere.

• 10:56Speaker 01

  Well, it didn't come out of nowhere, but they said that they just reproduced everything for a fraction of the cost. So that's a David versus Goliath moment whereby you kind of killed the AI dream of the market, which by the way, the Mac Seven are about 50% of the NASDAQ, one-third of the of the S and P. So that was like a first slap in the face. So that kind of killed the AI dream and people realized it slowly, slowly, and they got there, that these things are getting a bit commoditized. The second slap in the face of American exceptionalism, which to me was a very important one, and on that day, my American friends didn't understand it, but my European friends were very well aware of it, was the meeting of Trump, Zelensky and JD Vance.

• 11:41Speaker 01

  So when I was watching that meeting, you know, I was trying to see it with an unbiased view, but, you know, as a European, it was horrific because, you know, Trump was so aggressive against, actually JD Vance was very aggressive. Trump, I thought, was actually quite okay, but it was JD Vance was so aggressive against Zelensky, telling him, oh, you didn't give thanks. Did you say thank you? And he was so aggressive against a leader who's been invaded by Russia that I thought was a bit of a shocking moment for a European. And, you know, bear in mind, I, again, I was trying to see it from an unbiased perspective. But on that day, I actually got a lot of calls from US friends and my American friends were telling me Zelensky was very rude against Trump and Vance.

• 12:23Speaker 01

  And my European friends were calling me, telling me, did you see what JD Vance and Trump did to Zelensky? They were so rude and, you know, insulting. So I stepped back that day and I just realized that at that point, there was a schism between US and Europe. And I just tweeted out that day, the end of American exceptionalism. And people misunderstood it, but what I was trying to say was that on that day, the US made it clear that they would not be the world's policeman anymore. And I thought it was a very important event. And people downplayed that event. And the proof that it was so important was when the Germans came out a week later.

• 13:08Speaker 01

  And they launched the biggest fiscal stimulus plan since 1990 for a trillion euros. And that was a biggest shift in German finance since the reunification. That was a key milestone, and that was the third slap in the face of end of American exceptionalism. Now, I'm going to tell you the story of how all these things tie up together now, just to visualize it. The third and last element was very important, again, as an accelerant for various reasons. One is that to get the Germans to spend money, I'm sure you have German friends. That's a very difficult thing to get Germans to spend money. Like, they've literally been, even at Covid, they weren't spending anything.

• 13:49Speaker 01

  They spent like 2% of their fiscal deficit was like 2%, 3%, and the US was like 15%. So, number one, you got the Germans to spend something. Number two, to get the Germans to rearm and actually invest in weapons. Dude, it takes a lot for them to do that. And third, to unify them on that, and the Europeans to wake them up. That was a big wake-up call for Europe. Now, tying it up together to the markets, which is what I care about. I created an imaginary person that I call Klaus. And I think it's good to visualize Klaus. So, whereas we traders and the hedge funds in the US, you know, they trade around and monkey around like daily movements and monthly performance numbers.

• 14:32Speaker 01

  Klaus is actually the representation of the European pension fund industry. And just to give you an idea of the quantum. The Europeans own 17% of the US stock market. And the equity flows into the US since Covid was about 10 trillion euros. And the majority of that was actually from Europe. So Klaus is a European pension fund manager. Say he runs 100 billion in a pension fund. And what Klaus has been doing since Covid was hiding in US assets. Klaus was buying the MAC7, he was buying treasuries, and he was buying, more importantly, the US dollar.

• 15:14Speaker 01

  Klaus was hiding in these assets because they were working out for the last five years.

• 15:23Speaker 01

  Suddenly Klaus watches on TV JD Vance belittling Zelensky.

• 15:29Speaker 01

  And Klaus is like, oh shit. We're not allies with the US anymore when it comes to defense. And oh man, I mean, you know, the US is not a safe place to do business anymore, maybe for us. So Klaus panics that day. And he sits down and he says, well, you know, they called the investment committee meeting that's going to take place in June. You know, very European style, three months later. And, you know, just decide on their allocation and they look at their portfolio and they're like, oh my God, 70% of my assets are US dollar denominated. And it's mostly in the US. And then suddenly Klaus sees the euro rallying. And he's like, oh my God, I'm not hedged against the euro. So Klaus is down as he sees the market going down in the US for the last two months.

• 16:15Speaker 01

  His euro is also going up, but he's unhedged. So if the Nasdaq is down 20 and the euro is up 10, Klaus is down 30%. And Klaus is like, get me out of here. I need to go back home. I need to bring my money back home. And I need to invest it in euros. And, you know, the other reason why he's doing it, I mean, that's a smaller reason, but you know, capital goes where it's treated best. So he's got his money in the US and suddenly he's seeing Doge wanting to cut deficits. He's seeing cuts in the US market. He doesn't know what the tariffs are going to be. He doesn't know what the US policy is when it comes to Europeans.

• 16:56Speaker 01

  And suddenly he looks at Europe and he's seeing that Germany is actually going to go fiscal. So they're going to spend a trillion at home. And Klaus is like, oh my God, I'm under invested in my home country. And I'm over invested in the other country in the US. So he's trying to do come back home. And that whole repatriation of capital actually accelerates what we're referring to now as the end of American exceptionalism, which I actually mean by that is a rebalancing of capital.

• 17:28Speaker 01

  Out of the US into Europe because, you know, and after I wrote the piece, I had a lot of conversations with actual Klaus's that emailed me and they said, yeah, actually, we have about 70% of our assets and they're unhedged. And we have a big problem. We actually need to repatriate out of the US. So this is a big flow of capital repatriation and Liberation Day, by the way, was the last slap on the face of American exceptionalism. Because on Liberation Day, you inserted that uncertainty on global trade as well. And that was it because you've already inserted uncertainty on geopolitics with a Zelensky meeting. You've already inserted uncertainty from Deepsec on the NASDAQ.

• 18:06Speaker 01

  You've already inserted uncertainty on the capital flows and then now you have the on the US assets and now you've inserted uncertainty on global trade. And this is where we are. And to be honest, we're at a stage right now when that's why I told you at the beginning of our conversation. Timestamp this meeting, this call, because, you know, we don't know what's going to happen in the next few hours, right? We're at that stage and this uncertainty is actually the worst part of all of it.

• 18:31Demetri Kofinas?

  So I want to go to Paulo. Before I do, just a quick question. Do you feel like those pension fund managers are sophisticated enough to say, oh, US is going to cut back on deficits? Europe's going to blow out deficits and so that's going to be good for European equities relative to US equities? Or how much of this is a concern also about impending capital controls in the US and a desire to get ahead of that?

• 18:55Speaker 01

  I think it's a combination of both, but more importantly, it's the latter. And I think that's the scary part because let's put it this way. In a crisis, the dollar usually goes up and bonds go up. Why? Because in a crisis, every investor, you know, I've been there in 08, you know, 2008, all that stuff, 2022. The dollar gets bid because in a crisis, you want to hide in the dollar. You want to hide in the bonds. Right now, Klaus sees the crisis and he's like, I'm not sure I want to park my money in US treasuries now. I'm not sure I want to park my money in dollars. Actually, I want to get my money out of the US dollar. I want to get my money out of treasuries because I actually don't trust the system. Because capital goes where it's treated best.

• 19:38Speaker 01

  And you know, the problem is, and this is a problem of communication as well. The administration doesn't do itself much favor with certain communications. So for example, you know, there was a thought piece by Steve Miran, who's a great guy economist. I think he's the head of the economic policy now. You know, fantastic guy, very smart. But he was presenting, you know, five ways to help rebalance, to help share the burden of US of the US having the dollar as a reserve currency. Because the the US having the dollar as a reserve currency does have a burden as well to it. So he's like, well, we need to find a way to share the burden. And he says, he mentioned few ways. For example, you know, you have to build your factors in the US. Fine tariffs, fine.

• 20:22Speaker 01

  And then he says, well, one way could be to write for foreigners to write checks to the treasury. I'm like, well, actually, hold on, hold on, hold on. I don't know anyone who wants to write a check to the treasury. That's not a charity. So just to put it out there, it's not helpful because what you need is the US treasury has to be a safe haven. And when you float ideas like that, you immediately scare people. Because me, as a personal investor, I can just get my money out in like, you know, few minutes. But imagine you're Klaus that runs a hundred billion and you see that. You're thinking, you know what? I'm not going to risk it. You know, I can't really move my portfolio. It's going to take, I mean, it's going to take him like two years to rebalance. So he's not going to take that risk.

• 21:06Speaker 01

  So I think we are for the first time, since I remember, we're talking about haircuts in treasury bonds and treasuries, which is actually stupid. I don't think it's going to happen, but we shouldn't even be talking about it. Because you know, the old fashioned way of actually haircutting treasuries, by the way, for the last 50 years is that you just let inflation do it, right? So the value of the dollar 50 years ago is, you know, the value of the dollar today is a fraction of what it was 50 years ago, because this is the old fashioned way of capitalism. We just let inflation do it. So, you know, don't talk about haircuts, don't talk about these checks to treasuries. This is like, the narrative is wrong.

• 21:46Demetri Kofinas?

  Yeah, it's like telling people that you might not have all the money in your bank to cover their deposits. Well, that's the way of ensuring that you're not going to have it if you tell them that.

• 21:55Speaker 01

  Absolutely, and you know what? As a Cypriot, I really put this point forward because my American friends don't really appreciate it, but as a Cypriot, I've actually lived through it. We didn't believe it when the Europeans, so you know, people might not know this, but in 2015, the Cyprus was financially locked down as a country by the ECB. And they wanted to recapitalize the bank, so they imposed capital controls on the whole country, and they haircut the deposits of a whole country above 100,000 euros. So people thought it was a fantasy, no one believed it, not even the president believed it until the last moment, but the Europeans did it. It was a crime, by the way, but they did it. And you know, you know, the guy who came up with the plan, you know who he was?

• 22:37Speaker 01

  It was like an idiot who was a forestry minister of his country, like a complete maximum 10 brain cells, but he did it because, you know, he was a guy who was put in charge. So my point is, you know, you can't trust politicians when they say things like that or when they float things like that, because once you put it in people's heads, they might say, oh, that's a great idea. So this is a very dangerous thing. People, like, once you talk about something like that, you immediately just, you know, the cat's out of the bag, you just, you know, you have to put the cat back in the bag.

• 23:08Demetri Kofinas?

  So I have some thoughts, but I'm not going to share them now, I'm going to hold them for later. Paolo, you were there, sitting very patiently. I started this episode by just mentioning this, you know... Having an intellectual framework, but actually living through it, feel free if you want to address that or not, or just to sort of piggyback off of what of what Shrub was saying.

• 23:28Speaker 02

  Sure. So I always love listening to Shrub because, you know, he has a great way of kind of simplifying what seems like pretty scary, complex, you know, bigger picture into, you know, really kind of simple, you know, he's the king of memes for starters and you kind of have to keep a sense of humor in everything that's going on. So he does this all quite well. Rather than address your question out of the gate, because in truth, you know, my parents are from Brazil, but I'm born and raised in the US as sort of a first generation. So my experience with EM-ification or Truss-ification, as some

• 24:09Speaker 02

  people are starting to call it after Liz Truss and the, oh, my God, revolt moment around UK bonds in late 23, has really just been more as a visitor and as a kind of an observer who sort of has a foot in both worlds. But I would say, and I'm happy to provide anecdotes, but at the end of the day, like, the first thing I would say is, you know, the sun still rises, you know, people do adapt. It's questionable, the extent of the sort of damage that the population is in for, because they're going to have to learn some lessons pretty fast about what it's like to live under a level of economic and fiscal and monetary uncertainty that they're not familiar with, but certainly

• 24:53Speaker 02

  that their, you know, their parents, assuming they're, you know, they're immigrants, might be, you know, might be familiar with. But, you know, people learn pretty quickly and, you know, incentives matter and people are usually pretty good about adapting, you know, and following their incentives. I would say, actually, just listening to everything that Shrub laid out, I have nothing to argue against. He and I, our views kind of dovetail and converge very nicely and he laid it out well. But I couldn't help but thinking, as you focused on the element of uncertainty and hearing

• 25:31Speaker 02

  Shrub respond with the classic statement that capital goes to where it's best treated. And when you step back and you look at what's going on in asset classes all over the world, across regions, sometimes you worry when you look at that because you wonder like, where is there to go, right? If the US Treasury system and the dollar and that collateral, which always used to appreciate in times of a crisis, is not available to you. I mean, all roads eventually lead to gold, right? And I hate for this end up being kind of a gold bug discussion. But I couldn't help but smile and think back to a book that I read a while ago.

• 26:12Speaker 02

  And I don't remember if I mentioned it in our conversation last year, but it's so apropos now, if you think about tariffs being the big topic on people's minds. It was Herbert Hoover's memoirs about the Great Depression, the president who, under whom we saw the Smoot-Hawley tariffs enacted in 1930. And the, you know, the joke is that, you know, we in the West will tend to jack tariffs every hundred years because that's how long it takes for everybody who went through this stuff the last time to die off. And, and then we have to go and relearn these lessons. But there's, there's a chapter, I believe it's chapter seven, and it's, it's called

• 26:55Speaker 02

  "The Second Phase of the Great Depression, April to August 1931." So you've had the initial crash on Wall Street in the fall of 29. You had the bounce in 30. You had Smoot-Hawley in 30. And then you had the famous failing of the Credit Anstalt in Austria, where the crisis went global in, I believe, early 31 or mid 31. So chapter seven on its own, and you can find this for free. If you just Google Herbert Hoover Great Depression memoirs, the PDF is available from his library. And I would encourage everybody to read this chapter. It's 10 pages. It's fast and it's written very clearly and simply. But my favorite part is tucked in about halfway through where it says, and I'll just read it, it's a quick paragraph.

• 27:41Speaker 02

  Gold coming into the United States was absorbed at once into our currency and credit structure. When it was withdrawn, it tended to cause a shrinkage in the volume of credit or even endanger our currency coverage. We were especially predicable to such movement because of the large foreign deposits in our banks. Deposits not only those of foreign individuals in banks, but also foreign governments. During the years prior to 31, our banks had accumulated a good deal of gold from many smaller nations who sent the reserves behind their currencies with confidence that dollars were as good as gold. But by this device, they earned interest on their currency reserves. We were later to see our own citizens yielding to spasms of fright and exporting their capital, which moved gold from under our currency and credit structure.

• 28:24Speaker 02

  To stop gold exports would be, in effect, a refusal to pay our debts in gold and thus would amount to a repudiation of the standard. During this new stage of the Depression, the refugee gold and the foreign government reserve deposits were constantly driven by fear hither and yon over the world. We were to see currencies demoralized and governments embarrassed as fear drove the gold from one country to another. In fact, there was a mass of gold in short-term credit which behaved like a loose cannon on the deck of the world in a tempest-tossed era. And I love that because the imagery of this huge wad of capital in global savings pool,

• 29:06Speaker 02

  not knowing where to go and being tossed hither and yon on the deck of the world like a loose cannon in a tempest-tossed era tells you that the volatility regime today is different, but it's not anything that we haven't gone through before. And those who study history and can really kind of reach back to an era where these things are more familiar, where you get firsthand accounts of what it was like to live through, what came next, history rhymes, how people adapted under these systems, for me is fascinating because, you know, to be a successful operator in the markets, even on a short-term basis as a trader, you have to have a knowledge of history in order to recognize patterns, analogs, what have you. For me...

• 29:49Speaker 02

  Not having the US dollar or the Treasury bill collateral standard as money good and the shaking of global confidence, whether it's management's not being able to plan properly because now they have to wait a few months to see what Besen and Japan will do and who comes after, whether the tariffs will just change again tomorrow based on what side of the bed Trump wakes up on, what consumers will do in anticipation of potential scarcity or inflation or both on the shelf. All of this feeds directly into what Trump was saying about how capital goes to where it's treated best. And the other side of that coin is confidence or the decline therein. And the world we live in today of

• 30:33Speaker 02

  one where confidence is declining rapidly in public assets, and by public, I mean public with a capital P, you know, US treasuries and the currency in which they are based, but also the bonds of other Western nations. As Shrub rightfully mentioned, we saw the largest single day move in German boons since the history of reunification a few weeks ago because they had to change their approach to spending and fiscal completely overnight means that it's going to continue to be rock and roll. We are in the era of making macro great again, as I told a friend of ours, right when Trump got reelected, or rather

• 31:15Speaker 02

  elected the second time. And yeah, for me, it just comes back to trying to predict what skittish capital will do next and the size of it. You know, the amount of money that Klaus, for example, needs to move under Shrub's framework, these numbers are so enormous. I call it elephants through a keyhole. It creates massive opportunities for those who are fast and smaller and have flexibility, but it also creates a lot of problems. It also means that trends will go on far longer than people ever think possible from here because it will take Klaus forever. You know, it was 15, it wasn't just five years since COVID. Klaus has been sending money to ride the dollar against the euro and to

• 31:55Speaker 02

  ride the exceptionalism of US assets since 2009. I don't know how you change a boat that's been sailing in one direction for almost 16 years overnight. So it's going to take a long time and we're going to be talking about these trends for, for many years.

• 32:12Demetri Kofinas?

  You know, when I was younger, I don't know if you guys had this happen to you as well, but as I've gotten older, I learned something. I guess it happened gradually, which is that things don't happen overnight. When I was younger, I used to feel like things would happen right away. Like if I saw something, or if I thought that a certain dynamic was going to change, it was going to change that day, basically. But now you understand that it takes a long time for these types of shifts to occur. And this is a good example, because there are frameworks and systems to allocate capital. And there's not one guy that's, you know, it's a great name, Klaus, but it isn't just one guy. And so it takes a long time for these investors and these managers to change the way they

• 32:54Demetri Kofinas?

  allocate, especially when we're talking about institutional frameworks here and institutional assets. And so I think that's something important that I wanted to highlight. And the other thing I wanted to ask here to both of you guys, but we'll start with you, Pablo, since you were just talking. How would you articulate what the fundamental problem or crisis is right now that investors are really responding to? If we had to sort of try and be as specific and singular as possible, what is it that is causing this change in the dynamic?

• 33:24Speaker 02

  My answer there is very simple, and I think this is sort of like the ring to rule them all around what we've discussed. And that is, for the last 50-odd years, we have gone from living in a world where governments borrowed money from creditors with the expressed intention of paying that money back and retiring the debt, to living in a world where there is no expressed interest to repaying debt, ever. A world prior to coming off the gold standard under Nixon in 1971 was an experiment, but also an admission, that governments would not be retiring their debts in full.

• 34:07Speaker 02

  And prior to that time, governments always retired debt. It's an amazing thing to think about, where you don't just roll it in perpetuity and grow the debt stack, but rather actually pay the money back upon maturity. And this is a fundamental departure that has affected everything. And in my view, there's a straight line from that point in the decision to retiring debts upon maturity or rolling them in perpetuity and using that debt stack to fund and pull forward consumption in our case, but also growth, has led to everything else that we're talking about.

• 34:45Demetri Kofinas?

  But as you're describing, that's a 50-year dynamic. What I'm asking is, right now, what is the crisis that investors are responding to? If you had to articulate what that is?

• 34:55Speaker 02

  I think it's a realization that the debts will never be able to be paid back and that the game of the last 55-ish years, we have created common knowledge around the fact that there is no getting this back in the horse.

• 35:18Demetri Kofinas?

  Is that necessarily a problem, though? In other words, is the problem that the debts aren't going to be repaid? Because we've been okay with knowing that they're not going to be repaid, that we're going to have to go through transitory bouts of inflation to burn off that debt. Is that really the issue?

• 35:34Speaker 01

  Can I tell you what I think my problem is here?

• 35:37Demetri Kofinas?

  Yeah.

• 35:38Speaker 01

  My problem with this whole thing is that people sometimes shouldn't know how the sausage is made in the factory. Like, you don't want to go into the sausage factory to see how the sausage is made.

• 35:48Demetri Kofinas?

  You're going to lose your appetite.

• 35:49Speaker 01

  Dude, you sometimes just don't want to do it. So to me, that's actually a big problem that we're facing now in the short term. And I'll tell you why. Because this is how you piss off people and start wars. So for example, the Zelensky-Trump, J.D. Vance meeting. You know, when I saw it, a friend of mine said, "But dude, these things happen all the time. They just happen behind the scenes, and this time they just televised it." I said, but dude, you don't want the average person to have a look into the sausage factory to how the sausage is made. Because

• 36:22Speaker 02

  No, you you keep this behind the curtain.

• 36:24Speaker 01

  Yeah, dude, you keep it behind the curtain. So this is a big problem because this is how you start wars. This is how, and you know, I understand that the whole world is like a reality show right now, but this is what scares me right now. And this is the scary part in the short term, because I actually don't worry about the the debt short term. You know, I think they can just muddle along. They can do weird things and just devalue the dollar as they've been doing for the last fifty years. They can keep plotting along with, you know, just doing like a milder tariffs, like I think it was intended, or like Trump one point O. But you know, doing things out in the open, that's where you introduce a risk. So for example, you know, this whole China US confrontation. Xi is a president, leader

• 37:10Speaker 01

  of a one point four billion people country. You know, why are you exposing him to look weak? Do you think he's gonna wanna look weak to his people? I don't think he's gonna wanna look weak to his people. So, you know, putting all these things in the open creates a tension and something that could become like a negative feedback loop and just blow up the whole system, because I actually think that the system could just prod along for like another, you know, another decade, no problem.

• 37:38Speaker 02

  I agree with that, but there's also, you can say the same thing about finance, right? The classic line from, was it Trichet? No, it was Yunker, I think. When it gets serious, you have to lie. Right? At the peak of the European crisis. Is the financial system equivalent of take it behind the curtain, you know, don't slap the guy in front of all the cameras? And I think we're, you know, people to come back to your question, Dimitri, people are seeing how the sausage is made around the stuff that we're talking about in finance as well, because they're seeing the tariffs on tariffs off, wax on, wax off. You know, go after this country that day, go after this trade deficit the next day and

• 38:23Speaker 02

  It also shakes people's confidence via the element of uncertainty that Shrub mentioned, because people start to worry that there actually isn't a plan, that they're making it up on the fly as they go along. And I know that, you know, there are a lot of arguments on Twitter and social media about, no, he's playing 7D chess and it's the art of the deal. It's like, you're missing the point even arguing whether or not this is the art of the deal or not. The fact that you are arguing over whether or not there is a plan is the problem, because it means that there's a problem with confidence. You know, normally you wouldn't have to defend this. We would just assume that these guys know what they're doing.

• 39:02Speaker 01

  That's the thing. I mean, on Friday, for example, we didn't know what the rates were. You know, Trump said one thing, then Latnick came to say something else, Trump came out again. So, yeah, I think, yeah.

• 39:13Demetri Kofinas?

  So I want to, I want to actually propose something here, which is that while the things that you guys brought up are relevant to the problem, I don't think that they strike at the heart of what's going on here. So I want to propose to you guys what I think people are really responding to, whether they're aware of it or not. And then you guys can tell me what you think of it. So I think that ultimately, what investors are responding to is not just a crisis of leadership in the international system. It is a crisis of leadership, but it's a crisis of leadership born out of an accelerated recognition that the United States, and I don't mean Trump, the president was elected twice. He was elected in 2016 and he was reelected in 2024. So we have to understand that this is also very

• 39:55Demetri Kofinas?

  important. The first time Trump came into office, there was a sense in Europe that this is transitory, just like the inflation during COVID. It's transitory. They now know it's not, and they know that Trump represents a larger popular will in the United States. And what Trump is proposing, it seems, is the smashing of the international trading and capital system. And something that investors know better than the public is that current account deficits lead to capital account surpluses. And if you want to change that, if you want to run a current account surplus, or you want to get your current account up, you're going to have to get your capital account down.

• 40:40Demetri Kofinas?

  And that has dramatic ramifications, not just for the value of your portfolios, but it also has ramifications for the role of the dollar internationally.

• 40:49Speaker 02

  And the economy, right?

• 40:50Demetri Kofinas?

  Certainly the role of treasuries as a reserve asset. I mean, we can separate those two things out. But what were you saying, Paolo?

• 40:56Speaker 02

  And also the broader economy, because if you're not funded via a capital surplus of others, it means you have to save more yourself and live more within your means.

• 41:05Demetri Kofinas?

  Not just that, but the global, I mean, so this would be a serious drag on global growth if surplus economies cannot readily find new markets for their excess production.

• 41:16Speaker 02

  That's right. Less consumption by the US and more saving here is going to create a lot of pain suddenly you see.

• 41:23Speaker 01

  Yeah, I don't know. I mean, I'm the optimist for the rest of the world still, because I actually think that capital of Klaus, it's a big pool of capital.

• 41:32Speaker 02

  It is.

• 41:33Speaker 01

  So that pool of capital will come home and get invested. And I'll just give you a little bit of an anecdote here, but you know, when I lived in London in early 2000s, Milan was a financial center, Paris was a financial center, you know, Madrid was a financial center, and these were on par with, not on par with London, but close enough. And then suddenly, these centers got hollowed out by London, and London just sucked in all that liquidity, and London became the place to be, and the other places actually just really withered during the eurozone crisis, and they, they became hollowed out. Well, guess what happened after Brexit? They started getting revived. Milan now is back to thriving.

• 42:15Speaker 01

  Athens is a financial, well, mini financial center. Milan is doing very well. Madrid is doing very well. Paris is doing okay, in spite of all the fear mongering and on Twitter. But you know, my point is that that capital that left London after Brexit, it actually went back to like Frankfurt, Milan and all these places. So they're doing okay, they're doing better than London. I mean, I actually get depressed when I go to London nowadays. So I think, just to be a bit optimistic here, because my view is that what we're living now is the end of American exceptionalism as expressed in terms of capital getting reallocated throughout the world to where it once came from. I think that we shouldn't be too depressed about the rest of the world

• 42:59Speaker 01

  because that capital would get invested in the home countries of Klaus's. Unless something goes wrong about, you know, with a 1930 Redux or a Pearl Harbor Redux, which you know, God forbid, you know, that's why I don't like this public negotiations. And I would prefer that they keep making the sausages in the factories without having webcams in the factory, right?

• 43:22Demetri Kofinas?

  Yeah, no, so I don't disagree with that. So maybe, maybe I should have stated it a little differently. Maybe for global wealth creation.

• 43:31Speaker 01

  Can I just add one point there?

• 43:33Demetri Kofinas?

  Yeah, go ahead.

• 43:34Speaker 01

  Very important. The one thing I've been warning about throughout this process is that if you want to think about your capital preservation and your wealth as an individual, you have to be really scared during this reallocation of capital. You have to be thinking about two words that are scary, and this is wealth destruction. And I've experienced it as well in the last few months, you know, where I was very careful. I think I did very well, reallocated my assets in euros and all that stuff and yen. But even my US dollar portfolio, for example, you know, it's lost 10% in Euro terms and I'm Euro-based. So what I'm trying to get to is Klaus, he was long NASDAQ down 20.

• 44:16Speaker 01

  Well, the NASDAQ might bounce, but the Euro is also up 10 and the dollar is down 10. So he's lost 10% on his currency this year so far. But let me get to it, though. If they really want to do a rejig the global stage, there's going to be an accord somewhere, like a Plaza Accord and all these things. What happens after any time you hear the word accord? You should be scared about the dollar because that's what the accords do. So the Plaza Accord. Caused a 50% decline in the dollar. So what I want people to just remember from this conversation is that this can lead to wealth destruction. This is the real scary part, not the Nasdaq going up or down.

• 44:58Speaker 01

  It's actually you come in one day and you're like, oh crap, my dollars are worth 50% less. Even if the Nasdaq is up 10, you just lost 40% of your wealth. This is the scary part that's going on here.

• 45:08Demetri Kofinas?

  Totally. And the risk of that has grown substantially in the recent months. And I think that is what investors are responding to because going back to my point, the person in Washington, Washington is the center of the empire of the current global international capital and trading system that we've been living under that's created all this wealth, seems to be intent on smashing that system. That's not a value statement. It's just an observable fact. It's in fact what he was elected to do. And the story that, well, Trump says one thing, but he's going to react differently when the markets move against him, that's a lie that we've been disabused of. And so now the question is, what does that mean? And what I want to talk about in the second hour, guys, is exactly that. I want to answer that question.

• 45:53Demetri Kofinas?

  What does that mean? And also, what is the policy? You know, because we're in this sort of phase of uncertainty now where markets are really kind of unclear. And that uncertainty itself has long-term ramifications irrespective of what policy path Trump chooses. So I want to talk about what effect that uncertainty has had already that will persist? What policy choices Trump's going to, you know, follow? What can we sort of hypothesize about that? What effect will those have? And I absolutely want to talk about the dollar because I think there's been so much dollar FUD for so many years. And one of the things that I've talked about on this podcast is that if the dollar was ever going to lose its role as the global reserve currency, it was going to happen not because the rest of the world rejected the dollar, but because the United States

• 46:38Demetri Kofinas?

  decided to pull out of that system. And I think that's what we're actually seeing today. And so those are the things that I want to talk about in the second hour. For anyone new to the program, Hidden Forces is listener supported. We don't accept advertisers or commercial sponsors. The entire show is funded from top to bottom by listeners like you. If you want access to the second hour of today's conversation with Shrub and Paolo, head over to hiddenforces.io/subscribe and sign up to one of our three content tiers.

• 47:06Demetri Kofinas?

  All subscribers get access to our premium feed, which you can use to listen to the rest of today's conversation on your mobile device using your favorite podcast app, just like you're listening to this episode right now. Guys, stick around. We're going to move the rest of our conversation onto the premium feed.

• 47:24Demetri Kofinas?

  If you want to listen in on the rest of today's conversation, head over to hiddenforces.io/subscribe and join our premium feed. If you want to join in on the conversation and become a member of the Hidden Forces Genius Community, you can also do that through our subscriber page. Today's episode was produced by me and edited by Stylianos Nicolaou. For more episodes, you can check out our website at hiddenforces.io. You can follow me on Twitter @Kofinas and you can email me at [email protected]. As always, thanks for listening. We'll see you next time.