Marko Papic - A Multi-Polar World - [Invest Like the Best, EP. 268]

My guest today is Marko Papic, partner and chief strategist at Clocktower Group, where he leads the firm’s research on macroeconomics and markets. Marko has spent his career at the intersection of finance and geopolitics, making him a perfect person to speak to about current events in Ukraine and their potential impact further afield. Along with Russia and Ukraine, we discuss the Fed, inflation, China, the green energy transition, and the US’s position in the global order. Please enjoy this discussion with Marko Papic. For the full show notes, transcript, and links to mentioned content, check out the episode page here. ----- This episode is brought to you by Tegus. Tegus is the new digital hub for market intelligence. The Tegus platform empowers Investors and Corporate Development teams to invest smarter by pairing best-in-class technology with the highest quality user-generated content and data. Find out why a majority of the top firms are using Tegus on a daily basis. Head to tegus.co/patrick for your free trial. ----- This episode is brought to you by Lemon.io. The team at Lemon.io has built a network of Eastern European developers ready to pair with fast-growing startups. We have faced challenges hiring engineering talent for various projects - and Lemon.io offered developers for one-off projects, developers for full start to finish product development, or developers that could be add-ons to the existing team. Check out lemon.io/patrick to learn more. ----- Invest Like the Best is a property of Colossus, LLC. For more episodes of Invest Like the Best, visit joincolossus.com/episodes. Past guests include Tobi Lutke, Kevin Systrom, Mike Krieger, John Collison, Kat Cole, Marc Andreessen, Matthew Ball, Bill Gurley, Anu Hariharan, Ben Thompson, and many more. Stay up to date on all our podcasts by signing up to Colossus Weekly, our quick dive every Sunday highlighting the top business and investing concepts from our podcasts and the best of what we read that week. Sign up here. Follow us on Twitter: @patrick_oshag | @JoinColossus Show Notes [00:02:48] - [First question] - His thoughts on what’s happened so far between Russia and Ukraine [00:06:18] - The geopolitical motivations for Russia and what they can gain from the conflict [00:10:52] - How his impressions of warfare have evolved watching this play out [00:13:45] - What to consider about nuclear war and different types of nuclear weapons [00:16:31] - The economic warfare from the West against Russia and its implications [00:21:06] - Whether or not the world is de-globalizing and how interconnected we all are [00:24:45] - How we should view post-covid inflation, specifically in the US [00:30:34] - The ways the Fed’s role has evolved [00:33:25] - Impacts of liquidity on asset prices and why it’s such a key factor in markets [00:34:16] - China’s positioning and how the Ukraine conflict could alter their plans [00:40:58] - Thoughts on Taiwan and how global supply chains might change [00:44:47] - Why so few people believe that China has peaked; Young China [00:48:52] - His take on income equality in the US and why it’s the number one issue [00:53:03] - What the US could do to improve itself as a country most going forward [00:55:35] - Having a green energy transition view is crucial and the surrounding politics [00:59:22] - The preconditions for doing well in atoms-based innovation [01:01:13] - What he’s watching most carefully about the conflict in Ukraine [01:02:51] - The kindest thing anyone has ever done for him

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

• 0:00Patrick O'Shaughnessy?

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• 0:42Patrick O'Shaughnessy?

  by pairing best-in-class technology with the highest-quality user-generated content and data. Tegus content is powered by many of the world's leading institutional investors, where their expert calls are recorded, transcribed and uploaded to the shared platform, leading to the highest-quality content and data sets. Tegus also recently acquired BAMSEC, which will allow users to seamlessly toggle between financial data, management commentary and expert interviews as they get up to speed on a company. Any customer who signs up for Tegus before May 31st will receive a free BAMSEC license as part of their subscription. Find out why a majority of top firms are using Tegus on a daily basis. Head to tegus.com/patrick for your free trial. Stay tuned after the episode to hear my interview with Tegus and BAMSEC customer Steve White

• 1:27Patrick O'Shaughnessy?

  from SW Investments. We cover how Steve incorporates both Tegus and BAMSEC across his investment process. This episode is brought to you by lemon.io. The team at lemon.io has built a network of Eastern European developers, ready to pair with fast-growing startups. We have faced challenges hiring engineering talent for various projects, and lemon.io offers developers for one-off projects, developers for full start-to-finish product development, or developers that could be add-ons to an existing team. Check out lemon.io/patrick to learn more.

• 2:01Patrick O'Shaughnessy?

  Hello and welcome, everyone. I'm Patrick O'Neal and this is Invest Like the Best. This show is an open-ended exploration of markets, ideas, stories, and strategies that will help you better invest both your time and your money. Invest Like the Best is part of the Colossus family of podcasts, and you can access all our podcasts, including edited transcripts, show notes, and other resources to keep learning at joincolossus.com.

• 2:27Speaker 01

  Patrick O'Neal is the CEO of O'Neal Asset Management. All opinions expressed by Patrick and podcast guests are solely their own opinions and do not reflect the opinion of O'Neal Asset Management. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions. Clients of O'Neal Asset Management may maintain positions in the securities discussed in this podcast.

• 2:52Patrick O'Shaughnessy?

  Our guest today is Marco Papic, Partner and Chief Strategist at Clock Tower Group, where he leads the firm's research on macroeconomics and markets. Marco has spent his career at the intersection of finance and geopolitics, making him a perfect person to speak to about current events in Ukraine and their potential impact further afield. Along with Russia and Ukraine, we discuss the Fed, inflation, China, the green energy transition, and the US's position in the global order. Please enjoy this discussion with Marco Papic.

• 3:21Patrick O'Shaughnessy?

  So Marco, maybe the appropriate place to begin, I guess we kind of have to, given what's going on in the world, is just with your up-to-date, we're recording on March 8th, 2022, your sort of current snapshot of what is happening in Ukraine, Russia, and how it has evolved in the first 10 to 14 days or so of the conflict. I want to start there because it's the most important thing happening in the world, but then obviously spend a ton of time talking through near-term and long-term investing and economic implications of what's happening. But let's orient the audience by you describing sort of your interpretation of what's happened so far.

• 3:55Speaker 02

  Let me give you a figure before we begin there. In the first year of the war in Iraq in 2003, US lost about 500 troops.

• 4:05Speaker 02

  According to the Russian Defense Ministry, so this is like Russian official data. They lost about 500 troops in the first five days of the war. Now, you can multiply that by some sort of coefficient that adjusts for their propaganda. The fact of the matter is that the first thing I want to talk about is the failures of Russia in Ukraine. That were, by the way, telegraphed by some obvious material constraints we can talk about later, but I'm just going to outline some of the things that have happened thus far. First, they've conducted this multi-pronged attack that has basically divided their forces. It's eight lines of attack. It's almost performative art. It's like watching a Bolshoi Theater performance. It's performative. Fabius Assalti, Mariupol, paratroopers, multiple lines of attack.

• 4:50Speaker 02

  I mean, it's idiotic. I mean, that's the only way I can describe it, and I've studied war for a long time in my career. The U.S. and Iraq had two lines of attack. They both went from the south. Second, they conducted zero SAD operations, suppression of anti-air defense. Just didn't do it. They were like, "Yolo, let's roll in with the tanks. We're good." That was really stupid because Ukraine has a really sophisticated air defense capability that like Moscow paid for during the Cold War. So that wasn't smart. Their cyber capabilities are paltry, and they've now revealed that to the world. I mean, they're fighting a war with a country, and they basically hacked their websites. Like, "Oh, no." On top of that, you've got this fact that they invaded a country the size of Germany and the UK and forgot to supply them with stuff.

• 5:33Speaker 02

  I just want to tell all your listeners, when you look at a map of like Russians invading more and more of Ukraine, just be aware of a very important point. Ukraine has very low population density. When Russians every day conquer a greater piece of it, that's actually not a good thing. That's a bad thing because there's nothing to supply them with food and fuel in those areas. They should have grabbed the cities. They didn't. And the reason they didn't grab the cities is because Ukrainians didn't just wait for them at the border and have this coordinated tank battle where they would have lost in 30 minutes. Instead, they withdrew to the cities, garrisoned them, and are denying Russia the resupply opportunities. Finally, that 40-mile convoy is a huge sign of weakness. The media is talking about it as it shows and illustrates Russian power,

• 6:16Speaker 02

  but it shows that they're capable of replicating the I-35 traffic jam between Waco and Dallas, except it's less lethal. That's what it tells me. And in fact, it tells every country out there that has look-down, shoot-down capability on their air force that they can take on 300,000 Russian troops. So yeah, I mean, like putting it all together, I think there's a debate out there in finance, whether the media's narrative that's obviously we're getting a lot of Ukrainian PR, we're getting a lot of Western bias and propaganda. There's this narrative like, oh, well, maybe Russians aren't doing so poorly. No, I can tell you as a professional, they messed this up.

• 6:51Patrick O'Shaughnessy?

  If we go even before the invasion and think a little bit about the geopolitical motivations for doing this, and I realize this is a hard question because a lot of the open concerns are what are Russian objectives, especially with the difficulty that they've had? What is good, bad, ugly outcome for Russia geopolitically speaking? Not just this kind of saving face nonsense that you hear about, but truly new advantages that Russia as a country, given its objectives derives from owning the situation in Ukraine? So maybe you could walk us through the original motivations for doing this in the first place as you see them?

• 7:25Speaker 02

  So I would say that there is no outcome that's going to be good for Russia. But I would say that one of the things that Russia does want is a neutral Ukraine, a Finlandized Ukraine. That's a term that's been used for a while. Now, that is a dirty word in the domestic politics of Ukraine. So in fact, Zelensky has abrogated some of the commitments of Kiev under the Minsk protocols that were negotiated in 2004 and then again 2015. And he did that because domestic politics in Ukraine changed over the last eight years. It hardened. There was less room for compromise. And obviously, the US was writing checks, had no intention of cashing, offering Ukraine all sorts of things that we're now not going to give them. But there is no NATO membership on the table. And so what I think Russia wanted first and foremost is a commitment from Kiev that they

• 8:10Speaker 02

  will become Finland. And that was really difficult to accomplish for Zelensky and the current government. How do you do that when that's an extremely unpopular view in Ukraine? And I think that the one thing Russia will probably get out of this, perhaps within weeks, if not days, is a commitment from Kiev that they will be neutral. And it's not that crazy of a commitment, by the way. Moldova next door has that in their constitution. And they've been allowed by Russia to essentially pursue integration economically with Europe. That was the cost of allowing Moldova to have a relatively open relationship with the West. It's a very similar situation. Moldova has the region called Transnistria. There's 1,500 Russian troops there as peacekeepers, quote unquote.

• 8:51Speaker 02

  And so Moldova chose a different path, not an antagonistic one towards Russia. The second thing is that, yeah, sure, I guess Russia wants demilitarization of Ukraine. But again, your listeners should not be too literal about this. Demilitarization is in the eye of the beholder. When NATO bombed Serbia for three months, it didn't demilitarize anything. There were tank columns coming out of Kosovo for hours. And then NATO was like, we demilitarized Serbia. NATO forensic troops went to Kosovo, found that they hit four tanks. Four tanks, like a thousand Ugos with a tree trunk stuck in them. What I'm trying to say is like Russia can claim to have demilitarized Ukraine because of weeks of their special operation. So don't worry about that issue. The final one is obviously Donetsk-Luhansk and Crimea.

• 9:34Speaker 02

  I think there's no chance that Kiev agrees to give them up. But at the same time, Zelensky made a point yesterday, a couple of days ago, saying like, we can make some arrangements with this. He's basically saying like, relax, we're not gonna officially recognize that Russia has these regions. But the de facto outcome is what it is. Now, does Russia want to carve out a piece of Ukraine, like east of Mieper? Does Russia want to annex this, put in a puppet government? Your listeners can forget about these outcomes. Iraq was 65% Shia when Americans invaded. It was ruled by a Sunni dictator, basically a 20% minority. About 80% of the country welcomed American troops in 2003. Taliban is Pashto. 60% of Afghanistan are not Pashto.

• 10:19Speaker 02

  So I'm gonna just roughly estimate 60% of Afghanistan welcomed the Americans in the Northern Alliance in 2002. There is nobody welcoming Russia. If they want to annex a part of Russia, if they want to leave a puppet government, they better be ready to pay for 300, 400,000 Gares permanently in this country. And so I think that we will get a negotiated outcome. Over the next couple of weeks, I think that the material constraints that are acting on Russia, and that's my framework, that's what I used to make alpha in the market. Those constraints are now manifesting themselves. And I think eventually Putin will have to accept the reality and get a negotiated win, raise the mission accomplished banner, and then think about how to live off of there.

• 11:04Speaker 02

  Because the longer this thing goes on, the more of an incentivize other countries to, quite frankly, be more antagonistic towards Russia. Like Poland right now is begging for Russia to invade it. Because not only would it probably win, it would re-invade Russia and take Moscow in the month. I'm being hyperbolic, but like, nobody's looking at what's going on right now and saying like, oh no, I wish the Russians don't go further.

• 11:25Patrick O'Shaughnessy?

  How have your impressions of warfare evolved as a result of watching this? Because something that strikes me is we've gotten so used to in the modern world, relative lack of visible warfare of this type, where we obviously had the time in the Middle East and there have been episodes of it. But something like this that feels to some people at surface level that you could tip into something as a major global conflict where all sorts of sides get pulled together. You hear World War III as a phrase uttered, which is a bizarre thing to see in the news. But then you see this sort of weird nature of the military conflict. Like you said, Russia's doing a very bad job. There's the threat of nukes that obviously is scary and terrifying if you think about it for five minutes.

• 12:07Patrick O'Shaughnessy?

  With all of that in mind, like, has your view of kind of modern warfare changed? Like, what do you think modern warfare really even means, given what we've seen in the last couple of weeks here?

• 12:17Speaker 02

  I guess on one hand, I think it's interesting that it's not so modern. Drones have not made a big impact in this conflict. They did in the Azerbaijan Armenia conflict at the end of 2020. Most of us didn't pay attention to, there were other things going on. Azerbaijan really used drones very, very effectively. That has not been a big deal here. So this war has been actually quite classical, very 1990s, 2000s. Russians seem to have spent very little time studying American offensive operations, and that's to their detriment. And the second thing I think is that we're seeing a war that is... Televised in a way that I think we wouldn't have had it before. So think about 1960s, Russians go in, I guess 50,000 Russians die over the next three months.

• 13:01Speaker 02

  They leveled Ukrainian cities, but you don't know how difficult it was for them to have accomplished. And they look like they crushed Ukraine. And you're not aware of all the costs that they incurred doing so. And most importantly, Russian citizens would not have been, Soviet citizens would not have been aware of those costs. And so that's where I think the war is really different. It's difficult to aggregate access to the internet and information, especially with things like Starlink running around, providing people with access to information, whether they're hooked into the cables in the country or not. People in Russia are sophisticated, they can access through VPN all sorts of channels of information. And all of this is being televised and made very perfectly clear right in front of them.

• 13:43Speaker 02

  And so I think that there's an element here where the failures of Russia so far, and again, they might win in the end, but the failures are so egregious that if you're sitting in any other country in the world, whether it's Beijing or the US or Iran, Saudi Arabia, Turkey, and you're looking at what's going on, I think your lesson from this is not like, oh my God, it's so easy. I think you're saying like, man, this is really complicated. And not only is it complicated, but the challenges will be televised and reported and ticked off to my millennial and Gen Z citizens who quite frankly, don't give a shit about spheres of influence.

• 14:18Patrick O'Shaughnessy?

  What do you think we should discuss about nuclear? It is a scary, terrifying, ever-present concept. Nuclear deterrence has quote unquote worked, I guess, since no one's launched a nuke at each other since World War II. But it's also like this sleeping giant of a topic. Like I realized that I hadn't read about or thought about or considered it in a long, long time since high school or something. So what is necessary to bring into the discussion around countries that do have access to nuclear weapons and the hammer waiting behind these less effective forces?

• 14:49Speaker 02

  The issue with nuclear weapons is that tactical nukes are not very useful in this conflict. So tactical nuclear weapons are really designed to break large columns of tanks advancing on like a fortified position. So if Ukraine had tactical nukes, it wouldn't be useful. What's Russia gonna use tactical nukes for? There is absolutely no theater of war they have right now to use them. Like this low-yield tactical nuke. Ukrainians did a really smart thing. They withdrew to the cities at a cost of like civilian casualties, but they did that smartly. What are we saying? Like Russia's gonna nuke Ukrainian cities? I see no chance of that happening. That's the debate of tactical nukes. I've heard a lot in finance. A lot of folks are talking about it. It just doesn't fit this theater of war.

• 15:32Speaker 02

  In fact, Soviet Union had a no-first-use policy, and that was because they had the columns of tanks. NATO and America didn't have no-first-use because they would have used tactical nukes against Soviet tank columns. So just something to keep in mind. There is still deterrence. That's the reason why Russia is currently invading one of the most difficult countries to invade in the history of mankind, given size, capability of military veterans, fighting for the last eight years, blah, blah, blah, all these reasons. They're doing that instead of invading Estonia, which presumably would be much easier. And that's also a really good point. Is Putin irrational? Has he lost his mind where he didn't invade a NATO member state? Article five, nuclear weapon deterrent, those are all the reasons why you wouldn't want to do that.

• 16:16Speaker 02

  But he could have. He could have invaded other countries in the periphery, former Soviet space. He chose the one that is not a member of NATO.

• 16:25Patrick O'Shaughnessy?

  What is the difference between tactical nukes and whatever non-tactical or other categories of nukes are? Like, what is the taxonomy that we should be familiar with?

• 16:33Speaker 02

  Ability to deploy in a theater of war and yield. A tactical nuke is tactical because you can use it in a theater of war to accomplish a tactical objective, such as stopping a column of tanks coming towards a specific area. Strategic nuclear weapon, it's like using a hammer. You wouldn't use it in a theater of war. It's designed for deterrence, and it's designed to kill millions of civilians.

• 16:55Patrick O'Shaughnessy?

  It's much more of an actual battlefield weapon versus a... Calyptric weapon.

• 17:00Speaker 02

  Yeah, you can use a field artillery to launch that.

• 17:04Patrick O'Shaughnessy?

  If we bring this forward to the present, the other thing that's happened that I'm fascinated to get your take on is just the voluntary. I guess I'll call it like economic warfare that's happened from Western corporations shutting down services, cutting off access points to Russia writ large, which to me feels scary, complicated, interesting in a bad way. And I'm just curious how this has landed on you. So I think Visa and Mastercard was the one that everyone started really paying attention, but it's sort of become this huge momentum play for all the major Western corporations to say they're not buying from Russia or they're not operating in Russia or they're no longer selling in Russia or whatever the thing might be. What's the impact of all this? Like, do you think this lasts? Do you think if

• 17:46Patrick O'Shaughnessy?

  this thing in Ukraine ends, this all gets unwound? Like, what are the longer term implications of this voluntary economic participation against a country?

• 17:54Speaker 02

  That's a really crucial question, Patrick, because it's also going to determine whether we have much more macro volatility going forward. Because there is a scenario where I'm right and it's a law conviction view. Obviously Putin has already gone through his material constraints, so he could just double down and triple down his confidence and it lasts forever. But let's say I'm right and let's say that in three, two weeks, we get some sort of a ceasefire and agreement and he gets to put up a mission accomplished banner. And then you've got two problems. One, political pressure may remain, especially in the Biden administration, where the costs of being mean to Russia are non-existent. Okay, America can do whatever it wants when it comes to Russia. It can write checks to Ukraine. It doesn't intend to cash, as I said.

• 18:38Speaker 02

  It can promise them things. It can be mean to Russia. It can sanction the central bank. Consequences to America are non-existent because ultimately, US and Russia have pretty much no trade. I think the political pressure on Biden will be to be very tough and he will continue to do so. That will irk Moscow because Moscow will feel that it had basically dampened tensions. And so I can see Russia retaliating against the West if those sanctions are not removed. Now, how does it retaliate? Several ways. Russia basically exports 43% of world supply of palladium.

• 19:11Speaker 02

  Seventeen percent natural gas, sixty percent potash. Platinum is a twelve, crude is a twelve, wheat is an eleven, gold is nine, and so on. And some of these don't really bring in that much revenue. Palladium is only about three billion dollars if it were to stop exporting for six months. But it is a critical supply chain input. So Russia could choose something like palladium or potash, which Russia and Belarus, by the way, together, they're forty percent of global supply. If there was a self-embargo on potash, food prices are going to go through the roof, and there'll be mass deration in many countries, less developed countries, not the US. But my point is that there are ways that Russia could impose a self-embargo that would be really meaningful for the global economy.

• 19:56Speaker 02

  Now, energy is another one of those, and that's what I'm really worried about. I'm worried about this world where the US doesn't remove some of the top sanctions against banks or central bank, and Russia retaliates through the energy export. We did some scenario analysis, and basically, if Russia were to curtail its exports by a quarter, it still makes money at hundred twenty, hundred fifty, two hundred bucks. It makes money at every one of those price points. It will add revenue, it will replace lost volumes with higher prices. If it were to curtail oil exports by fifty percent, it would lose money at a hundred twenty bucks. There's no way that bread would stay at a hundred twenty bucks if Russia cut off half of its exports. So at a hundred fifty, its revenue was stable, at two hundred, it's making money. So there's this danger that they could actually do that,

• 20:40Speaker 02

  and that would obviously be very bad for the global economy. Doubling of oil prices and yield curve inversion tends to basically tell you there's a recession coming in twelve months, no matter what the current conditions are. Now, your point is a little bit different. You're asking what's the consequence of voluntary companies, basically responding to kind of like an ESG angle here. And again, that just doubles down on my point, because that's even worse, because there's no way for Western governments to force Shell or Starbucks back into Russia. Russia may go down a rabbit hole of abrogating capitalists. They said today there's going to start nationalizing factories that Westerners have left idle. It could be a complete abrogation of trade between the two countries,

• 21:22Speaker 02

  and in that case, I think it increases probability that Russia retaliates, even though it's not something that was state-driven. It's an organic response of corporates to Russian aggression in Ukraine, but Russia would then retaliate to that with a state-sponsored response through the energy or commodity channel.

• 21:39Patrick O'Shaughnessy?

  Do you think that all this is some first sign that the world is just deglobalizing? I've talked with Peter Zeihan about this a lot, where we've all come to experience this state of global trade, global peace, like relatively low amounts of warfare, et cetera. A lot of interconnectedness in global markets, whether they be commodity or some other markets. What is your prediction there? Like, what do you think this tells us about the future of globalization? And just the general interconnected nature of countries?

• 22:06Speaker 02

  My thesis since 2013 has been that we are at the apex of globalization, and it's all downhill from here. And the reason for that is not Trump, it's not Brexit, it's not anti-establishment, it's not mean Vladimir Putin or anyone else. The reason for that is that we're in a multipolar world. And multipolarity is this term from political science that describes a world where multiple countries pursue their foreign policy interests independently. Therefore, it's very different from a unipolar system where America tells you what you need to do, or where the United Kingdom tells you what you need to do. That's a very conducive world for globalization. Just one bully, everyone gets smacked around and told how to basically conduct. That's great. Everybody can then adopt the same rules and norms in trade.

• 22:51Speaker 02

  And it's also different from a bipolar world, where you have two bullies, like Soviet Union, US, and they create these two camps that don't talk to one another. A multipolar world is a messy world, and it's going to have less efficiency. It's not going to be de-globalized. Deglobalization is actually not empirically proven. We haven't de-globalized. In fact, global trade is coming back up since COVID. It's just less efficient. And what I mean by that is that in a multipolar world, a couple of things happen. First of all, there's obviously not an overarching set of rules and norms. So it's difficult to have efficiency in terms of trade in the US. Second, you start getting spheres of influence. And that's what Russia is protecting in Ukraine as an example. But spheres of influence, when the world gets carved up into Chinese, Turkish,

• 23:36Speaker 02

  European, American, Russian, Indian sphere of influence, what that means for an investor or CEO listening to this, what it means is that there is no longer a global market for stuff. And that means that supply is constrained. Supply of what? Supply of everything. Suddenly, the cobalt in the Congo is not... Up for the highest bidder. Parts of that cobalt, which is necessary for a great transition, is going to have to go to the Congo's basically geopolitical boss, which is China. And suddenly you've taken that supply off the global market. So this outcome is inflationary and it's less efficient, just still trade. And the irony of the multipolar world, though, is that the trade between enemies actually

• 24:20Speaker 02

  goes up, it doesn't go down. And that's because coordination amongst allies is very difficult. And you're seeing that right now because I think that the consequence of this conflict in Ukraine is not like a united West. It will be actually a disunited West. I think Europe is going to learn from this crisis, blame the US for what happened. You just wait. Right now, everyone's blaming Putin. After all, he is the one that crossed the borders. But six months from now, when Europe takes a couple of cold showers, you're going to look back in the last couple of years and say, wait a minute. Why were Americans promising Ukraine all this stuff? Then emboldened Kiev to stand up to Russia instead of forcing Kiev to sit down to the negotiating table with Moscow and create a stable equilibrium that will prevent the war. And so that is the kind of a multipolar environment where there's less efficiency,

• 25:04Speaker 02

  it's more inflationary, and also it's going to be a very complicated world in which we're going to have a higher frequency of geopolitical risks and events as political science theory basically tells us, multipolar world leads to.

• 25:17Patrick O'Shaughnessy?

  Obviously, we have to talk about inflation. You brought it up there. Now's probably a good time. If we had been talking, you and I, four weeks ago or something, almost certainly our whole conversation might have been around what's going on with inflation? What's the Fed's role? Are there historical analogues for this? How should we view this episode of sort of post-COVID inflation? So I'll ask that same question. And obviously, the geopolitical stuff will factor into it, I'm sure. But what is your view of inflation, not just globally, but maybe more specifically for the US?

• 25:45Speaker 02

  So I had a framework before the pandemic of what was going to happen with the next recession. And that framework, I described it in my book, Geopolitical Alpha. But like basically, my framework was, look, policymakers are not going to allow us to have a deep recession. So next recession that we have, which will probably be shallow.

• 26:03Speaker 02

  You'll see a policy response that will dwarf 2008, 2009. So when the pandemic actually happened, I was like, oh, my God, this isn't a shallow recession. It's going to be deep. So they're going to go crazy. And this is going to be the most extraordinary stimulus. So that helped me, one, find the bottom in 2020. But two, it also made me an inflationist, which I've never been in my life. I've generally accepted the structural deflationary forces in the world. But the policy response, combined with less globalization, not no globalization, just less apex of it, and combined with the geopolitical environment of a multipolar world, put me into the inflation camp. I wasn't surprised by us hitting seven and a half percent. Well, the CPI, most importantly, I wasn't surprised that the US inflation actually

• 26:47Speaker 02

  outperformed almost anybody else's inflationary outcomes because we actually stimulate more than anyone else did. But at the same time, this year, you know, there's like second derivative effect. A lot of these things that happened. And so I was in a camp that inflation would peak and go down. Now, go down where? I don't know. I'm not really good at math. So I'm just gonna like throw a dart, say maybe three to half, two, three to five percent. I don't know. I know you can drive like an aircraft carrier through those two assumptions, but whatever. The point was inflation would peak by the end of the year, and the Fed, in my view, would call that a victory. So eight rate hikes is nonsense. They would call peaking of inflation and its asymptotic approach to their met. They would make up something fancy

• 27:28Speaker 02

  like that. They would have called that a victory and kind of backed off. Now, I think we're in a world where that might not happen. So if you look at different oil price scenarios, there's a world where we ended like between 69% this year, if this is like the Yom Kippur War of 1973. And that's a really good analog to kind of just spend some time thinking about.

• 27:47Patrick O'Shaughnessy?

  Yeah, can you describe that? I don't know that well.

• 27:48Speaker 02

  Well, first of all, very similar setup historically. Late 60s, an era of profit ist, like America basically had Vietnam War, also LBJ's Great Society. Inflationary pressures were building up. And then in 1971, Nixon resolved the trade war that was going to happen. And he also resolved the de-bagging of the dollar through the Smithsonian Agreement, which depreciated and devalued the dollar. And from 71 to 73, you had this increase in basically prices of everything. It started bubbling up. So Yom Kippur War starts in 1973, the OPEC imposes a self-embargo. So OPEC imposes an embargo because Americans were helping Israel in the war against various Arab states. That was what the war was about.

• 28:31Speaker 02

  OPEC controlled by Arab petrol producing states basically imposes an embargo. And that was what I'm calling like an inflationary cherry on an inflationary Sunday. You know, like we were already in inflation. The Fed had been raising rates from seventy one to seventy, seventy two to seventy three. And then when that happened, boom, we get a recession seventy three to seventy five. The Fed responds, obviously with more hikes, then later it cuts as the recession comes in. And my fear is that we're repeating the same story this time where again, it's not like this war is the reason we have seven point five percent C P R. It has nothing to do with it, but then it prevents it from coming down. It prevents the Fed from declaring victory and mission accomplished just because of the trajectory. That is the macro consequence that this event could have. I do think there's differences between today and nineteen seventy three.

• 29:15Speaker 02

  So it's not as easy as nineteen seventy three. By nineteen seventy three, let me just tell you one other thing that happened then. It was a really bad recession and it was a really bad recession for the market. The yield curve inverted in February of nineteen seventy three. And it's the only time that the yield curve inverted and we didn't reach all time highs subsequently. So usually when the yield curve inverts, yes, it tells you that twelve months later, there's going to be trouble, potentially a recession. It basically tells you the Fed's going to have to cut because they made a pause here. That's when the yield curve inverted. Simple explanations, that's what it is. Normally you do get an all time high in stocks, except in nineteen seventy three. And I got to give a shout out my friend Anastasius Avdear, who is a chief strategist at the fun for Gando Capital, who gave me that insight.

• 29:59Speaker 02

  So I don't want to just steal his insight there. So what does it mean for us today? It means that if this inflation goes high, if the Fed responds to it, we're not even going to have from this point our like blow off rally at the end of the cycle. We're just going to go down. It's just going to be super bearish. If nineteen seventy three repeats itself exactly the same, sell everything right now, buy gold, hide some. Except that I do think we're in a different world. I think we're in a world where the Fed is scared. I think the elites in America in general just are scared of what is the consequence of the next recession. And so I think actually the Fed, not right away, but I think eventually by the end of the year, will create a narrative that this is an exhaustion shock. It's geopolitical and

• 30:40Speaker 02

  that it can be looked through. What does that mean, though? That means that we could end the year with 69% CPI with a Fed basically saying like, nah, it's cool. Like it's transitory. And I mean, that's a world where the real yields in the US go deeply negative and you probably have to stay in equities. Inflation-proof equities, obviously, healthcare, maybe real estate and materials, definitely energy, definitely commodities, definitely commodities and gold.

• 31:07Patrick O'Shaughnessy?

  If you think about the role of the Fed, how has it evolved? And in your mind, what is it? It gets invoked a lot. One of my favorite investors to study is Stan Druckenmiller, who I think boils everything down to liquidity and is a very careful Fed watcher, obviously an incredibly successful investor. Why the linkage between the investing world and the Fed in the first place? Why is it so inextricable? What is the Fed's role in your mind? Like, I know it's a big topic, but it just does seem to be this massive gravitational force in capital markets that's frankly hard to understand and hard to predict. How do you think about it and interpret it and its role today?

• 31:43Speaker 02

  I definitely fall on the side that, you know, the Fed controls liquidity, dollar liquidity, which is probably the most important macro variable out there. So that's the first issue and also financial conditions. But I think that the reason we're focused on the Fed so much is also because we, as an epistemic community, as a community of financial professionals, of investors, we have grown up over the last 40 years. Very few of us have traded before 1980. So we have existed in this world since 1980 that had certain features to it. One, laissez-faire capitalism became the dominant ideological position. And that means the state should withdraw itself from all facets of life. The state should be small enough that you can drown in a bathtub, as the adage goes.

• 32:29Speaker 02

  So that was the first issue. You didn't have to worry about so much. There was a deregulatory push, like the state was shrinking, so you don't have to worry about politics, domestic politics. Second, America basically started winning the Cold War from like 1985 onwards. It was a fair complete. So you didn't have to worry about geopolitics, because if any country was a rogue, pariah state, boom, it was on CNN from a video camera in a tomahawk. That's what the world was, geopolitical, unipolar moment of America. And then finally, in that world where geopolitics and politics doesn't matter, what does matter? Well, what matters is monetary policy. So for 40 years, the only thing that was a catalyst for markets was central bank decision-making, their policy, and arbitrage between different monetary policies.

• 33:11Speaker 02

  Like, oh, look at this, Norwegian central bank is going to be a little bit like hawkish, but Swedish is dovish, boom, you know, I've got a trade off. That's it. That's all we had to do. Now, I still respect monetary policy, don't get me wrong, Pash, just because I'm more on the geopolitical macro side, doesn't mean that I think geopolitical events are more important than Fed. I just think that today it gets a little bit more complicated. You have to put everything that's happening into its macro context, but you also have to worry about some idiosyncratic stuff you didn't have to worry about many years ago. Now, if the Fed responds to a war in Russia and Ukraine with a March 23rd, 2020 style stimulus, maybe I'm calling the bottom and I'm buying everything there is, of course. But they're not going to do that, given the context we're in.

• 33:55Speaker 02

  And so then suddenly, like Ukraine, Russia, it doesn't matter.

• 33:58Patrick O'Shaughnessy?

  How do you think about the impact of liquidity on asset prices? So, again, like liquidity is another one of these squishy terms that I think we all think we know what it means. What do you think it actually means? Like, why is liquidity such a key factor in markets?

• 34:12Speaker 02

  I mean, I got a chart for you. I'm staring at it right now. Very simple, global central bank total assets and MSCI world total returns. Looks pretty correlated to me. I think that that's just a way to think about it. I mean, what central banks have been able to do through QE and various forms of QE over the past decade and a half is just push investors further and further through the risk curve. That's a standard explanation. I don't think I'm giving you anything profound, but I think it does really make sense. And when they start to withdraw that, I think that's when you see real underperformance in risk assets. It is kind of that simple.

• 34:49Patrick O'Shaughnessy?

  Can we talk about China specifically and how you view its role on the global stage? I remember reading Hundred Year Marathon, that great book about their incredibly long duration, planning and ambitions as a sort of global hegemon or something, one of these multipolar powers, spheres of influence, whatever you want to call it. What is your view of their plan, their strategy, their current positioning and strengths? The way that this thing in Ukraine may alter their strategy going forward? Just walk us through your sort of model of China as a global player.

• 35:18Speaker 02

  Okay, so I'm going to start off with a 30,000-foot view and then go down. I'm in a camp, which is a very small camp. In fact, I may be the only guy on the court that thinks that China has peaked. It doesn't mean that it's going to go downhill. I just think that this is it. This is where China is. And it's peaked for three reasons. First and foremost, it's not really energy independent. It depends on global access to energy, and most of that energy comes through ships, not pipelines. And that's a real vulnerability for China because it doesn't have the navy to project power. It has a navy to deny access, so lots of frigates, lots of submarines, lots of things that can blow up other people's ships. But it doesn't have the ability to show up outside of the Straits of Hormuz and say, yo, what's up?

• 36:03Speaker 02

  We're getting that barrel of oil out of Saudi Arabia. Don't you touch it. And it's going to take it a decade to build that navy. Not like, oh my God, they built some aircraft carriers. Cool. They need a decade to match where the US is. So that's the first issue. And I think that they're actually quite intelligent about this, and that they realize that trying to compete with America in naval competition would end China. So instead, they're pivoting to EVs and green technology. That's their way to solve this problem. It's a national security prerogative for China to boost their ability to lower consumption of oil. But that's going to take a decade. So that's the first issue. The second issue is much more profound of a problem, and it's the fact that they've fallen into the middle income trap.

• 36:44Speaker 02

  The middle income trap basically is something that very few emerging market economies have escaped. So in the mid 2010s, I think in 2012, China produced this report with the World Bank. It was actually Liu He's effort to produce it, and it talked about developing the emerging markets. And it shows that out of 100-plus emerging markets, only 14 escaped the middle income trap. The middle income trap is basically being stuck between 30 and like 60% of US GDP per capita. It's when your GDP per capita just doesn't grow anymore. Because of inefficiencies, primarily because your predictivity slows down as you move from manufacturing to services. And Chinese policymakers were completely obsessed about this topic for good reason.

• 37:28Speaker 02

  Getting stuck in the middle income trap is usually a bad thing for political outcomes. But they've gotten stuck into it. They are stuck there, and that's because labor force growth is basically going to zero, if not negative. And their predictivity, I suspect, is much lower than what the published figures are. And so the reason that matters is because once you get stuck there, you need to start balancing your economy towards things that work in order for you to have any growth. And what works in China is exports and state-led initiatives, investments. So I actually think that everyone out there who expects the household sector in China, domestic consumption, to save this economy is completely wrong. Household debt in China as percent of disposable income is higher than the US.

• 38:12Speaker 02

  It's higher than the US, and you know why, Patrick? Because they spent the last decade leveraging up their households in the private sector because we took a vacation from spending. That was the secular stagnation. We were deleveraging in the West. Households in the West were deleveraging, didn't buy anything, so China had to leverage. But that means that China is right now, 2006 if they're lucky, 2007 if they're unlucky. And they're looking at a period of decade when they deleverage. So why is that a geopolitical issue? It's a geopolitical issue because it's a fantasy that China will somehow pivot to domestic demand, become independent, sovereign. No, no, no, they're going to depend on you and me clicking buy on Amazon for a long time. And if you are dependent on Patrick Dimarco buying stuff from you, hmm, you probably don't want to invade countries like that. The third issue is demographics.

• 38:54Speaker 02

  Now, most people focus on demographics, terrible demographics in China, like, oh my God, it's a growth problem. Man, whatever, sure. To me, it's a different issue. If China's going to have to continue to invest at a high level, its only avenues to growth are exports and investment. Well, what do you need in order to invest at a high level? You need a high level of savings. Well, okay, God bless, China has high savings, right? Maybe not for long. An aging society is a society of consumers, not savers. Old people don't save, they spend what they save. As China transitions to an older society, its savings rate will drop below their investment rate. And that's why demographic trap is critical to their current account. The current account of China will, I think, dip into a negative territory.

• 39:39Speaker 02

  Not anytime soon, but by the end of this decade, I think it will. It flirted, it flirted with negative. Current account deficit in, I think, 2018. Now, they avoided. How did Japan avoid dropping into a negative current account? Well, because it dropped its investment level. Investment as percent of GDP in Japan have dropped massively over the last 40 years as its society aged. But Japan also ended up escaping the middle income trap so they could afford to drop their investments. China won't be able to do that. What's my conclusion here? The three traps of China. One, it won't become energy inefficient for the next decade. Two, over the next decade, it's going to have to double down on exports and investment.

• 40:22Speaker 02

  And three, it's going to have to eventually depend on investors listening to this conversation, giving them money. A country that's not energy independent, that depends on exports and manufacturing growth, and depends on foreign capital, is not a country that evades or is aggressive geopolitically. It's a country that's actually quite pacified and they're still going to be a power, they're still going to be a rival of the US. But I actually think that they are quite trapped. And I wrote that, that's my thesis from last year. Now, if China's observing what's going on in Ukraine, what are the lessons they're getting from this? I hear a lot of mostly politically ideological commentary like, oh, Biden's weak, blah, blah, blah. Whether I agree with that, who cares? The point is like, nothing that's happening in Ukraine looks great for Beijing.

• 41:07Speaker 02

  Which is probably why it's a great move if they did tell Putin they were okay with him invading Ukraine, because hey, they get to see what it looks like. What happens? What are the consequences? What's the West's response? It's like two kids standing at a cliff going to jump into a cold lake. And one kid says to the other one, I'm right behind you. Bro, just go ahead. And then when the other one jumps, it's like, hey, are there any rocks down there? You okay?

• 41:30Patrick O'Shaughnessy?

  I think you've kind of answered the question, but I want to make sure I'm thorough. It stands to reason then that an invasion of Taiwan or something like that you think is a low probability event. But I would love to just hear what your thoughts are about Taiwan. It seems to be such a fascinating geopolitical space to me because if it wasn't for Taiwan Semiconductor and some critical assets there, maybe the balance is very different. What is your impression of something like that existing? And do you think that that will go away? Like, it seems like the West... Is woken up to points of failure in supply chain, you know, during COVID and maybe other things, commodities now today, and that the world will reshape itself around this multipolarity you talked about and have like different spheres of supply chain and

• 42:12Patrick O'Shaughnessy?

  not be relying on these places. Do you think that that's true? And is Taiwan a good example of that?

• 42:17Speaker 02

  I think it's very true. You know, in that world, Patrick, that you described, like Taiwan's actual geopolitical relevance to the rest of the world would decline because there's now this huge push, which by the way is inflationary, at least in the initial phase, there's this huge push, which I call the national security redundancy prerogative. If you think about why we have persistently high inflation and why this is not demand-driven and it's not transitory, there's like really three reasons. There's the multipolar deglobalization point or apex of globalization. There's the spheres of influence that agree in the transition and then the national security redundancy prerogative. Eventually, that redundancy prerogative will mean that France will build its own security. That's the world

• 42:59Speaker 02

  in which maybe Taiwan actually gets less geopolitical relevant. I think this will continue to be the number one geopolitical risk. And the question to me is like, how willing is China to incur considerable costs if it were to try to militarily reunify with its province of Taiwan? I think that's the question. And I think that what they're observing right now is how committed the West is to punishing its rivals. You've seen the use of central bank sanctions, which I think nobody expected. I didn't expect it. Honestly, I haven't talked to a single person. That was kind of a nuclear option. There was always this view that, oh, you can't mess with currency reserves because then the other country will sell them. And the West is just like, whatever, sell them. We got QE, bro. Like,

• 43:43Speaker 02

  we'll buy it. Don't worry about it. We're good. So that's the first issue. The second issue I think you're seeing, the point that you raised, which is this ESG component to the sanctions where countries are openly removing themselves from the country. And finally, you see the fact that this could get messy, that countries do fight back. Even in 2022, they're willing to die for freedom. Those are, I think, things that are real constraints to attacking Taiwan. In addition to the points I've raised in terms of China being still dependent exports, soon to be dependent on foreign capital. I think those are going to keep this issue simmering, but not exploding. Then again, of course, the argument against that is a more emotional ideological one.

• 44:26Speaker 02

  That President Xi Jinping, he has his legacy and so on. And I respect those views, but all I would say about that is this. Let's step back and think about China for a second. What do we know about the Chinese Communist Party? We know that it has survived as the legitimate ruler of China without having had to reunify with the province of Taiwan. In other words, that's a fact. We know that Chinese Communist Party rules China and Taiwan is a wayward province that is kind of in this nebulous situation. But what we don't know is what would happen to the Chinese Communist Party if it didn't deliver the Chinese dream to the median Chinese citizen. That is a much greater risk.

• 45:07Speaker 02

  And I still fall into the camp that believes that the number one priority to any Chinese leader is to ensure the steady progress towards some form of a Chinese dream. Moderately prosperous society.

• 45:20Patrick O'Shaughnessy?

  I think it's a fascinating read and I'm curious why you think your camp is so small. Like if you're the only occupant of this kind of China has peaked camp. Why is that a small camp? Like, why don't more people think this way? Seems logical enough.

• 45:33Speaker 02

  There is, I think, three camps. There's the China will blow off camp because of real estate. I mean, hell, there's a lot of people in that camp and have been for the past 20 years. You know, they'd be wrong.

• 45:41Patrick O'Shaughnessy?

  Yeah.

• 45:42Speaker 02

  Then there's the camp that, look, China's a huge rival and that America has to spend all this time and effort and has to become something other than America to face. And that's a growing camp for a couple of reasons. First, it's just really appealing to linearly extrapolate and linearly forecast geopolitics. That camp probably included a bunch of people who thought we'd be speaking Japanese today. You know, the Blade Runner movie, the original one. Like noodle houses in LA. It's hilarious. I love that scene. So there's linear extrapolation. There's also a lot of vested interests. There are vested interests in having a common enemy. One, it could solve our polarization here domestically. But also like, there's a lot of money to be made if there is somebody that you can kind of build weapons against and create software that protects you against and so on.

• 46:26Speaker 02

  So there's a whole college industry right now in the US of projecting China into some sort of a be him off that will dominate East Asia. The camp I inhabit is one that's kind of between the two. Like China will remain a rival. It has its own interests and it will pursue them. It's not going to be America's friend. Countries don't have friends or enemies. They have interests, they're going to pursue those interests. But at the same time, it's much more. Dependent on the rest of the world and its demand. Then people think, see, Russia is different. Russia sells stuff that we can't deny buying. It's very difficult to say no to Russia's stuff. China sells mostly T-shirts, toaster ovens and toys. Like, we can say no to that, and it won't be that painful. And also on top of that, if they do tip into a current account deficit with Russia,

• 47:10Speaker 02

  Russia has a huge current account surplus because of its exports of energy, and it doesn't buy anything. If China were to tip into a current account deficit, well, that means that suddenly it will care what pension funds in America think about it. Because someone has to finance that current account. And then it comes down to, what do you think? What do I think with the people listening to this thing? What is the number one prerogative for Chinese leaders? Look, if it's re-unifying with Taiwan, then they'll do it in the next five years. I'll be wrong. If it's to ensure that the median citizen in China continues to see development, then I don't think they will. By the way, that goes also to Russia. One of the things that I think we're missing here in this whole story is that a lot of people think that voters don't matter in authoritarian regimes.

• 47:54Speaker 02

  That somehow dictators just don't care what their population thinks. I think that's completely wrong. I think the Chinese focus on internet, security, and just social media in their country is not about suppressing thought. It's about basically having a constant feedback of what the population wants. If you look at what Xi Jinping has done since he came to power, it's been just a slew of highly popular policies. I mean, the common prosperity theme is just the latest one. Incomity equality became a buzzword on social media before Chinese policymakers acted on it. Good friend Zach Dickwold, who wrote Young China, told me that before common prosperity started. That's a great book, by the way, Young China, if anyone wants to read it. But in Russia, it's kind of the same.

• 48:37Speaker 02

  Russia has a history of massive revolutions, especially after failed offensive military operations. By the way, as a side point, which might be relevant for today. And the reason Russians have now revolted against the United Russia regime of Vladimir Putin is because he delivered to them something that they wanted, which is stability after the disastrous 1990s. And when I see these ATM lines, you know, in McDonald's in Russia, and when I see what's happening right now, I think that there's a real risk that we have dramatic domestic political upheaval in Russia because the social contract between Vladimir Putin and the people is starting to break down. He was supposed to bring stability geopolitically and economically,

• 49:20Speaker 02

  not the chaos that's now happening because of the sanctions and the war in Ukraine.

• 49:25Patrick O'Shaughnessy?

  I'd love to hear you apply this treatment to the United States. We haven't actually talked much about, other than maybe the Fed a bit and inflation about the US specifically. I came across last week this really compelling idea at an interesting dinner where China was kind of the topic, that the exports of the US predominantly are its military power, its culture, and business with a focus on finance and technology within business. And that those three things together sort of define our role in the world and have defined our role in the world in an obviously amazing way. If you're an American, like it's been a great place to live. I believe deeply in the American system. But what is your take if you're just an impartial judge, giving the same sort of treatment of what's going on that matters in the US in the same way that you've done for us for China and Russia?

• 50:09Speaker 02

  I mean, definitely income inequality. That is the number one issue that I think is motivating policymakers right now. And again, I describe that as the Buenos Aires consensus. So we've lived under something called the Washington consensus for the past 40 years. Washington consensus is a set of best practices we learned in the 80s. Orthodox monetary policy, countercyclical fiscal policy, free trade, deregulation, privatization, less affair, capitals. I think that what's happening because of the secular stagnation cycle of the past decade, I think that we are moving away from that Washington consensus and those best practices to something that's basically the opposite of that.

• 50:53Speaker 02

  So instead of cyclical fiscal policy, we have a profligate fiscal policy. You have a recession, you blow out your budget deficit like massively, to the point where we spent more money fighting the pandemic recession than the last five recessions and their fiscal responses. Five. And one of those was the great financial crisis, for God's sake, which was extremely deep. Second is instead of orthodox monetary policy, you have very unorthodox monetary policy. Even now, after the June 2021 Fed pivot, everybody talks about the June 2021 Fed pivot, like, Patrick, have we raised rates? Is the Fed still buying? Like, pull back. It's not that hot for you, right? And then, of course, free trade. We see what's happening with free trade. Democrats and Republicans are falling over each other to prove to the median voter in America who's less free trade.

• 51:38Speaker 02

  And then you have things like re-regulation, Lisa Khan being appointed, the fact that in the US, you do have more regulatory oversight now, and I think you will have more. All of these things tell me that we're in a different consensus, not the Washington one. I've gave the Buenos Aires consensus because I like to punch people in the face. It don't actually mean we're going to become Argentina. It don't, but I think it's a good moniker. But the point of all of this is that I think that's motivating everything in the US. I think Republicans struggle to be fiscal conservatives. I recently had a conversation with one of the Senate candidates, the Republican Party, in the upcoming election. He was saying, like, look, I'm a fiscal conservative, but whoa, whoa, whoa, I want to expand Medicare. And I'm like, OK, that's interesting. It's difficult for even Republicans to now run as a fiscal conservative.

• 52:23Speaker 02

  In fact, this guy was being attacked by his Republican primary candidates as being a fiscal conservative. There's a completely different world in the US, and I think it is motivating this cycle. That's what gave us this manic cycle. It was gave us this manic bull market, and will probably give us higher inflation than we expect. A lot of the long-term inflation indicators, if you look at them like five-year, five-year forward, I think it's at like 2.6%. In the UK, it's blown up. In the US, it's still anchored. And I think that's because the median investor doesn't realize that the median American is essentially a socialist. Whether they're Republican or Democrat, by the way, I'm talking about their economic preferences

• 53:04Speaker 02

  are for the government to have a greater role, are for less orthodox fiscal or monetary policy. And that's a huge mismatch in the market where the long-term inflation expectations are pretty well anchored, whereas the actual politics in the country are focused on solving income inequality. However, it's not. It's probably going to be done in a poor way, though. It's probably going to be done through inflation, which obviously favors everyone, not through like coherence. We all get together, we say what matters, maybe education, maybe healthcare, okay, I'll spend more on that, tax it. That will be a coherent way to solve it.

• 53:35Patrick O'Shaughnessy?

  What do you think the US could do to improve its lot as a country most? What would be the actions, policy or otherwise, that would get you most excited about economic prospect for equity returns, like all the kind of things that I think people want? GDP growth, per capita growth, maybe even the shrinking of the inequality? What are things that you think are potentially great for the country going forward?

• 53:57Speaker 02

  Well, here's what I would say, Patrick. I have a policy of not using the word should. I swear a lot of podcasts, but if I use that, like that would be a swear word. And that's because I bathe myself with basically aloof indifference. And the reason for that is I can't forecast politics if I have a force in the race. But since you asked me, and you've got hundreds of thousands of listeners, here's what I'm going to say. I'll say this. When I look at the US, I think a big problem in the US is its two-party system. My solution is basically a fantasy. It will never happen. But I think that actually European model of democracy is superior in one way, in that it forces parties to kind of work together more often. So pluralism is not something

• 54:41Speaker 02

  to be afraid of. Pluralism is not something to be afraid of because then everybody gets to kind of express their voice. It might be a small party that gets 10% of the vote, is represented by 10%, but they get to participate, maybe in a coalition building or something like that. What is happening in the US is that the two parties are getting captured because of the primary system of electing candidates. And by the way, nobody really votes in primaries, especially in an off-election. So you're going to have all sorts of nutcases on both sides of the aisle get elected, and then they get to deliberate. Here's an interesting thing. Where is the median American? Median American is actually a centrist. If you put together independent voters who identify as independent, if you put together liberal Republicans and conservative Democrats, if you put all of them together...

• 55:25Speaker 02

  They've gone from like sixty percent of the American electorate to like fifty-five. It hasn't collapsed over the last twenty years. So like, most Americans are exactly where they were. It's just that the representation of them is being squeezed out by the extremes. And I think the only way to really fix that would be a dramatic electoral reform, which is not going to happen. Which is why we're not going to fix these issues. We're going to have inflation and then we're going to kind of come to our senses, I think, on the tail end of this. And we're going to have a repeat of the eighties. I think the other thing that's working for the US is that in a multipolar world, I think Americans are going to realize that there are dangers out there. And I think maybe that will help solve polarization to some extent, having external enemies to get.

• 56:08Patrick O'Shaughnessy?

  What topics that we haven't talked about are critical in the world today? You mentioned food and wheat prices very briefly, like that's one that seems scary. Food is one potential topic, but another topic could be like a country like Iran or Turkey or something else. You know, in the stack rankings of important topics today, what are the next few down that we haven't touched on in your mind?

• 56:28Speaker 02

  I think the green energy transition is critical to kind of having a macro view. So I've done a lot of research on this. We have clocked our, we're very excited about that as an investment opportunity and it will have costs. It will have costs and we're seeing them right now. So I think how does politics evolve around the green energy transition? Will there be a pushback against it? Will countries adopt carbon pricing as Europe has done? Even in the face of geopolitical problems that maybe make that a difficult and expensive choice? And also, who are going to be the winners and losers of this epic, epic technological transition? I fear that here the US could fall behind.

• 57:07Speaker 02

  The US, because of its politics, is most likely to move away from the green energy transition. Europe has decided to pose massive costs on itself in order to get out of it. And it has been doing that for the last decade. So if you look at electricity prices and energy prices in Europe versus US, European energy prices have been extremely high relative to the US, both because US adopted natural gas and shale and also because Germany shut down its nuclear power plants in 2011.

• 57:37Speaker 02

  Here's the interesting thing, German trade balance against the US hasn't shrunk because of that. So I hear a lot of American bravado out there like, ah, you know, our industrial capacity will win. It's like, well, it hasn't been winning, it's been losing. America's share of global trade is falling. Germany is keeping it pretty up, even with its high energy prices. That means its productivity is going through the freaking roof. So not only is Europe remaining competitive on industrial exports, it's also incurring the costs necessary for technological breakouts in this new era. And so I think, Patrick, what's happening right now is that we've been obsessed with SaaS businesses, software. Peter Thiel has had this thesis of bits versus atoms. We've been obsessed with bytes, basically, with software.

• 58:22Speaker 02

  And we've put massive amounts of VC capital and private capital into that world. And I think that the future could be very much a future of technological innovation in the realm of atoms, industrials, materials, energy, agriculture, synthetic biology, all that stuff. And it's not clear to me that the US is going to be on the forefront of the next 10 years of that innovation. It's not clear to me that, like, Silicon Valley is going to have stranglehold on green technology revolution. Now, isn't some sort of like a climate change talk or something like that? Like, I just think that we are at a point where we're going to spend so much money, so much government money, on solving climate change.

• 59:02Speaker 02

  That even if you are in the camp that believes it's a hoax perpetrated by globalist elites to make us all buy, like, electric vehicles, but you're an investor, you would be stupid not to be invested in this. The amount of technological innovation that will come out of this endeavor is going to be massive. It's like the moonshot. The moonshot by itself was stupid. Going to the moon was idiotic. We went there in the seventies, we kicked around some dirt, we never went back. We never went back because it was completely idiotic. Except that the technological innovation that came out of that effort is the reason you and I can have this conversation. I'm in Santa Monica, you're not, and we're having this conversation because of the moonshot. And that's why I'm saying to people, like, whether you think the green energy transition is a good thing or a bad thing,

• 59:46Speaker 02

  that's cool, that's your opinion, but it's happening. And the technological innovation that comes out of that will be absolutely epic.

• 59:54Patrick O'Shaughnessy?

  Why would the US not dominate that, given our track record of bottom-up innovation, especially in atoms, not just bits, historically has been so strong? Like, what are the preconditions for doing well in atoms-based innovation?

• 1:00:08Speaker 02

  Well, I think having a robust and prosperous industrial manufacturing capacity is important, and a lot of that has eroded in the US. So that would be the first thing. The second thing would be having VC money that's interested in that. America has the best venture capital industry in the world by far, but it's gone from like 95% of all dollars were American and went to America about 10 years ago to VC. It's down to 50% now. So that's the other thing. And the third is that I worry about politics in the US more than in Europe. Europe is completely committed to this. Now, there's some voices talking about how the costs are too much, but Europe will just spend money to make it happen. And the other thing is that Europeans are now looking to impose a green tax, which is

• 1:00:51Speaker 02

  kind of a liberal version of Trump's protectionism, on the border in order to pay for the carbon offsets. They're much more committed. So those are the reasons why, for example, Europe could actually take the lead on this innovation. If I was to advise an investor on how to pursue this, I would just say, keep your eye on Europe, but certainly invest in America's green technology revolution, which is happening as well. There's plenty of companies here that are going to do great. I'm just saying that it's not as clear to me that the US will dominate this next chapter of innovation as it did software. Software, look, only two countries have had the web 2.0 revolution. They probably will have 3.0. There's only two. There's America and China. That's it. The end of the story. Everybody else failed. Japan didn't do anything. Europe has like Spotify. Yay, great.

• 1:01:36Speaker 02

  Russia, no. I mean, no, but everybody missed software. But I'm not sure that's going to be the case the same with green technology and broadly defined. I'm not just talking about solar power and wind.

• 1:01:45Patrick O'Shaughnessy?

  If we go all the way back to where we started focused on the current events of today, what are you watching most carefully? Sure, you're a good Bayesian, update your models of the world. Like, what variables are most important to you looking forward as you watch what's happening with the war specifically?

• 1:02:00Speaker 02

  The most important thing is the rhetoric coming out of Kiev, quite frankly. Just because Zelensky is starting to build that case domestically, I think, for neutrality. And so we need to watch that. One of his speeches was very partially made up, as I mentioned. So that's one of the things that I'm watching. The second thing that I'm watching is definitely the participation of China and Europe in negotiations on how to end this crisis without the US. In 2014 and 2015, the war in Donbass was ended because America didn't participate. And I suspect the same will happen now. US has a luxury today. US has incredible luxury to not really care about the consequences of this conflict.

• 1:02:42Speaker 02

  I'm not saying American government is callous, but the US does have the luxury. It's behind an ocean. You know, it can ban Russian oil as an example. We don't need it. The US is not going to have to deal with millions of refugees at its doorstep. The US has mutually assured destructive deterrent against Russia. Russian planes are not going to veer into US airspace by accident, as they may in Poland and in Germany. And so because of that, I think the Europeans and the Chinese are actually probably going to solve this crisis without the US, just like they did with the Minsk negotiations. And so that's really important because it will further ossify an entrenchers in a multifold world going forward.

• 1:03:23Patrick O'Shaughnessy?

  There's been a fascinating discussion. We could probably go in a million other directions, and I'm sure we could do this once a year. I'm so appreciative of your time. I ask everybody the same traditional closing question. What is the kindest thing that anyone's ever done for you?

• 1:03:35Speaker 02

  I think the kindest thing is that recently I was in an event. I was in an event and just felt that things weren't going that great. It was just someone putting their arm around my shoulder and saying like, hey, man, it doesn't really matter whether you're right or wrong. What really matters is if you're a good person or not. That's probably maybe not the kindest, but the most recent one I can think of.

• 1:03:55Patrick O'Shaughnessy?

  Sounds great. Marco, thanks for your time and all the insight.

• 1:03:58Speaker 02

  Thank you so much, Patrick.

• 1:04:01Patrick O'Shaughnessy?

  Next, you'll hear my conversation with Steve White from SW Investments. We cover how Steve incorporates Tegus and BAMSEC from sourcing to monitoring his portfolio. To hear my full conversation with Steve, make sure to check out our episode with Eric Mandelblatt. Maybe you could talk us through the specifics of how you use Tegus and BAMSEC, which are now under one umbrella, one company, but very different tools. What are the ways that you use those things actively in the process?

• 1:04:26Speaker 03

  I use these tools every day. So I first came across BAMSEC through, I think somebody mentioned it on Value Investors Club on a message board, and I went and checked it out, got a free trial. And I think within the first five or 10 minutes of using it, it was like the biggest no brainer to me. I think it was something like $30 a month. And I was like, you gotta be kidding me. This is the easiest 30 bucks I'll ever spend. And I absolutely loved it. You know, everybody in our business has Edgar bookmarked and that browser window open. Basically, it's like the first browser window you go to in the morning. And Edgar's fine and all, we've all been there, we all used it for many years. But I just love anything that takes sort of a clunky or cumbersome or not perfect process and just makes it easy.

• 1:05:11Speaker 03

  And that's what I immediately discovered with BAMSEC, where they just had this great interface and this great organization around this publicly available information that we all see every single day. And then they were able to add some higher value services on top of it, like quarterly call transcripts and some other things like insider buying and these other things. So what I found is that it had replaced Edgar for me. It was open, it was one of the first browser windows I opened in the morning. It was one of the last browser windows I closed when I shut down my computer at night. And I just sort of loved that it could make it easy. Anything that made my life easy, I'm happy to plunk that money, especially because as you know, like with the one man band, I'm a little bit time constrained. I'm conscious of how I spend my time and where I spend it.

• 1:05:55Speaker 03

  And I don't want to be spending my time Copying and pasting a million things from an SEC filing into some sort of separate note taking tool like Word or Excel or OneNote or whatever it happens to be. So I've been a huge fan of BAMSEC for a long time. In fact, I was always happy to give them feedback on product improvements. And I was involved with them when they were rolling out some beta features and I've loved it all. All they've done is made that site much more robust as they've added more features, including things like global search functions, which I find myself using all the time. So I was really impressed with the product and the thought that they put behind it and how they were rolling out new features. It's been a part of my daily process since I've used it.

• 1:06:41Patrick O'Shaughnessy?

  How about Tegus itself? I mean, obviously I like the Edgar first have open, last have closed concept. It's sort of the primary material. And now this is a BAMSEC tool on top that lets you parse through it much faster and easier. Tegus itself is something much different, but adjacent, obviously really important. How does that get used in the process relative to BAMSEC? Let's say.

• 1:07:00Speaker 03

  Yeah, it's funny. A friend of mine had told me about Tegus a few years ago and he strongly recommended it. And I didn't quite understand the concept of what he was talking about until I went to the site and spoke to somebody who got a free trial. And I instantly understood what it was that they were doing and I thought it was brilliant. And one of the reasons why I think I kind of quickly picked up on the value add was because the things that Tegus does, I used to do all myself. So I used to do in the hunt for fundamental research in Scuttlebutt, I would be on LinkedIn, searching for former employees of companies or searching for employees and competitors that might have something interesting to say. I'd be going to their company websites

• 1:07:44Speaker 03

  and I would look at things like white papers that they would publish and you'd find the author or people that were quoted in it because you would assume, oh gee, well, they probably might be a little bit more willing to share some insights as to this company. And so it was actually funny. I was living in Chicago. Tegus is a Chicago company. I had been reaching out to them just casually and they invited me to come over to the office and I was sitting down with some of the team and the founders and I was sort of laughing about them. I was like, you know, I know exactly what you guys are doing, only you guys are having a thousand times more success with it than I ever had, because I found myself increasingly running into non-responses. Reaching out to somebody with a cold, direct message

• 1:08:24Speaker 03

  on LinkedIn has gotten, had gotten worse and worse over the years. And so, Tegus had really kind of cracked the code as acting as a credible middleman between the buy-side and some of these experts. And so, they took, almost like BAMSEC, they took a process that was very clunky, and they made it almost seamless. In Tegus's case, they were taking a process that had become almost impossible for me, and they had made it very easy. So, once I realized what they were doing, it just became a no-brainer for me, and it became ingrained in part of my daily process. I get their morning emails where they say what all the new transcripts are.

• 1:09:06Speaker 03

  I like doing that. I've actually started using Tegus as sometimes a screening tool, actually a starting point for the research process, because I get very interested, for example, in companies where if I see it's a new transcript, and it might be the only transcript that's ever been done on a particular company, rather than the 50th transcript that you see coming in, and you go, "Well, I don't know if this is going to be that helpful." When I see a new one, I start thinking, "Oh, this is interesting. Maybe there's some hidden gem company that somebody else is doing some work on, and I get to piggyback on that a little bit.

• 1:09:40Patrick O'Shaughnessy?

  If you enjoyed this episode, check out joincolossus.com. There you'll find every episode of this podcast, complete with transcripts, show notes, and resources to keep learning. You can also sign up for our newsletter, Colossus Weekly, where we condense episodes to the big ideas, quotations, and more, as well as share the best content we find on the internet every week.